Strong Rental Growth and Easing Borrowing Costs to Support Core Plus Industrial Investment in 2025

Posted by Colliers on 16th December 2024 -

The industrial and logistics market will be undergoing a fascinating shift in 2025. With borrowing costs expected to come down, demand for core and core-plus assets is set to increase, particularly from those low geared investors seeking resilience and long-term value.

 

Despite pricing having stabilised, the elevated risk-free rate and uncertain economic environment have kept a lid on transactional activity over the past 24 months. The high cost of debt is the biggest barrier to entry, particularly for core buyers of prime product. The majority of value-add and opportunistic capital continues to target higher yielding assets or properties which offer access to reversion in the reasonably short term. Opportunistic investors are expected to continue pursuing select deals. At the same time, growing capital will be raised for core investments, and as borrowing costs ease, we anticipate a corresponding rise in transactional activity – particularly at this core end of the market.

During Colliers’ Creating Value in a Transforming Market webinar in October, where nearly 500 professionals tuned in, 67% of respondents indicated they foresee an uptick in transaction volumes for core and core-plus assets in 2025. This sentiment reflects a growing confidence in the market as investors seek greater exposure to industrial assets which are set deliver strong rental growth.

Supply-demand hotspots to see mild yield compression first

Financial markets and economic houses are forecasting the Bank of England’s base rate to decrease from 4.75 per cent to between 3.5 per cent and 4.0 per cent by late 2025 and early 2026. Lower inflation and falls in interest rates are expected to boost GDP growth from 0.9 per cent this year to 1.6 per cent in both 2025 and 2026 (Capital Economics). Therefore, it is plausible to foresee some mild yield compression next year. However, while monetary policy is expected to shift from a restrictive stance to neutral, tax rises announced in October’s Autumn Statement could curtail GDP growth.

Nevertheless, flight to prime remains the cornerstone of investor strategy during times of uncertainty, hence it is envisaged that pricing for strategic assets in key sub-markets in London, the Midlands Golden Triangle, North West, and in those South East locations with a compelling supply/demand story, will benefit the most from improving financial conditions. 

Speculative development and rental growth trends

Speculative development deliveries of 100,000+ sq ft warehouses have significantly declined—from 20 million sq ft in 2023 to a forecasted 9 million sq ft this year. Colliers’ data shows that a similar amount will be developed speculatively in 2025. This reduced pipeline, coupled with resilient occupier demand, is expected to keep availability in check, further supporting rental growth. Speculative development for smaller and multi-let units has been muted due to the greater barrier to entry to acquire land in urban areas and elevated construction costs resulting in most of the capital targeting larger and less asset management intensive developments.

As a result, rental growth across the UK has been remarkable, with the market achieving a year-on-year increase of six per cent in Q3 2024. The North West outperformed, recording growth of 7.8 per cent. Moving forward, Colliers anticipates average UK rental growth of 5.5 per cent for 2024, moderating to between 3.5 per cent and 5.5 per cent in 2025.

As we look ahead, the combination of forecasted lowering borrowing costs, normalising speculative development, continued rental growth and improving economic conditions positions the industrial and logistics sector for further growth. The build-to-suit market is set to pick up as increasing rental growth and rebalanced financial conditions should make appraisals stack up more favourably, while allowing some occupiers to turn to tailored solutions to meet their long-term property needs.