The big-box boom

It is therefore no surprise that the first few weeks of 2022 have continued where 2021 left off, with more capital following the sector as investors look to increase their allocations.

With the resultant strong interest in the big-box sector being driven by larger lot sizes and strong covenants, and long leases driving down yields, big-box development is accelerating, with circa 12m sq ft under construction.

Near-term inflationary pressures notwithstanding, the economies of scale will continue to make this development viable, although margins are being squeezed as land values reach in excess of £2m per acre in some areas.

The last-mile and mid-box markets, however, have a different dynamic. With higher build costs and less ability to secure pre-lets, development is far less viable in those urban areas where land values are already under pressure from alternative uses, so new supply of warehouse space is critically low. This has the potential to drive rental growth beyond the 5% experienced in 2021.

In a recent occupier survey, most respondents anticipated requiring more space within the next two years

In addition, by their nature, mid-box and last-mile units have a wider range of occupiers fighting for the same space, seeking to satisfy an ever-increasing need to be close to urban areas to meet B2B and B2C requirements.

While it is recognised that proximity to the customer is the most efficient way to improve the cost of delivery, which will drive demand for more last-mile urban warehouse space, there is next to no material new supply of either warehouse units or available land, and no sign of this abating.

Yet in a recent occupier survey, most respondents anticipated requiring more space within the next two years.

The imbalance between supply and demand has never been so stark. With real estate only accounting for 2% to 5% of supply chain costs, coupled with this shortage of supply, limited prospects for new development and increasing demand, we see rental growth prospects remaining strong as the year progresses.

This in turn should translate into strong performance for those companies with significant sector exposure.

Andrew Bird is managing director of Tilstone Partners, the manager of Warehouse REIT