One of the most dynamic parts of the real estate industry, the industrial and logistics sector, came under the microscope at our Developing Connections webinar on Tuesday 1 February.
Levels of occupier and investor demand have increased since the start of the Coronavirus pandemic. Businesses have been forced to adopt new technology and new practices with this filtering through to the logistics sector, which has boomed.
Commercial real estate business forum
Developing Connections is a networking forum run by Blake Morgan, tailored for the real estate industry. A big thank you to everyone who attended our latest event, including the expert panel, which was chaired by Blake Morgan Partner and Head of Property Services Group, Philip Jardine. He was joined by industry experts, Neil Francis, Partner at Knight Frank, and Philip Stott, Founding Partner at Caisson Investment Management.
The panel got their teeth stuck into discussing the intricacies of the sector, which saw a record breaking year in 2021 for investments across the UK. The pandemic-fuelled structural trends have accelerated occupier and investor demand, particularly with e-commerce dominating activity, and is predicted to continue with the sector expected to remain ‘one to watch’, in the coming year.
Trends in the industrial and logistics sector
For units over 50,000 square foot (sq ft), transactions hit £65 million in 2021, up £14 million from the previous year. Household names such as Hermes, DPD and DHL continue to take space but it is Amazon who dominate the market with over 10 units and 2 million sq ft taken in existing buildings and a number of large scale distribution centres under construction.
What about the supply of good available space? This surge in demand has meant the UK vacancy rate has dropped 10% in 10 years from 13.9% in 2011 to 3.9% in 2021. As a result, rental growth UK-wide is increasing, with the highest being in London, which was 7.8% in 2021. Demand is outstripping supply!
With rents for new build being discussed at over £7-8 per sq ft, (as high as £14 in some cases) development is suddenly becoming more viable. Hopefully this, and, being optimistic, some reductions in build costs, will mean in a years’ time there will be more new planned schemes, coming to a very needy market.
The occupier landscape
What about the consumer? How have they changed and what are they demanding? Occupiers are as equally focused on staff welfare as they are on the quality of the actual space.
Many of the established national occupiers want to be in an environment that provides opportunities for staff to have a break from their duties – whether that be a gym within the unit, landscaped areas to walk around or simply just break out and relax. All are important, as is the accessibility and links to public transport.
In South Wales, a particular hot-spot, more of the national occupiers are considering ‘Build to Suit’, products that tick many more boxes. Once a location is identified, they concentrate on a fixed layout that they know works for them and their staff.
As a result of this they are prepared to pay higher rents. It would not be a surprise to see a number of these ‘Build to Suits’ announced over the next 12 months at rents over £8 per sq ft and in some instances getting close to £10 per sq ft, something unheard of in Wales, traditionally a somewhat depressed and subsidised market, by comparison to more popular locations, closer to London.
Opportunities for landlords and developers
Landlords can afford to be more selective with new occupiers. Less flexible terms are being offered, incentives have hardened, and in some situations, we are seeing tenants competitively bid for a new lease. Classic features of an under-supplied market.
All of this is driving up headline rents and improving the overall value and performance of a landlord’s asset. As a result when units are becoming vacant, landlords are now more willing to spend the money to upgrade the quality of the product. This is very much with a focus on the changes in the Minimum Energy Standards but rental growth and demand makes it more viable and cost effective.
On older sites, which have reached the end of their economic life, it is not unusual to see partial or even total demolition to create smaller units. This makes the units more efficient in their use or, alternatively the creation of larger yards.
In terms of developers, multi-let estates comprising of small starter units, offering flexible lease terms based on affordability, are increasingly popular with evidence of strong occupier rates. Demand is, as ever, dependent on location, proximity to residential development, access and transport links and available lease terms.
What does the future hold?
Urban logistics will continue to be the main driver of the real estate sector, it seems. We expect the click and collect offering to grow whilst also seeing the emergence of ‘dark stores’, a retail distribution centre or warehouse that caters exclusively to online shoppers.
Other sectors to watch out for include ‘gigafactories’, which will be required throughout the world to cater for the anticipated surge in electric vehicle (EV) production through providing the most critical component – the battery. These batteries need to be manufactured at scale in order to drive down EV costs. We also expect to see more data centres to cope with changes in technology and data storage.
Environmental, Social & Governance (ESG) targets are being driven by governments. Needing to hit these targets is filtering down through investor markets. The requirements for green buildings could create a two-tier market, those that comply and those in danger of being left behind. There will be an impact on planning and meeting Energy Performance Certificate (EPC) standards. This needs to be addressed on the supply side, urgently.
In conclusion, a dynamic marketplace, is bound to become yet more dynamic; changes, already afoot, will continue to accelerate and the voracious appetite for compliant, available and accessible products, shows no sign of abating. The market is being challenged to respond.
To find out more details about the potential opportunities, obstacles, research undertaken, and what the future might hold, you can view a recording of the webinar here.
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