The numbers speak for themselves. By the end of Q3, the levels of capital deployed into the UK industrial and logistics market surpassed £10.8bn, beating the £10.2bn spent in the whole of 2020, according to data from Savills.
Take-up for the year to date stands at just over 42m sq ft and the expectation is that we will surpass the record 50m sq ft transacted in 2020. Average vacancy rates across the UK stand at just 3.3%, quoting rents have risen by as much as 15% in some key locations and prime yields now stand at 3.25%.
Investment and take-up activity in Q4 is showing little sign of slowing down, with the industrial and logistics sector look set to smash a host of records for the second year on the trot. But there is a problem looming on the horizon. Occupier appetite for industrial and logistics space – driven partly by the rapid acceleration of ecommerce during the pandemic – has created a shortage in some markets and this is one of the biggest challenges facing the blossoming sector.
That was one of the key findings of Property Week, Savills and Tritax Symmetry’s fifth annual Industrial and Logistics Census, in association with Analytiqa. The census canvassed the opinion of industrial and logistics occupiers, developers, land owners, investors, asset managers, advisers/consultants and agents to establish the current state of play in the sector.
It found that 29.8% of all respondents believe the biggest challenge facing the sector is the lack of supply of new buildings – in 2020 just 18% of respondents cited lack of supply as their main concern. Employment issues (17.6%), the planning system (14.6%) and power (10.8%) also scored highly, with Brexit cited by only 9.7% of respondents.
It is interesting to look back at some of the historic data points and compare how issues and concerns have evolved over time
Kevin Mofid, Savills
The reason behind the looming shortage of industrial and logistics stock becomes apparent when you look at the effect Covid-19 has had on businesses. More than half of all respondents (52.4%) said the pandemic had had a positive impact with business increasing, 27.1% reported no real change and a surprisingly low 20.5% said Covid-19 had had a negative impact with business decreasing – last year 47.3% of respondents said the pandemic had had a negative impact on business.
And it is unlikely that demand for industrial and logistics space will ease any time soon, with 17.5% of occupier respondents saying current business conditions versus the previous six months are much more favourable, 35.9% saying they are slightly more favourable and 26.2% saying conditions are the same. Furthermore, 46.6% of occupier respondents say they will require more warehousing space over the next two years – last year 41% said they would require more space over the next two years.
This optimism is shared by property industry respondents. Some 22.2% of developers say current business conditions are much more favourable and 46% say conditions are slightly more favourable versus the previous six months. For investors, the current situation is much more favourable for 11.8% of respondents and slightly more favourable for 46% of respondents. As for agents, 27% say business conditions are currently much more favourable than they were in the previous six-month period and 30% say conditions are slightly more favourable.
Building more buildings where they are needed is clearly a key priority in the coming months, but planning, employment, power and availability of suitable sites all present threats to the sector’s future success – as too does the spiralling cost of construction. Labour and material shortages have had a major impact on the property industry as a whole, as has the leap in the cost of labour and materials. So it is little surprise that 57.7% of respondents say the lack of construction materials for new warehouses will have a negative impact on the sector.
“In our fifth year of the logistics census it is interesting to look back at some of the historic data points and compare how issues and concerns have evolved over time,” says Kevin Mofid, head of industrial and logistics research at Savills. “Over this time, the market has had to contend with the impact of Brexit and then Covid, but it is interesting to note that in our latest survey the highest proportion of occupier respondents ever, at 53.4%, have said business conditions are more favourable now than in the six-month period before. This compares dramatically with 2019 when just 16.4% of occupiers said the same.
“One of the most striking comparisons over the five years of the census has been the rising importance of power availability when considering new warehouse space. Back in 2018, just 1.9% of our respondents said that power availability was the biggest challenge they faced, rising to 11.4% this year.
“With the supply of new warehouse space at record lows and over 90% of the respondents expecting to take more warehouse space in the next two years, it remains fascinating to see how our sector will continue to evolve.”
Tom Leeming, development director at Tritax Symmetry, adds: “Another year and on track for another take-up record. While this remains a very positive position with diminishing supply (3.7%) and strong rental growth (up to 15%), it also throws up challenges, which are shown clearly through the survey results, building on the positions in previous census years going back now over five years. A not inconsiderable 30% of respondents deem lack of supply of new buildings to be the biggest market challenge, while 46.6% of occupier respondents will require more space in the next two years.
“With this in mind, we need to call upon our planning colleagues (private and local and central government) to ensure allocated employment land is delivered in sufficient quantity and in a timely manner, especially on the many underutilised motorway junctions.
“One more point to remember in all this is the considerable economic benefit the logistics sector brings to UK Plc. Many thousands of varied job roles are created both in construction and operational phases, not just for rack-and-stack occupiers but also very specialist manufacturers in wide-ranging sectors from space to automotive to healthcare, which are critical to the country’s economic success.