European logistics continues to grow during pandemic

Silvia Jodlowski, Senior Analyst at Cushman & Wakefield

Europe’s commercial real estate markets maintained their trend of slowed rental growth and yield development across most markets in Q3 2020 according to Cushman & Wakefield’s latest DNA of Real Estate.

Silvia Jodlowski, Senior Analyst at Cushman & Wakefield comments: “As the global coronavirus pandemic continues, its impacts can be seen on Europe’s commercial real estate market, with retail rents dipping further into negative territory and office rents also showing a very marginal fall over the quarter. In contrast, the logistics sector continues to shine with rents continuing to grow and yields continuing to compress as investors remain attractive to the positive fundamentals the sector shows.”

The logistics sector managed to retain a degree of resilience also in Q3 2020. Supported by limited supply and strong occupier and investor demand, the sector continues to be the best performing mainstream market with continuous rental growth and yield compression in most areas. European prime rents increased on average by 0.6% in Q3 2020, helping to maintain annual growth at a respectable 2.1%. Berlin posted the strongest growth with rents rising 12% over the quarter, with Rotterdam posting an equally strong 7.1%. European all logistics yield dropped by 25bps year on year, to 5.26% in Q3 2020 with France and Germany holding a position of the lowest country average yield, both sub 4%, and with yields down at least 20bps year on year in a majority of markets.

The office sector experienced a slight drop of in rents (-0.1% quarter-on-quarter) in Q3 2020, following a heavier -0.7% fall in previous quarter. Overall annual growth slowed further, with rents just 1% higher compared to the same period last year, representing the slowest rate of growth since 2014. On a city level, there were only five cities which saw rents increase, led by Birmingham at +7% to £37.00/ sqft/ yr and Leeds up over 6% to £34.00/ sqft /yr. Overall ten markets recorded a fall, with rents 10% lower in Istanbul and Berlin reporting a 5% fall which ends a period of sustained growth that saw rents rise from €22.50/ sqm/m in Q3 2014 to €40/ sqm/m in Q1 2020.

Nigel Almond, Head of Data Analytics at Cushman & Wakefield added: “Overall the prime European office yield continued to rise having reached a floor of 4.26% in Q1 2020 and now stands at 4.34%. However, in the core markets of France, Germany and the UK, we have continued to see some modest compression over the quarter underscoring investor interest for best in class assets in key locations.”

The retail sector continued its negative trajectory in Q3 2020. Given the current pandemic with weaker sales in physical stores, loss of tourism in some locations and continuous growth of online has accelerated change in the struggling retail market. Prime retail rents decreased by -2.3% in Q3 2020. Albeit this is softer when compared with -4.3% fall recorded in Q2 2020. Overall annual growth rate slipped further in Q3 2020 (-7.2%), the weakest rate since Q4 2009 (-7.6%). No retail markets saw rents increase over the quarter with half of the markets registering a fall. The European prime yield rose to 4.67% in Q3 2020, 45bps higher on a year ago, and led by the UK with 6.19% prime retail yield in Q3 2020.