European Logistics Market Faces Uncertainty

LONDON-The outlook for the European logistics market faces growing uncertainty, say researchers at Cushman & Wakefield. According to the firm’s European Distribution Report issued in mid July, the positive growth in Central and Eastern Europe (CEE) that has largely driven the market over the past two years may slow significantly as the effects of the credit crunch ripple across the continent. Though key markets are forecast to remain stable given their lower levels of take-up, the relatively low amount of land available for development and the associated premium land prices, secondary markets may decline due to the relatively “footloose” demand they tend to satisfy.

According to report author Elaine Rossall, associate director of Cushman’s London office, over the past two years demand for distribution space has remained buoyant across all markets. As a consequence of improved economic growth, performance has been positive, with consistently high demand, particularly for larger facilities used by retailers and logistics and 3PL firms. These same users have led to an increasing focus on the highest quality space in locations with the greatest accessibility. Additionally, says the author, shorter lease terms have become an established feature of the market. This is particularly true in Western Europe where contract logistics is more established, but she calls the trend increasingly pan-European.

But Rossall says the general economic slowdown is having an impact. Though she does not expect the requirement for top-quality space to diminish, clients looking to cut costs will be searching out less expensive locations as long as infrastructure is suitable for logistics operations. At the same time, she cautions, a sustained reduction in consumption or drop in disposable income would inevitably have a negative impact on the distribution sector, leading to moreconsolidations and acquisitions. Rising oil costs are also likely to have an increasing impact, leading to greater use of inland waterways and rail and more concern with finding central locations.

“As we enter a very different and more challenging economic environment, the emphasis will be focused even more on cost efficiencies and defining the right location for large distributionwarehouses,” says Cushman partner Steven Watt, head of the firm’s pan-European logistics and industrial practice. “A number of issues are being brought to bear which could challenge the established patterns of distribution hubs across the region.”

The report says Belgium, the Netherlands, France and Germany remain the focus of pan-European distribution, but CEE markets are rapidly gaining in logistical importance as the economies of the region improves. While domestic consumer consumption is still driving CEE demand, growth of the region’s manufacturing base is also playing a role. However, transport networks continue to be of poor quality compared to Western Europe, and infrastructure improvement is crucial for future growth. According to Cushman, the Baltic States, Russia and Turkey offer significant albeit risky investment potential in terms of both domestic opportunities and eventual connectivity to Asia and the Middle East.

“With consumer demand slowing in Western Europe while maintaining apace in Central and Eastern Europe, there are questions being raised as to whether the traditional European distribution center (EDC) heartland of Holland, Belgium and northern France may come under threat,” Watt observes. “Supply chain pressures may force companies to close or downsize theirWestern European EDCs and relocate to the Czech Republic, Poland or even further east.”

In Watt’s opinion, the mantra for forward-looking real estate decisions looking should be “strategic location, location, location,” which he says means a more holistic analysis relative to transport and labor costs. “It will be fascinating to see how the central and southeasternEuropean economies stand up to the current challenges,” he states, adding that the locations to watch in the near future are Turkey and Romania, the former because of its large consumer population and the growth of large retail businesses, and the latter due to its size and perceived strategic factors. “Ukraine is also attracting more interest,” he continues, “and along with Russia, whilst not for the faint hearted, is all about correctly pricing the risk and big prizes on offer for the first entrants.”