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European Light Industrial and Logistics CMBS and the Impact of an Economic Downturn

In Europe, light industrial and logistics has become one of the most common asset classes securing new commercial mortgage-backed security (CMBS) issuance over the past few years, supported by strong investor demand with additional rental growth anticipated in the logistics sector amid the structural shifts. The onset of the Coronavirus Disease (COVID-19) pandemic in 2020 amplified demand for warehouse space as more space-intensive e-commerce gained share and businesses were looking to restructure their supply chains to hedge against disruptions, while completions struggled to keep pace. These market conditions fuelled rental growth in the sector to unprecedented levels, raising concerns about trend sustainability. Worsening economic prospects exacerbated these concerns as annual inflation in the eurozone and the UK accelerated to multi-decade highs, weighing on business sentiment and posing risks to consumer spending. This commentary examines structural trends that are driving the demand for logistics space in Europe against the backdrop of a slower economy and rising interest rates, as well as reviews the performance of logistics-backed CMBS loans rated by DBRS Morningstar.

Key highlights include:
-- Demand and rents in the logistics sector are not likely going to ease over the next few years due to the prolonged supply imbalance and sustained demand driven by e-commerce expansion and supply-chain restructuring, albeit rental growth is likely to slow down.
-- Increasing debt costs will have a negative impact on logistics properties values, which soared during the pandemic, as market participants are finding new pricing equilibrium and investment activity subsides.
-- Environmental, social, and governance factors will increasingly influence rental and investment decisions, as they can support cost-control efforts for occupiers as well as unlock access to cheaper green finance, thus helping to mitigate the rising cost of financing for investors.
-- DBRS Morningstar-rated European CMBS transactions backed by logistics properties have performed well over the past two years, largely mirroring the market trends.

“Although the sector is not completely sheltered from the current economic challenges, DBRS Morningstar views the light-industrials and logistics space as one of the most resilient in the medium term among other commercial real estate property types as the drivers that have expanded the logistics landscape continue to influence the market. The credit outlook for CMBS transactions secured by light-industrial and logistics properties will remain stable”, said Violetta Volovich, Senior Analyst of European CMBS at DBRS Morningstar.