European logistics market resilient amidst geopolitical shifts

Despite short-term cost pressures from the ongoing conflict in the Middle East, the long-term recovery of prime European logistics is expected to remain on track, according to research from AEW.

Logistics

In fact, a potential upside could emerge as companies shift from "just-in-time" to "just-in-case" inventory strategies, leading to increased demand for storage space.

Economic forecasts suggest only a very minor 0.10% annual impact on GDP growth relative to the baseline, with limited effects on long-term inflation and bond yields. However, a prolonged conflict could lead to significantly lower GDP growth, higher inflation, and increased bond yields.

E-commerce continues to be a major driver, but third-party logistics (3PL) providers now account for 44% of new space take-up, a trend likely to intensify with Amazon's recent entry into the sector.

Growing manufacturing demand is also a significant factor, fueled by Europe's push for self-sufficiency in defence, pharmaceuticals, and energy sectors.

Recent tax changes on direct-to-consumer shipments from outside the EU are prompting Chinese and other e-retailers to switch to bulk imports and local EU fulfilment hubs to improve costs and operational control.

Short logistics development cycles enable quick responses to demand changes. After strong take-up in 2021-22, pushing vacancy rates down to 2.4%, increased supply in 2023-25 raised vacancies to 5.4%. Looking ahead, new supply and demand are projected to be more balanced, with vacancy expected to fall to 4.3% by 2030.

Prime rental growth for both logistics and light industrial markets across 35 analysed European markets is forecasted at 2.3% per annum for the next five years (2026-30), with only a modest impact expected from a downside scenario.

Higher interest rates pushed prime logistics yields from 3.7% to 5.3%. After a repricing period in 2022-24 and a revised outlook with less bond yield tightening, prime logistics yields are expected to tighten by only 20 basis points by 2030. This emphasises that current income and rental growth will be crucial for investor returns.

Unlevered total returns across 35 European logistics markets are estimated at 8.5% per annum for 2026-30 (assuming no prolonged Middle East conflict). The UK and CEE markets are projected to achieve the highest logistics total returns at 9.9% and 9.1% per annum, respectively.

Projected annual returns for 2026-30 across covered logistics and light industrial markets range from 4.4% (Berlin) to 11.2% (Marseille), a 7% spread. Light industrial markets are demonstrating solid resilience compared to logistics, underscoring the importance of careful local market selection and liquidity for optimising risk-adjusted returns.