Inflation drives up construction costs for logistics projects

25%: that is the increase recorded by Global Contractor GSE in the construction costs of its logistics projects in France and across Europe, between the pre-COVID period and today. The main reason: inflation. “This inflation had already begun in 2021, a year that, as a reminder, was the best ever for investment in this asset class. Thanks to the strong growth of e-commerce, new investors appear to have (re)discovered this market.” recalls Damien Vernier, Commercial Director for GSE’s logistics business in France. Add to this an order book for warehouses that has continued to grow since COVID, the war in Ukraine, and material shortages, and the result is structural inflation. “We saw a sharp increase in the price of our purchases during the first and second quarters of 2022,” adds Bruno Becker, Director of Studies at GSE.

Among the main materials affected by inflation in logistics projects is steel. “Needed for several parts of a warehouse and widely used in foundations, structural frames, roofing, cladding, and all dock equipment, the purchase price of this material soared by 30% to 40% in just a few months ,” reports Bruno Becker. Then, from mid-2022 onward, inflation hit the prices of insulation and the technical equipment essential to a warehouse (heating, ventilation, air conditioning, etc.) head-on. “A spiral explained by soaring energy costs in Europe,” observes Damien Vernier. By contrast, rising prices for office finishing packages in a logistics development remain under control. As a result, the average construction price of a prime warehouse has risen “considerably” to €650/m2, compared with €400/m2 a few years ago. “At the same time,” continues Damien Vernier, the increase in land costs—linked to strong demand for urban logistics and the net zero land take (ZAN) policy—also contributes to rising prices for a logistics development.”

How have industry professionals adapted to this new reality of prolonged inflation? “In a highly volatile market, developers and investors have found their adjustment variable: rents. Fortunately, they are not as high as in some European countries,” replies GSE’s Director of Studies.

This upward trend in rents can also be explained by a very low vacancy rate, at around 5%, with major regional disparities, and an increasing shortage of supply relative to demand. Like its market peers, GSE—which derives 80% of its business from logistics—has introduced fixed-price contracts with an escalation clause that have been “well” accepted by its clients. “A process already used in the past during periods of high inflation,” says Damien Vernier. He adds: “While the economic equation will be difficult to solve in 2023, all stakeholders in a logistics project have adapted to market realities.” At the beginning of 2023, fixed, non-escalatable commitments are once again possible for projects whose construction can begin in the medium term. “ Discussions have been initiated with our clients; most of them have agreed to contribute to the effort needed to ensure the survival of some supply chain companies ,” Damien Vernier agrees.

Another consequence of inflation for logistics projects is delays in delivery schedules and in projects yet to be launched. “After a wait-and-see period, we expect delays,” states Bruno Becker. Especially as speculative developments are becoming increasingly rare.” While Damien Vernier believes the situation could be more “settled” after next summer, he says uncertainty remains “the order of the day” regarding soaring material prices and the cost of raw materials internationally. “No one knows when prices will level off or decline.” Yet these economic shocks are not disrupting the need for new square footage. “Demand remains and will remain very strong among users in the e-commerce, mass retail, and hard-discount sectors,” says the Commercial Director of GSE’s logistics business in France. Despite the difficulties of establishing new logistics projects throughout France, these players, as part of a strategy to expand their reach and organize their flows nationwide, need to lease new high-performance facilities, both technically and environmentally.”