Julie Whelan:
Now let's shift gears to industrial and logistics and retail. I welcome James Breeze, our Head of Industrial Research for the U.S., and Tasos Vezyridis, our Head of Retail and Logistics Research for UK and Europe, to talk about these two asset classes that have growing dependence on each other. Welcome, James and Tasos. James, industrial and logistics has been on a surge that many are envious of, and that surge only seemed to have gained strength during the pandemic. I'm gonna once again ask you, is this sustainable even amidst the outlook that Richard talked about?
James Breeze:
Hi Julie. Yes, the industrial and logistics sector has been experiencing record fundamentals over the past 24 months. And that includes record leasing activity, net absorption, rental rate, growth and development. The industrial real estate market is not recession-proof, but the sector is somewhat insulated from an economic downturn. There's still long-term changes to consumer behavior, supply-chain strategies and sustainability governance that need to be accounted for in the distribution strategies of retailers, wholesalers and outsource 3PLs. Some examples include the continued growth of e-Commerce, the need to protect inventory levels, the need to diversify supply sourcing, and that includes increasing domestic manufacturing the need to expand into growing population areas throughout the Sunbelt and even the need to find facilities with lower carbon footprints. So it would take a significant drop in retail sales for there to be a large decline in overall demand. And right now it just doesn't look like that's gonna happen. So that means that historically low vacancy rates are very likely here to stay despite some massive development in the U.S. We can expect to see double-digit rent growth for the foreseeable future in North America. Last year when CBRE projected there would be annual rent growth per lease comparables of 10% in the U.S., it raised eyebrows. And today it's 18%. We're seeing similar rent growth in Canada and accelerated rent growth in APAC and Europe.
Julie Whelan:
Okay. So we will keep an eye on those retail sales numbers, but things still seem rosy, but there are a lot of headlines about major occupiers giving back space. What's your take on that?
James Breeze:
Well there's definitely been exaggerated headlines about the industrial market out there recently. Whether it be the end of e-Commerce, the massive overstock of goods or major E-retailers giving up space. A lot of it's been inaccurate, which is frustrating. While we aren't speaking about specific occupiers, it is important to note that there is not one company that had market share of lease transaction volume over 5% the past 18 months and not one occupier with a market share of over 3% in 2022. Demand for industrial real estate comes from a diverse tenant sense. If one company decides to pause expansion, it really has no effect on industrial fundamentals. If there are headwinds for the occupier sector, it's in a, from a supply or a size-range perspective we're starting to see a pullback in demand for what we call light-industrial users. These are companies that lease space under 25,000 square feet. They tend to be small businesses, and they're being affected by the rising costs much more than larger companies are so leasing in 2022 is off about 21% for spaces under 25,000 square feet. And I think we'll probably continue to see that the rest of the year.
Julie Whelan:
Okay, thank you for that. So Tasos James painted quite a bullish picture and in Asia Pacific this year marks the 12th consecutive year of rental growth. And the demand for modern logistics space is very healthy and vacancy is low in that region. So from your perspective in Europe, are you seeing the same trends that James and our Asia Pacific colleagues are seeing?
Tasos Vezyridis:
Thanks, Julie. Yes. Trends in Europe for logistics property are probably similar to the U.S. On the demand side, we have seen a slowdown of expansion of some e-Commerce players. However, the decline in demand from pure-play retailers has been offset by other sectors, such as third party logistics, also servicing the online channel, traditional bricks-and-mortar retailers, with or without an online channel, and manufacturers. Now, the reorganization optimization of supply chains has been a high priority for all occupiers and trends such as nearshoring, diversification of sourcing and increases in safety stocks are driving demand in Europe at the moment. Now regarding e-commerce, we still expect e-commerce to continue to grow in both established and less established European markets because of the strong or growing presence of what we call e-commerce drivers. These are things such as the digital skills of the population, mobile internet usage and the use of credit or debit cards and the use of digital wallets.
Tasos Vezyridis:
All these are boosting demand for e-commerce. Sustainability. Sustainability is also a much higher priority for occupiers compared to a couple of years ago. In our latest European logistics occupier survey, most of the occupiers suggested that they are willing to pay a premium for green buildings, especially when the premium is being offset by savings and operational costs. Now let's move to the supply side. On the supply side in almost all markets supply is struggling to keep up with demand. Vacancy rates are at historical low levels and are already preventing from additional listing activity. The average vacancy rate for major European markets is currently less than 2.8%. Now tight supply is being driven by different factors, such as land availability, planning constraints, construction costs, and a tight labor market. These are factors that we do not expect to change in the short term, so tight supply conditions will continue. Again, in our latest survey, European occupiers stated that due to lack of space availability, they are increasingly exploring alternative locations outside of traditional logistics hubs, for example, locations in France's Atlantic coast, Southern parts of Italy. So to summarize, demand is still strong, supply is tight, and therefore the imbalance between supply and demand is pushing rents up in pretty much all European markets. This is a high-level overview of European logistics.
Julie Whelan:
Great, thanks Tasso. So I'm happy to raise my hand to set up a logistics hub in the Southern part of Italy. I can do that. So you also do a lot of research on retail, and I know in the us, we have experienced surprisingly positive demand in retail through the pandemic. Some are almost saying there's a bit of a retail revival underway. What's your perspective on retail around the world as your final question?
Tasos Vezyridis:
Physical retail has been through a lot of challenges the last few years due to the growth of internet sales and the impact of COVID. However, physical retail markets are recovering as the impact of COVID is fading. Footfall and retail sales have bounced back because they have been supported by saving balances, tourism recovery, and the return of office workers. E-Commerce growth has also moderated, penetration rates have declined following the lift of COVID measures. So overall we have seen a good recovery the last few months across the globe, and there has been a shift to physical retail and a retail revival predominantly in the U.S., But other regions are also following. However, there are also challenges: inflation, the tightening of monetary policy, geopolitical risks, and the prospect of a recession are now the main concerns of consumers, occupiers and investors. Inflation is squeezing disposable income.
Tasos Vezyridis:
I guess we all feel that. And consumer confidence is sliding across the globe. Now, the impact on retail sales has been muted so far because it have been supported by healthy saving balances. Although these are now eroding. In China, specifically, sales are also affected by COVID restrictions. Now, looking forward, we anticipate slower sales growth pretty much across the globe. Also occupiers are expected to be challenged by increasing operational costs. Now, that being said, not all is doom and gloom. Our latest research shows that retailers clearly see the value of the physical retail store, suggesting it is more effective than the online channel on a number of metrics such as consumer engagement and cross-selling products. Physical stores are also believe to boost online sales in the local area. So overall things are better for retail than they have been the last few years, but let's be honest here. There are also challenges ahead of us.
Julie Whelan:
Well, thank you, James and Tasos for the context you have shared on retail and industrial. It's really fascinating to hear how consumer behaviors are evolving to shape these assets that are poised to move forward with strength due to their fundamentals.
