Deals are there to be done

ENTERING INTO 2024 and the consensus from commercial property companies and researchers across the board is that the availability of warehouse space is on the rise, making right now a good time for industrial and logistics occupiers to secure modern Grade A space.

“Availability has edged-up, largely due to the completion of new speculative space,” reports Gerald Eve’s head of industrial research Steve Sharman in the company’s latest Prime Logistics publication.

“This reflects around 55 million ft2 of marketed space (over 50,000 ft2) in total, a significant increase on the 33 million ft2 low point in Q4 2022. Availability is now above the five year average with 60% of all marketed space either new or refurbished.”

Looking at buildings over 100,000 ft2 Colliers’ head of industrial and logistics research  Andrea Ferranti notes: “We saw a 5.5% increase in available space in Q3 2023 alone to 33.6 million ft2 with 14 million ft2 of completed schemes coming to the market in the first nine months of the year. Colliers is tracking a further 9.5 million ft2 of speculative space  due to reach practical completion in the next 12 months.”

It is hardly a surprise then, that vacancy rates are also rising with DTRE’s research partner Robert Taylor predicting vacancy rates to reach a ‘high watermark’ of 6.6% up from 3.5% at the beginning of 2023.

Vacancy rates on smaller units between 10,000 – 200,000 ft2 now stand at 7.5% according to research by Savills.

It seems the market is tipped in the occupier’s favour. CoStar’s Director of Market Analytics Grant Lonsdale says: “Everyone is aware that the environment is more tenant friendly with more speculative space around meaning that there are deals to be done (thought the caveat is that it is individual market and stock dependent).

CoStar’s Director of Market Analytics Grant Lonsdale

Colleague commercial property analyst Giles Tebbitt adds: “Landlords are a bit weaker than they have been with void periods rising and more second hand and sub let space available.

But the ‘window of opportunity’ is closing. Lonsdale notes: “Speculative warehouse completions are tailing off. Give it a couple of quarters and the market will swing back into the landlords favour.”

The increased amount of availability is largely due to the significant drop in demand for warehouse space seen in 2023. Sharman says: “The challenging and uncertain backdrop has made it difficult for occupiers to business plan with any confidence, and an increased number of occupiers have mothballed units.”

ASOS recently mothballed its £90 million state of the art facility in the Midlands, while Selfridges which had been poised to secure a brand new state of the art hub at SEGRO’s Northampton Gateway scheme has called a halt on it.

Lonsdale says: “Corporates are kicking the can down the line and financial directors are reluctant to put their heads above the parapet and commit to costly moves right now.”

Indeed, according to the Barclays-BDO UK Logistics Confidence Index 2023 published in October this year’s score is 47.3, down from 50.4 in 2022. In 2020, the confidence index stood at 47.1. Any index figure below 50 indicates overall pessimism in the logistics sector 

The latest figure is in contrast to the marked optimism seen in 2021, which produced an index reading of 62.5, as the sector bounced back from the effects of the pandemic – a time of increased levels of home delivery and higher rates for global logistics services. 

The research found that (75%) feel business conditions are more difficult now than a year ago, with levels of demand the number one concern for 71% of logistics businesses.

BDO corporate finance partner Jason Whitworth says: “Given the economic environment and market dynamics, it’s not surprising that the industry is cautious about the current trading environment, with real concern over volume of activity across certain sub-markets. “As always, the logistics industry is feeling the effects of a tightening economic climate more than most, as inflation and interest rate rises continue to have an impact on consumer behaviour.”

Take up of warehouse space over 50,000 ft2 for 2023 is 25% down on the previous year and currently 17% below the 10 year average according to Gerald Eve’s prime Logistics report. While take up for big box logistics over 100,000 ft2 sees a more startling fall off. According to DTRE’s latest research figures 1000,000 ft2 plus warehousing take up stands at 16.7 million ft2 down 41% year-on-year. Taylor says: “Occupational demand has fallen back to it’s pre-pandemic trend line after the Covid-induced boom.”

During the pandemic there was an overall 36% increase in demand or an additional 64 million ft2 of lettings relative to trend largely driven by internet retailer activity – for which proportionate activity is well below trend as consumers  face a cost of living crisis.

Despite the economic headwinds and relative political uncertainty with an election due, 2024 is looking better. Colliers head of UK industrial and logistics Len Rosso says: “We do believe that towards the end of 2024 the borrowing cost will ease.”

Taylor agrees: “As the worst of the interest rate and inflationary environment passes, we expect to see retail sales and consumer confidence and to see the online retail segment of the market recover also, back to levels of around 30%.”

And that will drive a resurgence in take-up. Unfortunately, as already mentioned there will be a constrained amount of space coming to market, and the current tenant friendly atmosphere will quickly harden. All pundits predict rent rises.

Ferranti says: “Looking ahead to 2024 the current suppressed attitude to speculative development will sustain rental growth over the next few years, averaging around 4% in 2024-5, and up to 4.5% in 2026-27.”

DTRE is forecasting average distribution warehousing rent growth of 4.3% for unit above 100,000 ft2 in 2024.

The issue for occupiers therefore right now is can you afford to lose the window of opportunity…