Diversity of industrial sector ensures strong performance

First, the facts as they are today: according to a number of commentators, the opening to this year has been a record-breaking one for take-up. CBRE’s first-quarter Market Snapshot showed 10.6m sq ft leased in 28 deals beating the previous best of 10.4m sq ft. There was also another 2.9m sq ft under offer, with the South East the strongest market.

In each of the research pieces, retail broadly accounts for about a third of take-up directly, and indirectly more given the retail sector will be behind many third-party logistics outsourced requirements too. The picture is one of pure-play online retailers continuing to grow strongly and bricks-and-mortar retailers moving to omni-channel re-engineering and repurposing their supply chains.

So the retail sector is clearly important to logistics and any difficulties should be noted with some caution. However, those who have hit trouble are hardly a surprise.

All have been slow to adapt to a changing retail environment and have struggled with one or more of the following: an expensive large-store format, poor or no internet offer and an unclear customer proposition.

How the mega merger plays out with the competition authorities remains to be seen. However, if it does go ahead it will not be easy to amalgamate everything into a single supply chain – if at all.

Space race

Recent analysis by JP Morgan Cazenove, which suggests that growth in online retail sales may not continue at the same rate because new devices such as voice activation tools will not contribute as actively as smartphones and tablets, is certainly an interesting read. However, it is difficult to imagine the tide of online convenience will diminish – a convenience that is likely to be enhanced with the introduction of 5G.

Recent international activity in the retail sector, particularly in food, demonstrates there’s still a way to go. Ocado’s latest tie-up to provide the online platform for Kroger in the US, Walmart’s increasing online success and pursuit of Flipkart in India and Lidl’s creation of a corporate holding structure for what is presumed to be an online offering do not seem to indicate a slowing situation.

But let’s just say some space does come back, is that likely to be a major concern? As JP Morgan Cazenove rightly concedes, tight supply in UK logistics will continue to support rental growth. With a 5% to 6% overall vacancy rate – substantially lower in certain submarkets – and around 70% of new development occurring on a pre-let basis anyway, as long as those providing space remain sensible then it’s hard to see a supply response that will unhinge the current attractive fundamentals.

And a last thought. We do get rather pre-occupied with retail – particularly online – but industrial, warehouse and logistics space is needed by a plethora of different types of users: high-end engineering, light assembly, food production, media and telecoms, services support, pharmaceutical, oil and energy. It’s probably part of the reason JLL’s latest Industrial Market Tracker forecasts that between 2018 and 2021 the industrial sector will deliver a total return of 8.8% per year. Which other sector has that kind of occupational diversity, which, when coupled with capital markets interest, creates that level of projected performance?

Andy Gulliford is chief operating officer of SEGRO