I recently shared my thoughts on where the future lies for the real estate industry, with a particular focus on offices. In this latest blog, I’d like to focus on another less talked about area: the light industrial sector, which comprises a significant proportion of the Sirius portfolio and Germany’s economy.

The light industrial sector, or ‘Unternehmensimmobilien’ is in the German commercial real estate context a distinct set of businesses that make use of multi-use and multi-let commercial properties, characteristically split between production, logistics, business parks and transformed former industrial sites. 

There are three key pillars that underpin long-term demand for these kinds of flexible spaces.

Structural underpinnings

We see a number of factors at play in the German economy that point to resilient long-term demand for light industrial real estate, particularly the flexible sort that we at Sirius offer the market.

Firstly and fundamentally, Germany’s economy is built on the ‘Mittelstand’, the backbone of which are often family owned businesses which typically turn over less than €50m. These are usually manufacturing businesses that act as suppliers to global corporates and blue-chip companies, and the critical mass of these firms in the German economy leads to resilient demand for commercial real estate from these firms, across the country’s major business centres and beyond.  

Secondly, manufacturing trends and changes in the configuration of global supply chains, which I’ll touch on more below, mean that many manufacturing firms increasingly require a close dovetailing of production, logistics, office and service spaces, often under one roof or across one site. This is something that can easily be achieved through a flexible platform such as ours at Sirius, one that can be both reactive and adaptive to tenant demand for these different kinds of spaces. 

Finally, consumers increasingly prefer e-commerce which is accelerating the speeds with which manufacturing businesses need to be able to bring products to market, and as such the rate at which light industrial firms need to change and reconfigure their manufacturing spaces. Again, this means that a flexible and reactive platform is what’s needed to ensure tenants are able to adapt quickly to these changes.

Supply chain shifts

Another trend that’s driving demand for light industrial spaces in Germany is ‘nearshoring’ – this means bringing manufacturing and other critical elements of supply chains back closer to the markets in which end products are sold, and in many ways the antithesis of the well-documented trend towards offshoring production to markets with cheaper costs that’s been the driving force of so much of the global economy in recent decades.

Now, however, with the pandemic and other issues such as the Suez Canal blockage earlier this year having shown in no uncertain terms the potential fragility of global supply chains, many companies are looking to return their processes to countries nearer to home. This has been exacerbated at a European level by the impacts of Brexit, and more globally by tensions between China and the USA, and I expect it would take a profound reappraisal of global circumstances to undo this trend – it’s here to stay, and what’s more it’s gathering pace.

So what does this mean for the ‘Mittelstand’ companies that make up the backbone of the German economy and often build their business through supplying global blue chip corporations? They’ll need to be more agile and flexible in terms of the products they produce and therefore the tooling and spaces they’ll require to meet more rapidly shifting demands from locally-based customers, who are looking for shorter lead times and more agile practices than they can find from global supply chains.

A good example is Bosch, which recently opened a chip manufacturing plant in Germany to help get around global supply chain shortages, so they can serve the country’s automotive sector with more certainty – and in turn this will mean increased and rapidly shifting demands from their Mittelstand and SME suppliers here in Germany.

There are noteworthy benefits to nearshoring, namely that time differences are avoided, lead times can be shortened, and in many cases risks in exchange rates can be avoided

In terms of spaces, this means Sirius is in prime position to meet the rapidly shifting demand for a variety of spaces created by this nearshoring, as we can move quickly to adapt our spaces to a wide range of sectors and needs.

Uneven demand

Finally I want to touch on ‘flexspansion’, whereby tenants are cutting back on spaces that the modern way of working frees them from, while expanding their footprint in other areas such as flexible production facilities to better reflect demand for the products they make.

Again, the Sirius model is well placed to provide for this, as we can rapidly flex our platform to create the spaces our customers need, in the places they want them – which increasingly is less in city centres and more towards edges of towns and near logistics hubs.

Closing thoughts

In summary, the operative word here has been ‘flexibility’ – what we’re seeing across supply chains, consumer trends, and economic shifts all entails a more rapidly changing environment for our light industrial tenants, and as such we as a provider of spaces will continue to be increasingly more flexible to the ever evolving requirements of our tenants.