Demand for good warehouse property has never been as high and supply has never been so low. Rental growth has never been stronger and yields have never been lower.
According to CBRE, rents achieved for certain prime units exceed 20% of the quoted rent, with the sharpest increases in the South East. We’ve seen that, and more, in our own portfolio – particularly in London. The best urban logistics warehouses are now leasing at more than £30/sq ft and rents for the best Midlands big-box warehouses stand at a record £8/sq ft-plus.
In the UK, in the first nine months of 2021, 17.6m sq ft of speculative buildings were let or went under offer, compared with 11.1m sq ft in the whole of 2020 – itself a record year for take-up. I’ve never known vacancy so low; typically on average in double figures across Europe, it is now 4% to 5% and many locations face even more acute shortages.
The investment market is also very strong. Knight Frank forecasts a record year across Europe, with €38.3bn (£32.8bn) already traded in 2021. Yields of 3% to 4% are now typical both in the UK and on the continent, Germany probably having the lowest.
The Urban Land Institute and PwC’s benchmark Emerging Trends in Real Estate research, released in November, continues to rank logistics facilities high in the list of the sector’s most desirable asset classes, so the weight of capital pursuing these assets looks unlikely to diminish.
So where is the subsector heading in 2022? How does the world of warehouses continue to thrive in an already red-hot market?
Potential dark clouds on the horizon are: the reopening of shops; affordability issues for occupiers; rising inflation through material shortages and supply chain difficulties, potentially leading to interest rate rises; and, of course, a hugely competitive market for new opportunities.
The rise of ecommerce – more recently turbocharged by the pandemic – kickstarted the warehouse boom. And with the latest iteration, ‘Q-commerce’– operators such as Deliveroo, Getir and Gorillas – generating demand from new entrants (particularly as they partner with established supermarkets), increasing online penetration in retailing appears to have no let-up.
New types of customer
Other types of customer are also fuelling demand and reducing supply. Two examples are data centres and creative industries. Netflix, an important new SEGRO customer, has taken 250,000 sq ft in Enfield, north London, for a content production campus.
This is speculatively developed space that would otherwise have been taken by more traditional warehouse users.
With demand so strong and supply of warehousing overall constrained by limited availability of land, a slow planning process and restrictive planning policy, and now shortages of materials and labour (which is also pushing up construction costs), the result can only be continued rental growth.
This is good news for investors, as rising rents continue to underpin low yields. And while that growth is in place, inflation becomes less a threat and more an opportunity. Even an increase in interest rates to dampen inflation – the consensus among most economists is that there will be only modest rises anyway – is likely to be outweighed by the sheer level of capital looking for a home.
A lack of affordable warehouse space for occupiers then becomes the risk. However, Property Market Analysis (PMA) suggests that property continues to be a very small part of overall logistics cost; rent typically accounts for less than 5%, with transport at 50%, carrying of inventory at 22% and labour at 10% (and rising).
Also, occupiers are willing to pay a premium for the best locations because they are crucial to their business. A company promising delivery within the hour in London simply cannot lease a warehouse half way up the M1 because it would torpedo its whole customer proposition.
But a word of caution to those looking at the subsector. Not all industrial property is equal. A tertiary, multi-let estate on the edge of a small market town cannot accurately be described or regarded as ‘urban logistics’. Its performance will not be driven by the themes I’ve described.
Last-mile delivery locations need a large concentration of customers in their immediate radius and road congestion to inhibit easy access to them. That’s what justifies their high rents and valuations.
Overall, the outlook for warehouses remains extremely strong. The historic image of industrial property as real estate’s ‘Cinderella’ sector is certainly over, she really can stay at the ball!
Andy Gulliford is chief operating officer at SEGRO