Demand for last-mile to outlast tariff disruption

As demonstrated by our fundraise for Crossbay II, one of the largest private real estate vehicles to have closed globally last year, investor appetite for European urban logistics was on the rise following a sharp correction in values after the COVID-era boom.

Marco Riva, CEO of Crossbay

While investors are now reassessing their regional and asset class exposure in the wake of Trump's' 'Liberation Day' tariffs, demand - especially in the last-mile sub-sector - looks set to remain on that upward path.    

Before considering in detail the likely impact of the current macro-economic situation, it is worth revisiting the underlying fundamentals that make European urban logistics an attractive asset class and why we believe the last-mile segment is best placed to outperform in this cycle. 

1. Demography: Growing population size across Europe’s core economies, coupled with increased household formation, together provide powerful tailwinds for occupier demand that are unlikely to be dented by trade policy-related volatility. Knight Frank research previously revealed there is 10.1 sq m. of occupied industrial and logistics floorspace for each dwelling in the UK. Applying this ratio across the nearly 200 million households in the EU would mean over 2 billion sq m. of warehouse space is needed. With an additional 2.9 million households forecasted over the next five years, this represents an extra 30 million sq m. of required floorspace. The bulk of this growth will be in cities, with the UN estimating the percentage of Europe's population living in urban centres will climb to 81% in 2040, up from 75% in 2020.
2. Digitalisation: Market research firm Mintel projects online sales across Europe’s top economies - the UK, France, Germany, Spain, and Italy - will grow by 27% between 2023 to 2027, representing €5 billion in additional spending. With every €1 billion in online sales estimated to require approximately 108,000 sq m of warehousing, this growth will drive a need for an additional 10.2 million sq m of fulfilment and delivery space, according to Knight Frank.
3. Low supply responsiveness: The realities of inner-city development mean that the market cannot respond to growing demand for urban warehousing with adequate supply at speed or scale. The dense, built-up nature of European cities and zoning restrictions together limit the availability of development sites. Intense competition for land from alternative uses such as residential puts additional pressure on future supply, as do rising construction costs and regulatory initiatives designed to limit emissions such as congestion zones. Meanwhile, much existing stock is inadequate from a functional or sustainability standpoint and requires significant capex to be upgraded in line with modern standards.

Supply-demand dynamics in urban logistics - and the last mile especially - are far more favourable compared to traditional segments of the logistics market such as ‘big box’ warehouses, which are in more suburban areas and along main highways, where land availability and competition is higher.

This story plays out at a greater scale in the US, where vacancy rates have increased materially as land availability and ease of construction enabled investors to overbuild, driven largely by speculative development of big box sheds.

Europe's significant demand/supply imbalance, lower vacancy rates and high e-commerce growth potential offers a much more attractive investment landscape than the US. With an industrial stock per capita about eight times lower than in the US and with steadily growing e-commerce penetration, Europe has an enormous ‘catch-up’ growth opportunity that institutional and private investors can capitalise on by partnering with specialist managers able to access what are fundamentally granular and hard-to-access assets in the most urban locations.

Global investors are now looking to Europe for diversification in the wake of Trump’s trade announcements. Meanwhile real assets such as logistics properties offer low correlation to equities and bonds, which have witnessed significant volatility as well as the potential for defensive, inflation-linked cashflows that are contractually underpinned.

Even before 'Liberation Day', rising supply chain costs were pushing operators to reorganise their portfolios. Rent typically accounts for just circa 4% of a logistics tenant's operating costs, with tenants willing to pay more to be in key location to save on transportation, which can be anywhere between 40% and 75% of costs. We expect that tariff-related disruption will only fuel this trend.

Marco Riva is CEO of Crossbay