BNP Paribas eyes growth in pan-European logistics space

American-born Logan Smith aims to 'shake things up some’ in his new role as European head of logistics investment for BNP Paribas.

Based in Amsterdam, the American-born logistics veteran sees plenty of scope for the Paris-based company to develop its own signature in the European advisory space despite the presence of strong competitors like CBRE and JLL. ‘This is a special time for logistics regardless of the fluctuations of the global economy,’ Logan told PropertyEU in an interview. ‘What we aim to do is to help our clients be on the vanguard.’

How is the sector developing?
Ecommerce is fundamentally changing the dynamics of real estate, not just logistics real estate but all segments. It just happens that logistics real estate is on the leading edge, so we have a better vantage point. To illustrate, it is estimated (by Prologis) that ecommerce requires about three times more distribution space (per unit of sales) than required by traditional bricks-and-mortar occupiers. Also, the proportion of ecommerce relative to total retail spend is currently between 5-10%, but that percentage is expected to increase and plateau somewhere in the high teens. So until this plateau we should expect, say, three times more ecommerce than we currently have. This ‘back of the envelope’ estimate does not necessarily mean that we will need nine times (3x3) the ecommerce logistics space that we currently have - but it does hint at the direction and magnitude of the changes still to come.

What can BNP Paribas RE offer that your competitors don’t already have?
Just like the other pan-European service firms, we provide a full pan-European suite of services for logistics and industrial real estate including investment, leasing, valuation, and property management. But there are a few important ways in which we differ. Firstly, we are designing our pan-European logistics offering from scratch and we are designing it specifically around the needs of clients. For example, although not specific to logistics per se, there are about a dozen simple ways we are applying cloud-based technologies to streamline our communications and pan-European platform. For clients, this means we will offer more responsiveness, and more granular market knowledge. Secondly, we deeply understand the challenges that investors and owners face. Over the past year, many members of the pan-European logistics team we’ve put together has more of a ‘client’ background than a ‘services’ background, coming from firms including Prologis, Goodman, TPG/P3, AEW, and others. We have moved over to the services side because we all see the opportunity to build this.

In what ways has the sector changed and what do you see going forward?
Logistics as a sector didn’t really exist 10 or 15 years ago, and it certainly wasn’t regarded as a real institutional asset class. This has all changed. But the truly interesting part is that we are still only at the beginning. In spite of all the growth we’ve seen in this sector in Europe, modern logistics space per capita in Europe is still only about a third of what it is in North America. Developers have figured this out and are now building more. Eventually we will arrive at some sort of equilibrium within the parameters of the current ecommerce business model. I don’t know precisely when this will be, but I do know that when we do arrive it will all change again. Ecommerce and consumer purchasing habits will continue to evolve, and this will impact real estate.

Although most people equate ecommerce with direct to consumer delivery, technology has been shaping the logistics real estate sector for much longer. The ‘big box’ trend of the late 1990s and 2000s, although not often thought of as ‘ecommerce’ was essentially driven by the information technology advancements in the supply chains of retailers and distributors (ie ERP systems, warehouse management, and transportation planning systems). This led them to consolidate smaller regional warehouses into a single larger one, and this was the central trend on which today’s major developers built their business. Amazon, Zalando, Ali Baba and others are simply just the next wave of this trend. And eventually there will be others.

What are the risks?
Overall, the impact of ecommerce on logistics real estate has been enormously positive. However, I don’t hear many other service firms or even very many asset managers discussing the risk of functional obsolescence in a meaningful or quantifiable way. In short, functional obsolescence is the risk that potential changes in ecommerce can make a building less valuable to a potential future tenant. It is a real risk, but very difficult to assess because it partly depends upon predicting the future shape of ecommerce which is a difficult task. Typically it seems like investors sort of just ‘bake it into’ tenant renewal probabilities or downtime assumptions on an ad hoc basis. Therefore, on behalf of our clients, our team at BNP Paribas built a tool to measure and quantify this risk. In our experience, there are a few key metrics that seem to correlate well to releasing potential and potential vacant possession value in different supply chain scenarios. Some of these include land value, proximity to population and others. Like any other underwriting assumption, the tool isn’t perfect and is still being refined, but it is better than anything that existed in the industry before to our knowledge and is an example of how the BNP Paribas Logistics and Industrial team intends to go ‘above and beyond’ for our clients.