UK Industrial Spotlight – Feb 24

Welcome to our first ‘Industrial Spotlight’ of 2024. Our aim is to provide clients with regular short insights into the industrial and logistics market including key market indicators, market commentary and deals and our view on issues that are impacting the market. 

Key headlines

• Following a market re-set last year, we think 2024 will mark the start of a new property cycle, with UK economic growth expected to pick-up over this year and next, and inflation and interest rates set to fall. Consequently, at the start of this year we see more grounds for positivity and cautious optimism across both occupational and investment markets compared with 12 months ago.

• Industrial and logistics rental growth remains positive. While growth has decelerated compared with the very elevated levels seen in the past two years, there is potential for further uplifts notably for prime buildings incorporating best in class ESG features in core markets, where demand and supply dynamics are supportive.

• We are seeing increasing occupier requirements for flexible logistics space available ‘on demand’ and on more flexible terms, reflecting business requirements and the rapid pace of change. This market will develop alongside the more traditional and established market. JLL has just gone live on a new UK-wide listing section wholly dedicated to flexible logistics spaces to help address the rising need for flexible space.

Recent economic and market indicators

• Recent economic forecasts point to a slow recovery in economic growth with inflation falling back to its 2% target level by 2025.

• According to the latest (January 2024) Consensus Economics average of independent forecasts, UK GDP is expected to grow by 0.2% this year followed by 1.0% in 2025 with annual CPI inflation falling to 2.7% in 2024 to 2.2% in 2025. Bank Rate is expected to see a reduction from its current level of 5.25% to around 4.50% by the end of this year, according to the Consensus Economics’ January survey. While headwinds and risks clearly remain, the outlook suggests a more stable and predictable macro-economic landscape for property market decision-making.

Big box logistics market sees strong finish to 2023 and a large quantity of space is under offer

JLL’s data on the big box logistics market (based on Grade A buildings of 100,000 sq ft and over) shows that while take-up in 2023 was only around 65% of the elevated level posted in 2022, Q4 finished strongly accounting for 8.1 million sq ft out of the annual total of 21.4 million sq ft (38%). Another positive sign is that take-up in 2023 was slightly higher than the pre-Covid five-year average (21.2 million sq ft over 2015-2019), suggesting a market re-set and return to norm rather than a more fundamental retrenchment. Overall available supply rose over the year to end the year with a vacancy rate of 6.6% (excluding space under construction) but at the start of the year we estimate that there is some 5 million sq ft under offer within this stock and about the same quantum of space in potential land or pre-let deals. 

Industrial and logistics rents continue to rise

Across the 32 big box markets JLL monitors, prime headline rents increased by a healthy 7.8% over 2023, including 0.7% in Q4. Our annual rate of growth is in line with the MSCI Quarterly Index (December 2023) which showed UK Distribution Warehouse growth of 7.2% over the year, but slower than MSCI’s rate for Q4 (2.1%). 

Based on our data for around 60 markets, prime headline rents for standard industrial buildings between 10,000 sq ft and 20,000 sq ft rose by 8.3% over 2023 including 1.7% over Q4. The MSCI Quarterly Index showed UK Standard Industrial rental growth of 7.0% over the year and 1.8% in Q4.

In our opinion, the incorporation of best in class ESG features will be one factor behind on-going rental growth.

Improving sentiment in industrial investment market

The UK industrial investment market saw some £5.1 billion transacted last year, which despite a turbulent economic back drop, was just under half the 2022 level, which was one of the top three record years for volumes. Sentiment wavered through the year however investor confidence began to improve towards the end of the year. One of the catalysts for this was a fall in interest rates, with the 5-year SWAP rate now some 65 bps lower than late October, and gilt rates also lower. In addition, the robust Q4 occupational data also aided confidence. With inflation trending lower, but still at 4.0% for the last two months’ data (December and January), there are expectations that the Bank Rate will start to be cut with a survey by Consensus Economics (January 2024) pointing to Bank Rate at around 4.50% by the end of this year and a number of forecasts anticipating even greater cuts. Other things being equal, this should result in a further strengthening of investor attitudes and sharper pricing.

Recent transactional evidence includes Aviva’s acquisition from BlackRock of Leicester Distribution Park a fully let park of eight units providing a total of 714,478 sq ft on 45.15 acres with significant reversionary potential for £102.5m, reflecting a 5.00% NIY.

Ares’s acquistion from Royal London Asset Management of a 1.48 million sq ft portfolio of multi-let industrial and single let distribution assets predominantly in the South East and Midlands for £212 million is also one of the notable deals so far in 2024. REIT mergers look to be major transactions in the year following announcements between LondonMetric and LXi REIT and Tritax Big Box and UK Commercial Property REIT respectively.

JLL’s UK Industrial Capital Markets team is advising on over £400 million of investment currently under offer or exchanged. We recently advised AXA on its disposal of the Co-op distribution warehouse (439,000 sq ft) at Cabot Park Avonmouth which was acquired by ICG for £43.15 million. In addition the JLL team advised Wilson Bowden on the funding of its two-unit speculative scheme in Rochdale with Cabot. We are now seeing more cautious optimism among investors reflecting the continuing strong fundamentals of the UK industrial and logistics sector, including forecasts of ongoing rental growth. Following a challenging year in 2023, in our opinion, 2024 looks set to be the first year in a new property market cycle. 

Talking point: ‘Flexible Logistics’ – meeting the need for ‘on-demand’ short-term logistics space

Logistics buildings (aka warehouses or distribution centres) are key nodes in virtually all supply chains and play a critical role in the movement of materials, supplies, parts and finished products to end consumers, and in any associated ‘reverse flows’. They are also central to the transmission of information along supply chains.

Over the past 30 to 35 years, which broadly corresponds with the emergence of the modern logistics property market in the UK, most occupier requirements for logistics space have typically involved businesses either owning or leasing a warehouse and operating it themselves, or owning or leasing a facility and outsourcing the operation to a logistics service provider (LSP) or outsourcing the building and operation to a LSP either on a dedicated or shared / multi-user basis. However, each of these standard solutions usually takes time (months) to source and often involves a long-term commitment (such as a lease or a contract with a LSP) typically measured in years, although short-term contracts are available for shared / multi-user contracts. 

Each of these options remains available today and the market that embraces them clearly still suits many occupiers and landlords. However, in a world characterised by increasing volatility, uncertainty, complexity and ambiguity (VUCA) the demand from occupiers for more flexible logistics space that is available more quickly (on-demand) and on shorter and more flexible terms is rising. Add to this, the continuing pressure that businesses are under to control supply chain costs and improve customer service and it seems to us that demand for flexible logistics space will become a growing trend in a way it has not done in the past. 

In addition to these changes affecting demand, a market for flexible logistics space is being facilitated by digital technology platforms that help occupiers find the spaces they require when and where they need them. At JLL we have been marketing logistics and other types of properties online for over a decade, but most of these properties are being marketed on traditional lease terms. However, to meet the growing demand we now see for more flexible space we have just gone live on a new UK-wide listing section wholly dedicated to flexible logistics spaces. This platform currently offers millions of square feet of flexible logistics space available on a short-term basis, on ‘easy-in, easy-out’ terms and the potential for a simple ‘all-in’ cost with options that could include rents, business rates and service charges packaged together; a model we refer to as ‘Warehouse as a Service’ (WaaS).”

We think this new online marketplace will increase the visibility of flexible logistics supply to match growing demand, but it will not be a purely digital solution. Customers will still be serviced by professional JLL agents to ensure the space provides the right solution in the right place for their specific needs.

For businesses requiring additional warehouse capacity our new flexible logistics marketplace provides easy access to a market of suppliers and the opportunity to add (or subtract) additional warehouse capacity when and where required. Some businesses may choose to use on-demand warehousing and services to supplement a core network of facilities that they own, lease or outsource on a long-term basis, while others could potentially choose a wholly on-demand flexible solution to their warehouse needs.

In addition, this model also offers benefits to landlords, or occupiers, offering surplus space, through the opportunity to secure additional income by renting spare capacity. In addition, for landlords with a large logistics portfolio this model has the potential to attract new businesses by offering a combination of flexible logistics space as well as the opportunity to scale up over time into larger buildings on more traditional terms, as business conditions permit.

We are not suggesting that the demand for flexible logistics will completely upend the market and become the new normal. But we are convinced that the demand for flexible logistics space is here to stay, and our new flexible logistics online marketplace is uniquely well-placed to service this demand.

To visit our online marketplace follow the link here.