Mega-deals Make Up H1 Industrial Market

Posted by Colliers on 23rd July 2024 -

We are clearly returning to a more normalised industrial market environment, with take-up, rental growth and investment now within the long-term averages for our sector. 

Prime locations have led the way this year, with some occupiers looking to future-proof their supply chains by fulfilling their larger scale requirements which, due to the difficult macroeconomic conditions, they have been contemplating for a while. 

Our H1 analysis has shown that while take up is in line with the 10-year pre-COVID average, it’s interesting to note that this has been achieved across fewer deals. Typically, by this time of year pre-COVID, there would have been around 62 deals of 100,000+ sq ft over the line, but in H1 2024 there were only 53. The most acquisitive occupiers this year are those with larger warehousing needs: almost half of space taken up (46 per cent) was with storage and third-party logistics suppliers (46%), followed by the wholesale/retail sector, which secured almost a quarter (24 per cent) of the space let.

Examples include Yusen Logistics at SEGRO Logistics Park Northampton in Q1, in which Colliers, acting as the disposing agent, facilitated a pre-let agreement for 1.2m sq ft. More recently, the market has also witnessed Nike pre-letting 1.3m sq ft at Magna Park Corby and Greggs’ securing c.500,000 sq ft at SmartParc SEGRO Derby.

However, most occupiers are still faced with subdued retail sales alongside elevated operational costs which is inhibiting plans to expand their logistics network. 
 

Lack of speculative supply coming forward

One of the biggest hurdles for occupiers to consolidate or expand their logistics operations is the elevated cost of capex, which can be prohibitive in a slow growth economic environment. 

It is widely anticipated that with interest rates reducing, there will be improved consumer spending towards the end of this year and into 2025. Some cash in the coffers is what will give occupiers the confidence to start looking at their logistics strategies and real estate portfolios with more vigour once again. While businesses, and the wider economy, had enjoyed sourcing debt cheaply until Q1/Q2 2022, when the Bank of England started raising the base rate to counteract inflationary pressures – it’s unlikely that interest rates will return to anything like what they were between 2010 and 2022. Forecasts suggest that it won’t be until the second half of next year that rates might approach or dip below 4 per cent.   

Due to the market and economic conditions, developers have generally been reticent to break ground on new speculative supply. Although construction cost inflation is starting to decrease – Colliers’ Cost Management team is predicting an overall tender price inflation forecast of 2.25% this year - there is less than 10m sq ft of speculative warehouse development under construction, due to be delivered over the next 12 months. As a result, we’re expecting that when occupiers are ready to once again move on their strategies, there will be a dearth of good quality space in prime locations for them to take-up. This will put pressure on those with defined ESG strategies and will likely result in a return to build-to-suit demand. 

Meanwhile, those with space available to let, will continue to reap the benefits of rental growth.