Is There Really No Space Left?
- Research
- Unternehmensimmobilien
Every square metre of real estate needed already exists. This notion is often cited in regard to real estate. At the same time, it has always been acknowledged that surplus floor space is never evenly distributed but more prevalent in some places than in others. In addition to the natural relationship between supply and demand, their cycle is also influenced by the real estate investment market. German real estate investments used to focus essentially on the use types office, retail and sometimes residential. Logistics and industrial real estate played a negligible role in Germany. For decades, the boom-and-bust cycles of the real estate market followed set patterns.
That is, until the financial market crisis struck. The latter caused a rupture whose repercussions are felt to this day. Aside from many other aspects and trends, it caused industrial and logistics real estate to become established as an investment commodity in Germany. This, too, is ultimately explained by the low interest rate environment the crisis entailed. For it encouraged investors to venture into other real estate asset classes. Logistics has lately become one of the most sought-after asset classes, and demand for it has become virtually impossible to meet. The growing scarcity of suitable land is lamented more and more often. The shortages are perceived in regard to:
- effective floor area or warehouse area
- land zoned for industrial and logistics real estate
- and ultimately to potential investment assets.
The discussion below will limit itself to the first two aspects.
Short Supply in Warehouse Units
Real property is not an end in itself but serves a purpose – e. g. the execution of logistics processes. Land suitable for this use type has been subject to persistently strong demand and in permanently short supply. The associated take-up in Germany grew from around 4.0 million sqm in 2010 to 6.6 million sqm by 2020. This implies an average annual growth rate of 5.1 %. Over the past years, the building activity has more than doubled (from 2.1 million sqm in 2010 to 4.7 million sqm in 2020) but still trails the strong demand. A bottleneck is gradually forming. What are the demand drivers?
Of course, the steady growth of e-commerce significantly contributes to its increase. But the bread-and-butter business of the logistics sector is also generating keen demand. It reflects the shift toward Industry 4.0 and the general trend to outsource certain value-chain elements in manufacturing to logistics. The gap between the net increase in completions and the market absorption as sum total of lettings and owner-occupier take-up has been widening for years. Finding available accommodation keeps getting harder. Nationwide stats on the vacancy rates are unavailable. But a generally accepted assessment of a marginal vacancy average of around 2.0 % illustrates the predicament.
Increasingly Dire Shortage in Available Land
Logistics developments require sites that meet specific needs. Not every piece of land does. An industrial zone permitting around-the-clock operation seven days a week (24/7) without noise constraints would be ideal. Operators favour motorway access, ideally in direct proximity to a motorway slip road or within easy reach, with no towns in between and no residential area nearby. Commercial or special areas with matching parameters and low-level constraints are also highly popular.
Keen demand, however, is making suitable sites increasingly hard to find. Less and less land is zoned for this purpose. And even then, the approval and planning processes are long winded and marked by obstacles. Far from incidental, these hurdles result from regulatory constraints on further soil sealing. While Germany will slow its soil sealing rate from currently around 63 hectares/day to 30 hectares/day by 2030, the EU Commission has gone even further: Soil sealing is supposed to drop to net zero by 2050. None of this will help to alleviate the land shortage within the foreseeable future.
Wanted: New Sites for Logistics Real Estate
The end of the ongoing pandemic is not likely to bring any fundamental shift in floor space demand in the logistics sector. On the contrary: industrial production is already back up to speed. Important sectors like the automotive industry have self-confidently embraced the structural challenges of the future, not least because they outperformed in recent quarters due to strong demand from Asia, for instance. Another factor is the e-commerce boom, which continues because many people have grown used to the convenience of being resupplied in this manner. That is true even for segments like e-food, an e-commerce variant that used to struggle. The situation is reflected in future space requirements which bulwiengesa projects at 6 to 7 million of effective floor area per year – matched by around 5 million sqm in annual completions only. Given these assumptions, is there any way to meet the space requirements? Well, it depends. The answer could be affirmative if stakeholders dare to try new approaches and strategies and bring fresh resolve to the search and provision of such space.
Measure #1 – Brownfields
The strategy of recycling pre-used or obsolete sites is hardly new. Lately, though, the brownfield strategy has been embraced by more and more market players, increasing the need to think outside the box. The former focus on industrial and railway sites has recently been expanded to consider reclaiming all kinds of other brownfield sites. These include defunct open-pit mines, quarries, landfills and military conversion areas. Eligible in urban areas are moreover decommissioned leisure and cultural venues as well as disused municipal infrastructure. No relief should be expected from the office segment since there is virtually no excess capacity. But the situation is subject to change. Many corporates have come to appreciate the home office concept, and now consider downsizing their premises. If this model is adopted on a large scale, office vacancies could rebound. Similarly, retail assets under pressure from e-commerce, on the one hand, and successive lockdowns, on the other hand, could become a source of urban brownfield sites.
The total stock of brownfield land in Germany is estimated at around 150,000 hectares, offering plenty of potential to ease the strain. But a closer look will quickly reveal that detailed information is often missing. It would be extremely helpful if market players had access to comprehensive public land records to speed up the process of identifying suitable sites. But cadastres of this type, where available, tend to be open to planning authorities only.
Moreover, it can be quite difficult to recycle brownfield sites. On the one hand, they tend to be contaminated (pollutants, ordnance, etc.). On the other hand, such sites often contain massive structures above or below ground. Either scenario calls for thorough decontamination and demolition. For the stakeholders, they are not only rather costly but also risky and time-consuming. Providing substantial support in the related planning, approval and funding processes would be helpful, not least because the reclamation of contaminated sites is in the public interest.
While brownfields can provide significant relief to floor space shortages, they are not always the answer. After all, they are not available everywhere. The brownfield strategy therefore needs to be complemented by other measures.
Measure #2 – Smart Inventory System and Demand-Based Zoning
Comparing regional policy programs or land use plans with the standing structures in a given area reveals a dilemma: The potential development sites shown in the plans exceed the number of structures actually built. A careful look by an expert observer will quickly find suitable but undeveloped sites even in online maps. How do you explain the mismatch? Many of the underlying plans are not edited and updated for years. But the market evolves rapidly and may find a given site more useful for other purposes than its intended use. This causes many plots that are zoned for development to remain unsold despite manifest demand pressure. Elsewhere, an emerging need for land may go unmet because no plots are available.
Until recently, development plans consisted of bulky hard copy volumes which, even if recorded in digital cadastres and land registers, were not open to the public but for administrative in-house use only. There was no fully digitised back-up inventory of all publicly and privately traded plots and the structures built on them. Accordingly, many municipalities had patchy knowledge of the exact floor space stock within their planning jurisdiction. Even available pieces of land were not centrally recorded but kept locally in municipal files unavailable for processing.
Here, a changed approach is called for: The first step should consist of a fundamental stock-taking, based on a digitised complete land survey. Such a survey would ideally detect potentially available plots, whose status would be subsequently updated to match the land use plan. This approach will in many cases identify principally suitable sites. Whether such sites are eligible for logistics use depends on the local parameters. Even when a site is not zoned for development, it may be possible to change that. However, these efforts will not always succeed, and even if they do, they will normally involve lengthy processes.
The existing and potentially available sites determined via the fundamental stocktaking could prompt neighbouring municipalities to zone new demand-based inter-municipal development land. Further soil sealing could be avoided by preventing the zoning for purposes already covered by existing land use plans. Inversely, plots that are zoned for certain purposes in regional policy programs or land use plans but are not marketable could have their zoning status repealed. This could vindicate the zoning of suitable sites elsewhere because the total area zoned would remain the same.
Measure #3 – Consolidation of Commercially Used Land
Especially in older urban trading estates, a richly varied mix of businesses has often formed over decades. The presence of diverse industries with vastly different space requirements have often led to strongly fractured settlement patterns. Mergers or takeovers may sometimes have made premises too large, while insolvencies can make them obsolete altogether. As a result, units may have been sold or let in whole or in part. Historically, it used to be common practice to keep a land reserve on hand to be developed once the company expanded – which did not always happen. Commercial and industrial sites of this kind remain under-developed and could be put to more efficient use. The problem is that the parcels are not owned by the respective municipalities but by many individual owners.
Here, it makes sense to take an entirely new approach. It can be a good idea in such cases to create a moderated process for reorganising the plots according to demand. Occupiers whose space requirements have decreased or failed to evolve as expected could give up some of their land. Unused pieces of land could be merged to form market-consistent new plots and even be made available for logistics if the location lends itself to the purpose.
The approach may seem like land consolidation, whose benefits are always matched by much-lamented drawbacks. But at issue here is ultimately the need to rearrange development land as a finite resource in demand- and market-consistent ways, and to prevent the unwarranted consumption of land by new zoning ordinances. Of course, such a procedure would be largely uncharted territory, and would have to be developed in theory and practice first.
Measure #4 – A New Mindset Among All Stakeholders
In addition to the above measures, a change in attitude is often called for: Many stakeholders should adopt a new mindset regarding logistics. According to a common stereotype, the logistics business creates no jobs and merely consumes land. Municipalities prefer to wait for a “white knight” in the shape of a manufacturing business. However: The time of large industrial and production plants has come and gone. Under the Industry 4.0 paradigm, labour productivity is enhanced by deploying efficient, compact and smart machinery while space requirements decline. Certain sections of the value chain are outsourced, including to logistics service providers. It is here, then, that valuable jobs are created. Word may not have got around that logistics has become a high-tech industry and is not the same as warehousing. Organising an interest group for residential real estate seems easy enough to do in Germany. But you will look in vain for a logistics alliance. This needs to change, and the change presupposes a fresh mindset.
Is There Really No Space Left?
The supply in land available for industrial-commercial use is admittedly contracting. But to say we have run out of land would be misleading. Rather, we need to think of new ways to find or create available plots of land. This will necessitate a coordinated effort by all stakeholders. There should be general agreement that the logistics business counts among the major growth industries and that it creates jobs in large numbers. It is high time to acknowledge this and to support it, e. g. by providing more space.
BROWNFIELD: THE FUTURE FOR LOGISTICS REAL ESTATE?
The conversion and use of former industrial sites are worth more than one consideration for project developers of logistics real estate.
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