Logistics market overview and compensation due diligence

Logistics market overview and compensation due diligence

Introduction

As an asset class, industrial and logistics have been the belle of the ball for the past few years, with investors of all types feeling the pull of sound macro fundamentals and stable rental growth. Now with the world rocked by a global health crisis recession, we look at the likely impact of COVID-19 on this darling of the industry and explore the approach investors are taking.

Later on, we will also analyse the range and structure of compensation for the following roles:

  • Business Heads 
  • Fund / Portfolio Managers 
  • Asset Managers 
  • Acquisitions Professionals 
  • Development Professionals 

Sector overview and key questions

Prior to the COVID-19 crisis, fundamentals in the industrial and logistics sector were extremely strong. The asset class was enjoying a continued boom across Europe, with demand continuing to grow year on year. Occupier demand was at an all time high and vacancies were nearing record lows. Unlike most asset classes, the COVID-19 crisis has only served to improve the underpinning for logistics as consumers increase their reliance on ecommerce to deliver goods of every description. The global demand for quality logistics real estate will only increase, positioning the sector as one of the most attractive places to invest capital.

As the market looks towards logistics as one of the most stable asset classes, they also recognise it has the best potential for growth and to deliver decent returns, particularly relative to other forms of commercial real estate (CRE). That is not to say that the industry is immune from the effects of the global crisis; there is the potential for increased vacancy from customers going out of business which would put a pause on rental growth in the short term. Nevertheless, this impact is likely to be muted as demand from new tenants will outstrip any vacancies and this demand will only increase if there is a pause in rental growth. This makes the sector hugely attractive to all types of capital and, as such, the market anticipates deal activity to increase. 

Here we explore some of the key questions which are front of mind for the logistics investor: 

What type of activity will we see in the sector in the coming weeks and months? 
Players who already have exposure to logistics will look to increase their holding, while new entrants also look to deploy capital in the sector. These new entrants to the market will include well capitalised investors who are looking to diversify their portfolios, as well as investors who are keen to shift their focus from beleaguered asset classes such as retail and hospitality. The anticipated large number of new entrants (some better positioned than others) to the already crowded market, will make for a very competitive space. 

As debt markets contract, anyone who relies on high levels of leverage (typically developers and some private equity (PE) funds) may struggle over the coming months. 

As is often the case, capital is king in this environment and there are various funds with formidably deep pockets, such as GreenOak, TPG and Blackstone, who have stated their desire to deploy capital in this sector. These types of investors are not shy of ground up development and are no stranger to platform aggregation strategies, characteristics which lend themselves to logistics where supply of standing assets is scarce, and the efficiencies gained from operating sizeable portfolios of assets are material.

At the other end of the spectrum, developers are being hit as construction and planning are on hold and supply chains stall. A lot of business planned for Q3 and Q4 of this year will be kicked into 2021 as projects will be delivered late. Developers will benefit from a reduction in cost (due to declining GDP and inflation) however scarcity of financing will cause major issues, particularly for the speculative developer who relies on high levels of leverage. Strategic pre-let developments are continuing to perform; they are suffering from the same construction and supply chain delays as their speculative cousins but are less impacted by the issue of financing.  Overall, the short-term outlook for logistics development in 2020 seems shaky, however most expect activity to come back stronger than ever in 2021.

What property types will be the most popular? 
Like other sectors, the quality of tenants will have a big impact on the resilience of a portfolio. Those involved with food, pharmaceuticals and other essential goods will be far less affected by the crisis compared to those with fashion, manufacturing or automotive tenants. 

Last mile logistics (also known as urban logistics) will undoubtedly fare the best. With the boom in ecommerce only set to continue as people change the way they live; urban logistics will become even more sought after as the industry continues to grow. 

Cross Docking/High Flow Through assets will also remain resilient as they are essential supply chain infrastructure for ecommerce home deliveries.

Traditional industrial assets are less likely to perform well. These assets have been falling out of favour for a while as appetite for newer forms of logistics assets have outstripped interest in this sector. As the global crisis improves the fundamentals for ecommerce and associated logistics assets, so the declining interest in old format industrials assets will only accelerate.

Will COVID-19 affect the current geographical landscape of the sector? 
In the short term the US will grow faster than Europe as they currently have fewer restrictions on what can be distributed via ecommerce channels. In many European countries home deliveries are restricted to essential goods only and we don’t know how long these restrictions will last. Therefore the US is likely to experience short term gains over Europe. 

Southern Europe may see some short-term price reduction due to higher vacancy rates, but this will only be temporary as demand from new tenants will fill the breach once lockdown eases. 

In the medium to long term we don’t expect the European landscape (particularly Northern Europe) to change dramatically. With so much new capital entering the market prices are likely to remain stable if not increase.

What does the future look like? 
With the influx of capital into this sector, investors who are exiting the market for liquidity reasons will quickly be replaced by ambitious new entrants, including those who are reallocating money away from the depressed markets of hotels, retail and office. This will create an increasingly competitive marketplace and keep prices buoyant. 

The COVID-19 crisis has created a global shift in the way we all live and work. This new paradigm has been extremely disruptive for individuals and businesses alike, however logistics real estate looks set to benefit and, with a few bumps in the road expected in H2 2020, the long-term outlook looks brighter than ever before.

Compensation analysis

We have pulled together data from across the sector to give you an overview of compensation bands and structure for various pan European roles. We have collected data at different levels from the following types of firms: 

  • Real Estate Investment Managers 
  • Private Equity Funds 
  • Real Estate Investment Trusts (REITs)
  • Property Companies
  • Developers 

Compensation analysis - base salaries

Compensation analysis - annual cash bonus

Compensation analysis - structure

Compensation analysis - long dated forms of compensation

Long term incentive plan (“LTIP”)

Carry

Logistics coverage

Our reach extends across the logistics industry, with examples of key relationships below 

 

Broader real estate track record

We have advised the following business on their real estate human capital needs

More insight