Logistics real estate, from undesirable to undeniable

Logistics has long been perceived as an alternative asset class, less glamorous with its warehouses than retail and its luxury boutiques, or even offices and their large international headquarters.

However, by becoming the most transacted asset class in France in 2024, it has established itself as the new kingpin of a French real estate industry in need of a benchmark. And while some doubts remain as to the rental situation, the momentum is unlikely to slow down any time soon.

With almost €4 billion deployed in logistics real estate (up 105% versus 2023), to which we can add the €1.3 billion invested in business premises (up 4%), what the English speakers call "industrial" was the most transacted asset class in France in 2024, surpassing office space and its €4.9 billion invested.

"This is a first, and a far, far cry from what the sector was capable of a few years ago, when it accounted for no more than 10% of invested volumes," said Romain Nicolle, head of industrial capital markets France at Cushman & Wakefield. "But that's not so surprising, since it's been clear for three or four years now that investors are increasingly convinced about logistics, and that, conversely, other real estate sectors are suffering from a variety of ailments. "

In the French logistics real estate market, 2024 will be remembered above all for its numerous portfolio transactions, including Montclair (more than €320 million by Ares Asset Management), Bollène and Puceul (€315 million by WDP), Reverso (€150 million by Montea), Pâris (€135 million by Boreal IM) and Onyx (€135 million by Hines). We found in the breakdown of volumes the trends observed between 2018 and 2022, good years for the logistics market," said Franck Poizat, co-head of the industrial France department at BNP Paribas Real Estate Transaction. "In particular, there is a strong appetite for large-scale operations, with portfolios accounting for 62% of volumes invested and a third of transactions exceeding €100 million. "

"Logistics is the relative winner, and it's impossible to analyze this without understanding the detour from the office sector that we've seen over the past few years", said Xavier Musseau, senior managing director, head of France, Hines, which acquired the Onyx portfolio from Segro for around €135 million, following a two-round invitation to tender that received some 15 proposals. In the same vein, Laurent Dubos, managing director of Logicor France, noted that "investment volumes in logistics real estate are obviously good, but are still a long way from the peak of the best years".

But in addition to high volumes and the size of operations, 2024 was particularly notable for the keen competition during the various marketing processes.

"The market's belief in lower interest rates and more accommodating monetary policies, which occurred around the second quarter of 2024, marked a turning point and led to a real return of liquidity to the logistics asset class", said Luc Merigneux, country director, France for Montea, which acquired the Reverso portfolio in the summer, a group of 17 logistics assets complemented by 650,000 square metres of land.

"The upturn in interest in French logistics was particularly noticeable from March 2024 onwards", adds Xavier Aubrun, principal at Boreal IM, one of the most active players in France over the past two years, with the acquisition of the Pâris portfolio in 2024 and the Daisy portfolio at the end of the previous year.

"From Mipim onwards, many projects were presented to the market and generated a level of competition not seen in 2023," he said, adding that the French market presents a rather special situation in the European context: "Valuations have corrected much more rapidly than in Spain or Italy, for example; economically, rents are more moderate than in more northerly markets such as the UK, Germany and the Netherlands, even though the market presents very solid fundamentals. "

Laurence Giard, managing director of Segro France, a property company specializing in logistics and industrial real estate, with assets of nearly €3 billion and 2 million square metres in France, has observed a change in the profile of investors attracted to the sector: "For a very long time, logistics and industrial real estate was an asset class for relatively few specialists. Gradually, given a number of structural trends that have pushed this asset class onto the radar of a much broader spectrum of investors". She also notes that "many investors who were positioned in our Onyx portfolio want to allocate a significant portion of their funds to logistics, which is new".

For Musseau, "there is no doubt a shift on the part of some more generalist funds" seeking to further diversify portfolios still overexposed to office space. "Institutional players have historically held a lot of office space, but face a denominator effect: as office values fall, they will have to buy again to keep the same real estate pocket in their allocations", added Laurent Dubos. Yet, he noted, "few asset classes present such operational and structural trends, while offering the possibility of deploying significant investment volumes".

"All our international investor clients place France at the top of their investment list, notably because it is a crossroads of Western Europe in geographical terms, the e-commerce penetration rate is lower than in other countries, and the potential for rental growth is greater than elsewhere," said Nicolle.

Among the structural trends attracting investors to logistics, Giard cites firstly "changing consumer habits, with home delivery or click & collect becoming faster and more flexible", "digitalization, which supports this whole process", "urbanization, which fuels the growth of our assets", and "sustainable development, which is very positive for the renewal and restructuring of the entire supply chain".

Romain Nicolle confirms that "economic and societal trends such as the rise of e-commerce and near-shoring are imposing new ways of managing supply chains and generating new needs for warehouses" and "convincing investors that logistics real estate will be a more flourishing and secure market, with greater growth potential".

In addition to these trends supporting growth in demand for warehouses, there is also a potentially constrained future supply: "We have moved from 'just in time' to 'just in case' when it comes to storage. Furthermore, as the French regulatory framework tends to be more and more restrictive, developing new warehouses is becoming increasingly time-consuming and demanding." A shortage of supply that is all the more cyclical as it is exacerbated by the high level of land tension observed within the main urban conurbations, he continues: "There is always competition, for example from residential or even data centers, and there won't be enough land for everyone. The investment thesis around the scarcity of the product and rental growth is therefore very robust."

This conviction is clearly shared by investors active over the past year in France, reports Aubrun: "We participated in all the major tenders of the year and observed a substantial increase in the prices offered between the first and second rounds, a sign of strong competition and the conviction of several investors about the potential for rental growth in France over a three- to five-year horizon." Pointing out that the asset class has benefited from a general rise in rents of around 20% over the past three years, Poizat believes that, "even if this upward trend is currently experiencing a lull in many sub-markets, investors can count on a compression of exit rates in their business plans, while the 'prime' rate is set to fall quarter after quarter".

However, not everything is perfect in the kingdom of French logistics. "The market has been split between attractive markets, which everyone was fighting over, and less sought-after products", said Merigneux, adding that, in his opinion, "this dichotomy still exists". This is confirmed by Poizat: "We're in a two-tone market, depending on location: the Paris/Lyon/Marseille backbone works very well and remains very liquid, but it becomes more difficult as soon as you leave it. "

And that's without counting on a disappointing rental market in 2024, when ImmoStat reported take-up of less than 3.1 million square metres (including class C) in France, down 24% year-on-year and 31% on the five-year average. The end of the year was particularly difficult, with only 40 deals signed and 745,300 square metres placed in Q4 2024. "We have to recognize that we are currently experiencing an inflexion in rental demand and a slowdown in rental growth due to cyclical factors directly linked to the inflationary financial crisis we have been experiencing since 2022, as well as the macroeconomic and geopolitical uncertainty that followed it", said Romain Nicolle.

Emphasizing that this downward trend is not unique to France, and that "most European logistics markets have experienced a broad reduction in take-up", Aubrun nevertheless noted that "the political uncertainty felt in France since the summer means that many operators are finding it harder to project themselves in the short term, which is prompting them to adopt a wait-and-see attitude."

In the same vein, Merigneux observes the contradictory mechanisms currently at work: "The lack of new supply is pushing up rental values. On the other hand, the economic crisis and the political situation are prompting customers to postpone their leasing decisions. There is also a certain lack of transparency in the subletting market, as some tenants experiencing a drop in activity prefer to sublet part of their space rather than lose it."

Although he acknowledges that "not all the indicators are in the green", Poizat qualifies this malaise: "There's no reason to worry at all. Despite a fall in take-up, the rental market remains very healthy, with a vacancy rate of just 4%, despite a few over-supplied sectors such as Hauts-de-France. In fact, three quarters of France has a vacancy rate of less than 1%." Dubos is also not overly concerned about the French rental market's current slump: "Our conviction is that the lack of rental dynamism is cyclical, which seems to be a view shared by the market, since most of the portfolios transacted in 2024 were core-plus products with a positive rental reversion thesis. "

Although the 40 or so leases signed by Logicor France last year represent a lower volume than usual, and "negotiations are more complicated, with a more balanced relationship between lessors and lessees", the managing director remains optimistic for the future: "We are seeing weak signs of a slight upturn in the rental market, notably more requests for asset viewings." In this respect, Poizat reports that "50% of the buildings launched in 2023 and 2024 have been sold on delivery, and 70% 12 months after delivery", while Luc Merigneux believes that "there are still opportunities to increase rental values in areas outside the backbone".

All these factors encourage the majority of players surveyed to look forward to 2025 with optimism. "There's no reason why investor appetite won't persist in 2025, and competition could even be stronger this year, as we continue to see new entrants seeking to penetrate the French market," argued Nicolle, noting that Cushman & Wakefield presented the market with over €200 million of new product in January alone. He continues: "The first transactions of the year will mark the beginning of a decompression, particularly in core products. Having already lost between 20 and 25 bps over the course of 2024 on core-plus and value-added deals, we can expect new prime rates below 4.75%. "

Merigneux was also convinced until recently that "2025 would be an active year in which even more capital would be deployed, with a return of core money in particular", but he is worried that "the political situation in France and Europe's decoupling from the US" could slow down this dynamism: "More core-plus than core capital has returned to the market, as reflected in the overwhelming majority of major transactions signed in 2024, and there is still a question mark over a possible return of core capital, particularly from German investors. "

According to Dubos, the evolution of buyers' target yields suggests the arrival of such investment theses: "At the beginning of 2024, buyers tended to target 5% assets offering positive rental reversion potential, but this rate slipped below this mark during the course of the year, without a reversion thesis, and we can believe that the trend will be confirmed in 2025. "

Aubrun believes that "the French market, with greater clarity on both core and core-plus pricing, could be even more competitive in 2025, despite the uncertain political context", and that "the logistics asset class still offers the most buoyant fundamentals and the best prospects for value creation". For him, "one of the issues for 2025 will be the depth of supply and the number of assets or portfolios that will be brought to market". And with the level of supply potentially constrained, he believes that "we may have to become a little more creative to be able to deploy capital, possibly by returning to more usual definitions of core-plus and value-added strategies".

A return to pan-European portfolios, largely absent in recent times, could be part of the answer to this problem. One example is the €350 million sale Logicor signed last November with Greykite European Real Estate Fund. "This was the first pan-European portfolio to be sold in a long time, and we believe it marks the start of a new trend for this type of transaction," said Dubos, before adding: "In particular, this transaction saw a return to pan-European financing, which had not been seen for some years. A possible return of pan-European portfolios would be likely to stimulate the market and bring significant investment volumes once again."

Predicting that "the rebalancing of the market in favor of logistics should continue in 2025", Musseau is convinced that "logistics real estate will establish itself as an asset class in its own right, continually attracting significant investment volumes".

Long perceived as an alternative product, logistics should no longer suffer from any inferiority complexes against other real estate asset classes. And while it owes the fact that it accounted for more than a third of investment volumes in France in 2024 to a number of cyclical factors, "logic would dictate that in the future it should account for between 20 and 25% of the market", concludes Poizat. "Not as an alternative, but as a respected product on a par with office, retail or residential."