European Industrial & Logistics Sector Outlook 2024

THE TIDE IS TURNING

LOGISTICS & INDUSTRIAL FORECAST

KEY TRENDS TO HELP NAVIGATE THE REAL ESTATE MARKET IN 2024

THE TIDE IS TURNING

NAVIGATING THE SLOWDOWN

TOWARDS STABILISATION

or other businesses, have expressed concerns about securing new business, prompting a hesitation in committing to new space. As a consequence, businesses are delaying new space requirements into the market, and when they do seek new space, the decision-making process is prolonged, elongating the deal completion process level.

After experiencing significant growth during and after the pandemic due to a spike in demand for space, European logistics occupier activity decelerated notably in 2023. Peaking at 46 million sqm on a rolling four-quarter basis in mid-2022, the total take-up volume has receded by nearly a third, settling at 31 million sqm. This brings it more closely in line with pre pandemic levels of 30 million sqm per year. The deceleration is partly attributed to businesses exercising caution amid economic uncertainty. Companies, whether directly serving consumers

LOGISTICS & INDUSTRIAL OCCUPIER TAKE-UP ROLLING FOUR QUARTER TOTAL

50

"

45

40

35

30

Companies, whether directly serving consumers or other businesses, have expressed concerns about securing new business, prompting a hesitation in committing to new space.

25

20

15

10

5

0

Q1 ‘15

Q1 ‘16

Q2 ‘16

Q3 ‘16

Q4 ‘16

Q1 ‘17

Q2 ‘17

Q3 ‘17

Q4 ‘17

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q3 ‘19

Q4 ‘19

Q1 ‘20

Q2 ‘20

Q3 ‘20

Q4 ‘20

Q1 ‘21

Q2 ‘21

Q3 ‘21

Q4 ‘21

Q1 ‘22

Q2 ‘22

Q3 ‘22

Q4 ‘22

Q1 ‘23

Q2 ‘23

Q3 ‘23

UK & IRELAND WESTERN & NORTHERN EUROPE SOUTHERN EUROPE CEE

Source: Cushman & Wakefield Research

4 LOGISTICS & INDUSTRIAL OUTLOOK 2024

THE TIDE IS TURNING SWIFTER | 5

"

The demand for logistics space to support retail supply chains is anticipated to persist into 2024 and beyond.

While economic factors have contributed to a slowdown in occupational activity, additional dynamics are bolstering ongoing demand, particularly for new and high-quality space. In the current climate of emphasising operational cost, businesses may discover that upgrading to new logistics space is operationally more cost effective. Likewise, the consolidation of operations into fewer but larger buildings can yield efficiency gains, subsequently reducing costs and enhancing processes. These somewhat counter-cyclical dynamics can spur activity even in a challenging economic environment. From a structural change perspective, ongoing factors drive the need for additional logistics space in Europe. The expansion of online retail and the necessity for logistics properties to meet delivery demands are expected to persist. Although the growth in online retail sales volume has been relatively subdued in 2023 due to consumers scaling back spending both online and overall, forecasts indicate a return to growth in the coming years. While retailers adapt their online sales fulfilment strategies, including utilising stores as micro-hubs, logistics warehouses remain inherently more efficient for delivering effective logistics solutions. Consequently, the demand for logistics space to support retail supply chains is anticipated to persist into 2024 and beyond. Furthermore, space demand from manufacturers is poised to persist as the nearshoring trend, strategically situating production closer to consumer markets, unfolds. Demand from manufacturers surged 27% from 2017 to 2022, and the level of inquiries, particularly from high-value added manufacturing businesses in Central and Eastern European countries, remains robust.

Considering the enduring nature of manufacturers' real estate needs, this trend is anticipated to grow steadily over time, adding to demand for both manufacturing and logistics facilities. A significant structural shift impacting all property categories, including logistics, is the occupiers' demand for spaces that prioritise sustainability. Given that the lifecycle of logistics and industrial real estate is typically longer than of office and retail spaces, there is a pressing need for higher quality environments that help deliver on occupiers' sustainability goals. This demand is expected to prompt occupiers to choose buildings with higher sustainability credentials to align with their corporate ethos or brands regarding sustainability, some doing so rapidly, consequently driving transactions. With the anticipation of diminishing economic uncertainty, business confidence is beginning to stabilise, marking a positive turn from the downward trend observed since early 2022. This trend is promising for occupiers, increasing the likelihood of committing to new logistics space. In certain countries, the pace of occupier take-up decline has slowed, and, in some instances, take-up has actually increased. Across Europe overall, our expectation is that take-up volumes in 2024 will be on par with pre-pandemic levels, as opposed to reverting to the extraordinary levels witnessed during the pandemic.

6 LOGISTICS & INDUSTRIAL OUTLOOK 2024

THE TIDE IS TURNING SWIFTER | 7

SHIFTING LANDSCAPE

LEASING AVAILABILITY WITH CONTROLLED DEVELOPMENT SUPPLY In 2022, vacancy rates plummeted to unprecedented lows. The surge in demand during the pandemic, coupled with shortages in building materials and labour, led to tight availability in many markets. However, since the start of 2023, vacancy rates have begun to increase as demand has slowed. New development supply has continued to enter the market, with ongoing construction projects progressing and being delivered. Developers, driven by both occupier-led and speculative strategies, have expanded construction into new geographical areas over the past few years.

Despite this, some markets still require new supply, particularly where existing stock is older, and there has been limited speculative development to meet the demand for modern spaces. Consequently, there is a growing appetite for redevelopment and refurbishment options where feasible. Additionally, supply remains constrained in certain markets where a scarcity of development land and challenges in obtaining permits for logistics spaces hinder the potential for development, thus limiting the ability to capture occupier demand.

Yet, the supply of new developments is showing signs of moderation, both in terms of volume and pace. Speculative development is expected to slow, partly due to developers' cautious approach to prevent market oversupply following the deceleration in occupier activity. Challenges such as higher financing costs, elevated yield levels, and difficulties in securing capital for development have resulted in a slowdown in the delivery of new spaces.

LOGISTICS & INDUSTRIAL VACANCY RATES

"

16%

14%

12%

10%

The demand for logistics space to support retail supply chains is anticipated to persist into 2024 and beyond.

8%

6%

4%

2%

0%

Q1 ‘15

Q1 ‘16

Q2 ‘16

Q3 ‘16

Q4 ‘16

Q1 ‘17

Q2 ‘17

Q3 ‘17

Q4 ‘17

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q3 ‘19

Q4 ‘19

Q1 ‘20

Q2 ‘20

Q3 ‘20

Q4 ‘20

Q1 ‘21

Q2 ‘21

Q3 ‘21

Q4 ‘21

Q1 ‘22

Q2 ‘22

Q3 ‘22

Q4 ‘22

Q1 ‘23

Q2 ‘23

Q3 ‘23

Source: Cushman & Wakefield Research * Spain = Barcelona

CZECH REPUBLIC FRANCE IRELAND ITALY NETHERLANDS POLAND SPAIN* UK

8 LOGISTICS & INDUSTRIAL OUTLOOK 2024

THE TIDE IS TURNING SWIFTER | 9

RENTAL GROWTH CONTINUES

BUT STARTING SLOW

EUROPEAN LOGISTICS & INDUSTRIAL PRIME HEADLINE RENTS (AVERAGE GROWTH RATES BY COUNTRY; REBASED TO Q3 2018 = 100)

160

Prime logistics rents have grown at extraordinary levels over the past few years, and extended into 2023 in certain markets. Over the last five years, prime logistics rents have grown by an average of 37% across Europe, with growth in some markets surpassing 80% However, after such remarkable growth in a high-demand, supply-constrained environment, the pace of rental growth is slowing. In the year leading up to Q3 2023 , the average rate of rental growth across European markets was 11%, compared to 15% in Q4 2022 (although, in some countries, rental growth has continued to accelerate). A more nuanced narrative is now unfolding. Instead of all markets within a country following a similar growth trajectory, local market dynamics, especially the supply-demand profile for different types and sizes of real estate, as well as the degree of involvement by developers and landlords, are exerting more influence. Consequently, the profile of rental growth may vary among different markets within the same country.

Nevertheless, rental growth is expected to remain positive across European markets . Landlords are eager to ensure that headline rents continue to ascend, creating a basis for new lease and rent review negotiations at much higher rental levels than previously contracted. However, tenant incentives are becoming more common in lease negotiations, as landlords seek to secure income amid a slowdown in occupier demand. This trend may begin to affect headline rental growth. Landlords are also being more creative in crafting tenant incentive packages, sometimes including amortised fit-out costs alongside more traditional rent-free periods.

150

140

130

Chart 3: European logistics & industrial prime headline rents

120

110

100

90

SEP 2018

NOV 2018

JAN 2019

MAR 2019

MAY 2019

JUL 2019

SEP 2019

NOV 2019

JAN 2020

MAR 2020

MAY 2020

JUL 2020

SEP 2020

NOV 2020

JAN 2021

MAR 2021

MAY 2021

JUL 2021

SEP 2021

NOV 2021

JAN 2022

MAR 2022

MAY 2022

JUL 2022

SEP 2022

NOV 2022

JAN 2023

MAR 2023

MAY 2023

JUL 2023

SEP 2023

FRANCE SPAIN

GERMANY SWEDEN

UNITED KINGDOM NETHERLANDS

ITALY

POLAND

EUROPE AVERAGE

Source: Cushman & Wakefield Research

"

Prime logistics rents have grown by an average of 37% across Europe, with growth

in some markets surpassing 80%.

10 LOGISTICS & INDUSTRIAL OUTLOOK 2024

THE TIDE IS TURNING SWIFTER | 11

RESURGENCE ON THE HORIZON

STABILISED INVESTMENT PRICING

Pricing has moved out sharply since Q1 2022 and some major markets have seen yield decompression in excess of 130 bp to end Q2 2023. Encouragingly, in Q3 2023, prime yields in many markets have remained stable relative to Q2 2023, which is providing both vendors and buyers with confidence that prices agreed are a true and sustainable reflection of values. As a result, activity is starting to return: more product is entering the market, and we anticipate an improvement in volumes. In fact, in certain markets such as the UK and Germany, investment volumes in Q3 2023 have shown a quarter-on-quarter uplift, although volumes remain muted in other markets, including France and the Netherlands. We expect that, with pricing stabilisation, investment activity will start to recover more meaningfully as investors remain confident in the sector. Many have secured or earmarked capital specifically for investments in logistics and industrial assets, patiently awaiting the right time – and pricing levels – for deployment. The active capital currently in the market tends to be of value-add or opportunistic nature, with core capital likely reengaging in active acquisition strategies later in the cycle.

Investment volumes in 2023 have declined significantly from the record highs of 2022. By the end of Q1 2022, investment volume had peaked at just under €80 billion (four-quarter rolling total), compared to nearly €41 billion in 2019. This exceptional surge in investor activity during 2021 and early 2022 was propelled by extremely tight occupier market conditions, robust rental growth, and an attractive return profile compared to other asset classes. The overwhelming investor demand for a limited supply of investment products led to soaring capital values and compressed investment yields. In major markets, prime yields decreased by 100 basis points or more between 2019 and Q1 2022. However, with the slowdown of the economy and occupier activity, along with increases in interest rates and financing costs throughout 2022 and 2023, investment activity has significantly decelerated. Investors have been patiently awaiting pricing stabilisation. Industrial investment volumes for Europe were reported at just over €32 billion at the end of Q3 2023, a marked decrease from the nearly €80 billion transacted in the year leading up to Q1 2022 but only slightly behind the average annual volume in the pre-pandemic period.

"

We expect that, with pricing stabilisation, investment activity will start to recover more meaningfully as investors remain confident in the sector.

12 LOGISTICS & INDUSTRIAL OUTLOOK 2024

THE TIDE IS TURNING SWIFTER | 13

Sally Bruer Head of EMEA Logistics & Industrial and Retail Research sally.bruer@cushwake.com

Sukhdeep Dhillon Head of EMEA Forecasting Research sukhdeep.dhillon@cushwake.com

Michael Carson Partner michael.carson@cushwake.com

Rob Hall Executive Account Director robert.a.hall@cushwake.com

Tim Crighton International Partner tim.crighton@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.