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European logistics: surveying the digital evolution

10 Jul 2020

As the growth of ecommerce has surged in recent years, the demand for logistics space has soared. But the sector is also facing unprecedented disruption as technology evolves rapidly, as city populations grow, and as environmental and governance issues gain importance. Logistics companies are under particular pressure to adapt quickly because their businesses are anchored to rigid bricks and mortar supply chain networks. As one of the Europe’s largest real estate investors, it is critical for us to understand what challenges our tenants are facing.

Aberdeen Standard Investments conducted a second annual survey at the start of 2020, in partnership with Transport Intelligence. We explored the latest trends in the sector and gained insight into how logistics companies are changing to meet the increasing demand from the industry and from consumers. The survey received 123 responses across 24 countries. There was a broad range of respondent types, including logistics operators, manufacturers, ecommerce providers, retailers and parcel couriers. There was also a mix of owner-occupied and leased properties.

The findings from the survey revealed that, as expected, the logistics industry is growing strongly. Around 77% of respondents said that their business activity had grown either modestly or substantially in 2019. As a result, respondents declared a growing shortage of existing capacity to service more contracts. The availability of new premises in order to allow expansion is also a growing problem. Around 38% of respondents said that a lack of available property constrained their business ambitions. We estimate that the vacancy rate for the European logistics market is below 5%, on average. In many areas, the only source of good-quality space is through development.

Structural changes with regards to the environment and governance are also affecting the supply chain infrastructure in new ways. These demands are reshaping the requirements for logistics companies, while placing a greater focus on the environment and employee welfare. Around 76% of respondents confirmed that their businesses are already undertaking initiatives to reduce environmental effects. This is an increase from 70% in the 2018 survey. Occupiers are demanding more engagement from landlords on this matter – particularly in terms of supplying alternative energy supplies, such as LED lighting, solar panels and electric charging points for cars.

Similarly, the ‘gig economy’ and zero-hour contracts have ignited a debate about employee welfare. The activities of a warehouse can create dangerous environments, which mean that logistics tenants face tighter legislation and more media scrutiny than other businesses. Amazon, for example, has been criticised by the UK media for allegedly failing to recognise the effects of working conditions on employee welfare. It is unsurprising, then, that 65% of our respondents said that their businesses had implemented initiatives to improve conditions for staff. Labour shortages are significant in the industry, particularly truck drivers, and it is important for companies to take employee welfare seriously if they want to remain operational.

Meanwhile, digitalisation has replaced physical technologies as the focus of business investment. The move into data analytics, artificial intelligence, blockchain and the ‘internet of things’ is driven by growing demand from customers for speedy delivery and transparency in the age of ‘instant’ delivery. In terms of warehouse requirements, 80% of respondents said that automated technology had become increasingly important, as manual labour is becoming more expensive and scarce. The 2019 survey also shows that, while technology is the major disruptor to the industry, it is also the solution. There is a growing emphasis on robotics and finding efficiencies in the supply chain through data analytics and digitalisation.

The survey also demonstrated that the demand for logistics real estate will continue to be in urban fringe locations, given the acute pressures from ecommerce. Companies need to be located close to major population centres in order to deliver quickly and to have access to large pools of delivery staff. This will increase the pressures on regulators to support the balance of economic infrastructure and human welfare in urban areas. If operators are not thinking ahead, they could be regulated out of sensitive areas, despite this often being the optimal location for their infrastructure.

The latest survey made it clear that logistics operators are under intense pressure to adapt

The latest survey made it clear that logistics operators are under intense pressure to adapt. Changing demands from globalisation, urbanisation, consumption patterns and the growing constraints of environmental and social legislation all require their attention. The challenge for landlords is that the rigid nature of physical real estate is part of the mismatch between the need for supply chains to adapt and their inability to do so.

To mitigate any loss of income, landlords need to engage with tenants throughout the duration of their lease agreement to ensure the facilities are meeting tenants’ requirements. And tenants need to identify any complications arising from changes to their business model as early as possible. In a world where real estate is becoming more operational and where cashflows are less certain, landlords should treat tenants as partners to prevent downside risks from emerging.