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News Release

London

Strong start makes 2008 Another Record for Take-Up of UK logistics space

Although demand could reach record low in 2009


London, 12 February 2009 – The recession will have a significant impact on the UK’s logistics sector in 2009, with falling demand for larger logistics units anticipated to result in one of the lowest take-up volumes of the last decade according to Jones Lang LaSalle.

Despite record levels of demand in 2008, which saw a total of 19 million sq ft of industrial space leased in the UK for units over 100,000 sq ft, occupier leasing activity declined sharply in the second half of the year, representing a 70% drop compared with the first half of 2008 and by 50% on the same period in 2007.

Richard Evans, joint head of National Industrial & Logistics at Jones Lang LaSalle, said: “Take-up levels for 2008 were driven largely by buoyant activity during the first half of the year when we saw demand almost double the volume recorded in the first half of 2007 and stand at 61% above the record second half of 2007. However the deeper economic downturn has impacted sharply on occupier leasing transactions from the second half of last year, with less than 2 million sq ft leased in the final quarter of 2008.”

He continued: “The worsening outlook for manufacturing and production levels will continue to have an adverse impact on the logistics sector this year, and we forecast demand for larger logistics units to be comparable to the volumes witnessed in the final quarter of last year.”

Jones Lang LaSalle’s research shows that completion of new speculative schemes reached a peak of 14 million sq ft by the end of 2008, exceeding 2007 completion levels by 9% and just 12% less than the record volumes witnessed in 2006. In response to the decline in occupier activity, logistics developers have postponed most new speculative schemes and in the second half of 2008 new completion volumes declined by 40% on H1 2008. Almost no new speculative development is expected to commence in 2009 and with reduced occupier activity, the number of pre-let or turnkey schemes is anticipated to remain limited. Jones Lang LaSalle does not expect the development market to return until 2010/2011 when occupier demand could again pick up, following a recovery of the economy.

Alexandra Tornow, head of European Industrial Research at Jones Lang LaSalle, added: “Deteriorating market conditions, combined with the high completion volumes across a number of regions, and has resulted in an unequal spread of vacancy rates. Notably Greater London and the south east, as well as parts of the Midlands, are still recording good demand for larger units; however increasing vacancy rates in other areas are now beginning to put a downward pressure on headline rents, although landlords are naturally keen to resist any falls.”

Prime rents in Greater London decreased by 4% during the last quarter of 2008; down 2% below the same period of last year to £12.75 per sq ft p.a. Rents in the larger conurbation cities including Birmingham (£5.75 per sq ft p.a.), Edinburgh (£7.00 per sq ft p.a.), Glasgow (£ 6.00 per sq ft p.a.) and Leeds (£6.00 per sq ft p.a.) remained stable over the same quarter. Markets recording a growth in headline rents included Glasgow, which saw a 4% increase over 2008 and Manchester (£6.00 per sq ft p.a.), driven by new quality supply, recorded a 9.4% year on year increase.

Cameron Mitchell, joint head of National Industrial & Logistics, concluded: “Overall, whilst we expect occupiers to remain conscious of the current climate, and requirements to move more slowly, leasing activity is expected to be driven by occupiers with new management structures or rationalisation strategies, equity in their property and those able to take advantage of the current market conditions to demand more flexible leases and lower rents.”

Going forward Jones Lang LaSalle expects the following:
Occupier activity is expected to come from occupiers taking advantage of a more favourable leasehold market, relocating to buildings offering higher standards or moving back into prime locations from more remote markets with poorer access to the national transport network.

Continued outsourcing to third party logistics providers and expansion from the retail discounter market could potentially provide new space requirements.

Environmental pressures, in particular the environmental legislation and pressure on road transport, could bring forward some transactions from the waste and recycling sector along with occupiers adopting a more flexible intermodal based supply chain, in particular taking advantage of the more favourable occupier market to take space in rail connected logistics developments.

Driven by the uncertain economic situation, a significant trend in the UK could become the shortening of lease contracts. Compared with European standard, where the majority of leases are now between 3-5 years, so far in the UK leases between 5 and 15 years are not unusual and contrary to length of service contracts which are generally between 2-5 years only.