Big Sheds Half Year Report: It’s the economy, stupid…

THERE IS no one event that marks the beginning or end of a cycle - especially in property. While the frankly extraordinary excuse of a mini budget by the Truss government certainly added rocket fuel to the flames, the flames were already there.

For some the writing was on the wall as early as late 2020, long before the idea of Liz Truss as Prime Minister was even considered necessary, as inflation started to take root globally due to the pandemic causing a hiatus in worldwide supply chains pushing up costs across the board from food prices to construction materials.

At first these inflationary figures in the UK were relatively small going from 0.3% in November 2020 to 1.5% by April 2021 but quickly gathered apace thereafter.

At the same time, the glitter sparkling on eCommerce performance which had hyper boosted warehouse take up worldwide, began to tarnish as more and more people secured Covid-19 vaccinations and life began to return to normal meaning they relied less and less on online shopping.

In Q2 2021 internet giant and 3PL Amazon reported a revenue increase of 27%, this should have been good news, but it was a 14% drop from the year before when it had seen a 41% hike. These continued to fall throughout 2021. By the end of 2021 its shares rose just 2.4%, and at the beginning of 2022, the company was announcing the closure of physical retail concepts across the US and UK. In May 2022 it reported a $3.8 billion net loss - its first quarterly loss since 2015 and went on a massive retrenchment and revaluation of its warehouse portfolio which saw the loss of more than 30,000 jobs worldwide and the closure and mothballing of hundreds of warehouses across the US, UK and beyond.

This certainly spooked property investors, despite - at the time - a sustained level of occupier demand especially from 3PLs. All of this was compounded by Russia’s invasion of Ukraine in 2022 sparking a global energy crisis further pushing inflation figures to 11% in the UK and 9.1% in the US resulting in both the Federal Reserve and the Bank of England raising interest rates. 

In December 2021 interest rates in the UK were at 0.1% and the bank started to raise them as inflation took hold. In August 2022 they stood at 1.75%, then came the Truss mini budget and the resultant backlash saw the Bank Of England raise interest rates swiftly to 3.5% by December 2022 and by August 2023 they hit 5.25% where they have stayed ever since.

Despite this, occupier demand was sustained through 2022 even though there was a lack of take up from pure play ecommerce companies. Figures from Savills showed that in 2022 take-up hit 45.73 million ft2 - 49% above the long term annual average, which pre-Covid sat at 26 million ft2.

However, after the Truss minibudget that all changed – while operationally many companies needed to take new space due to lease events, consolidation, expansion and ESG aspirations etc, financially it was difficult with rampant inflation and seemingly rampant base rate increases, with many kicking requirements into the long grass and only committing to new space if deemed strictly necessary. Take up dropped dramatically in 2023 to 25 million ft2.

According to real estate analyst CoStar’s director of market analytics Grant Lonsdale: “Tenant demand for warehouses, as measured by net absorption - the change in occupied space - has cooled sharply across the UK over the past 12 months to 11 million square feet, down 70% from a year earlier and 70% below the annual levels recorded in the three years to March 2023.”

Panattoni head of development North West & Yorkshire Dan Burn

CoStar colleague and senior director of market analytics Patrick Scanlon adds: “A lot of companies are still sorting themselves out and unless they have a reason to move are probably not going to do so for the time being.”

HBD managing director Ed Hutchinson notes: “We have had a scenario since 2022 where both occupier and investors understandably have been a little more cautious leasing or buying buildings, however that is not a reflection of their being no intrinsic demand for industrial and logistics space rather a result of the macro economic picture.”

In terms of development over the same period, particularly speculative development, inflationary pressures such as the huge increase in construction costs, were initially covered by increased rent levels. Rents for warehouses in the UK rose on average by 40% between 2019 and 2024 with London recording a 71% increase.

Developers and investors continued to bring forward schemes because money was relatively cheap, but it was the increase in base rates coupled with inflationary pressure caused by geopolitical events and increasing political instability at home that slowed the economy as well the money flowing into development.

Coming into 2024 what does all that mean for occupiers? In terms of development according to Lonsdale: “It’s tanked.”

He notes: “While there are a lot of schemes and sites coming through planning the amount breaking ground with a vertical build has slowed dramatically with just 3.5 million ft2 coming forward in the past three months compared to 20 million ft2 at the start of 2022.”

Property company Colliers’ head of industrial research Andréa Ferranti agrees: “In H1 2023 some 11.3 million ft2 of speculative space was delivered, this has nearly halved in the first six months of 2024 to 6.1 million and this trend is set to continue with 4 million ft2 scheduled to complete in the second half of the year and just 5.2 million scheduled for completion through 2025.”

Tritax Symmetry development director Jonathan Wallis says: “Speculative space has reduced dramatically in the last six months due to financial market constraints.”

Obviously with occupiers not taking space unless forced to there should not be a problem as such. Right now, there is a lot of space thanks to unprecedented levels of speculative development in the past 18 months which has yet to be taken up and the second hand stock coming back to market. In addition, there is some 17 million ft2 of grey space on the market – warehouses for sub lease or assignment. Lonsdale says: “Net absorption is very weak - more space has been vacated than occupied to the tune of around 6 million ft2.”

Ferranti notes: “Vacancy rates have been increasing for the last nine quarters across all grades and are only just pitching down having peaked at 7.5% in Q1 2024 and now 7.3% in Q2.”

According to Savills latest Big Box Briefing supply stands at 56.28 million ft2, a rise of 14% since last year. As ever all is not what it seems, according to Savills’ national head of industrial and logistics Richard Sullivan: “Of the total supply 55% is classified as Grade A which has trended down from 58% since the start of the year.”

Northwest B8 Real Estate director Steve Johnson

In addition, Panattoni head of development North West & Yorkshire Dan Burn, notes: “Although there does seem to be an increase in supply, it is definitely not across the board.”

There are plenty of regions where there are actually supply shortages in certain size bands. According to CoStar data Kent has no immediately available warehouses above 250,000 ft2, and occupiers looking for warehouses sub 100,000 ft2 will find it challenging in Leicester.

Wallis says: “You cannot make sweeping statements about the market - it is very polarised with supply specific to location and size bracket. If you want a 500,000 ft2 shed nationwide there are fewer than five options.”

Tritax has an active speculative development pipeline and Wallis says: “We will continue to speculatively develop in locations and sizes where there is a supply demand imbalance. The number of locations where they have that imbalance will increase over the coming years. In prime locations buildings are letting quickly and land coming through the system is taking longer and that is leaving a gap that needs to be filled.”

In the Northwest, B8 real estate director Steve Johnson notes there is just nine months worth of supply over 100,000 ft2. He says: “In terms of availability now there is 2.585 million ft2 in 11 units ranging from 107,000 – 674,000 ft2, two of those units are under offer and only three are above 300,000 ft2. There are 13 units under construction totalling 3.11 million ft2 but based on the demand we are seeing we are looking at less than one year’s supply – we could be talking about market failure as there just is not enough space.”

That, he caveats, is on the basis that developers fail to push on with development. Johnson is currently working on six or seven sites across the region all at least providing a million ft2 upwards.

In the southwest Avison Young senior analyst market intelligence Lewis Rapley says: “Big-box, grade A supply, as of H1 2024, totals 4.1m ft2 in 13 units. Of all available units, 58% are completed speculative units; the remainder are secondhand units, with no new units available that are under active construction. Three of the available units are mega sheds (over 400,000 ft2), accounting for 55% of available big-box space in the region.”

While take-up has been curtailed over the past 12-18 months due to inflationary pressures and interest rate rises there has been a change in sentiment with inflation back to normalised levels of 2% and the expectation that the Bank of England will cut rates before the end of the year. It is this single act that will bolster the market far more than any political change in the UK. According to Swedish bank Handelsbanken’s latest Property Investor Report more than half of its property investors in the UK say the prospect of a rate cut in August and potentially a further cut before the end of the year makes them more optimistic about the market, with a similar percentage saying a change in government would not affect plans for their business.

Colliers’ Ferranti notes: “When [there is a cut in interest rates] the costs of debt will lower. There is an expectation that it will result in an increase in investor confidence leading to  money being sunk into the sector.”

Colleague and national head of industrial and logistics Len Rosso concurs. “It’s not just investors who will benefit so will occupiers in terms of reducing capex.”

Big Box head of research Henry Stratton notes: “Reducing the cost of financing matters because of the levels of capex required for any real estate commitment. Fit-out costs, for example, now often run into the millions – if not tens of millions. Leading occupiers have strong balance sheets and widespread access to capital, which is allowing them to selectively make new real estate commitments. For others, the cost of capital is proving a challenge as available sources are more limited and financing costs are relatively higher.

“For companies of all sizes, convincing the CFO and board to sign-off on the capex requirements associated with a new real estate commitment is challenging currently (no matter how strong the strategic rationale). Yet companies clearly need and want to further evolve their logistics real estate networks.”

Putting it bluntly, Knight Frank’s head of logistics and industrial Charles Binks says: “The election has not been a big factor [in terms of sentiment and confidence]. It is pretty clear what occupiers and investors are waiting for is an interest rate cut. Occupiers with big capex projects want to see movement on interest rates before committing.”

Rosso warns though that a single cut won’t change minds instantaneously, rather the market will need “series of cuts and a continued cap on inflation” going forward. HBD’s Hutchinson agrees: “What is more important [for the property sector] than a cut in interest rates is that they are on a downward trend.”

It is unlikely that the Bank of England will reduce base rates to those seen at the end of 2021, but the hope is a new normal will be set around the 3-3.5% rate with inflation at a steady 2%.

Already there has been movement in terms of demand and take-up on the back of easing inflationary pressures. Take up in the first half of the year reached 16.82 million ft2 in 63 transactions – with 61% of deals transacted in Q2. This is 44% up on the same period last year.

Tritax Symmetry development director Jonathan Wallis

Panattoni’s Burn notes: “Demand has become polarised, with many units from 200,000 to 350,000 sq ft in size remaining vacant for periods. Whereas the big units of 400,000 sq ft and above continue to attract a large number of enquiries and have seen a high level of take up.”

Savills head of EMEA industrial and logistics Kevin Mofid is of the same opinion, adding: “There are regional nuances. Right now, it’s all about the East and West Midlands performing really well ahead of long term averages but when you look at other regions - the picture is not as positive. There seems to be a retrenchment to the core.”

According to Collier’s research the five largest deals of Q2 occurred in the Midlands. These included fashion and homewares specialist 3PL Bleckmann taking GLP’s 587,662 ft2 MPC3 unit and Nike securing a 1.3 million ft2 build-to-suit on the adjoining plot at Magna Park Corby. Chinese eCommerce logistics provider CIRRO Fulfillment, trading as Super Smart Service, took NFU and Ergo joint venture Aver’s 354,00 ft2 warehouse at Fradley Park, Lichfield and in Q1 Yusen Logistics secured a 1.2 million ft2  build-to-suit at SEGRO Park Northampton while an as yet un-named global appliance manufacturer took Prologis’ 376,563 ft2 DC1 warehouse at Prologis Rugby Central Park. 

DTRE co-head of industrial and Logistics Jake Huntley notes: “In certain regions and size brackets there remains a reasonable level of nervousness from landlords, with some protracted voids and limited tenant engagement raising questions over the strength of particular sub-markets.”

Knight Frank senior research analyst Deidre O’Reilly agrees, adding: “We are seeing sub-markets within the regions where certain chunks are active and others very quiet. In one region if you want a new Grade A building of 100-200,000 ft2 they are pretty much all gone such has been demand. At the same time, in that very same region there are five or six plus properties over 350,000 ft2 where landlords willing to cut short term leases and attractive deals to stimulate interest.”

That being said, developers and agents are reporting renewed occupier interest. Jaynic development director Ben Oughton says: “We are seeing a growth in genuine enquiries with far less speculative ones – we are getting the wheat not the chaff and its all linked to the wider economic outlook and a resurgence in confidence.”

Avison Young managing partner Andrew Jackson reports: “Enquiry levels have picked up in Q2 and, are, on average 16% higher than  in Q1.”

This is borne out by the latest figures from Savills’ requirement index which saw a similar rise in the second quarter.

Johnson says: “In the last three months we have had more viewings and activity. It feels like we are out of the worst of it now with more depth to the market especially at the bigger end of 350,000 ft2 plus.”

Savills reports that requirement for units over 500,000 ft2 remain 250% higher than they were in Q1 2020. “This is why,” says GLP UK’s managing director Bruce Topley: “We are continuing to speculatively build larger units.” GLP is currently developing out its 761,361 ft2 mega shed at its Magna Park North Lutterworth scheme in the East Midlands. The cross docked property, known as MPN 761, will target a BREEAM Outstanding and EPC A+ rating and will have 18m eaves, 80 dock and ten level access doors and an 80kn/m2 floor loading. Construction is expected to be completed in June 2025. Joint letting agents are DTRE and Cushman & Wakefield.

Mofid notes: “In the online retail sector, the engine room of growth over the last decade, there are signs of renewed optimism. For Amazon on a global level, Q1 retail sales were up 12.5% year on year in the USA, and they will add a further 43 million ft2 to their network in 2024, a trend we expect to see in the UK and Europe as we move into 2025.”

Indeed, the internet giant acquired a plot earlier this year at SEGRO’s 7 million ft2 SLP Northampton scheme where it will build a 2.86 million ft2 next generation customer fulfilment centre. It is also looking to take Panattoni’s 882,000 ft2 speculative warehouse at Panattoni Park Avonmouth in the South West as it gears up to take advantage of an expected growth in eCommerce over the next year.

Savills head of EMEA industrial and logistics Kevin Mofid

GLP UK’s managing director Bruce Topley says: “It is encouraging to see that consumer confidence is resilient and getting better – some may be surprised about that – but that is what the surveys are showing, and it has manifested itself in continued ecommerce take up, not just Amazon, but other [ecommerce companies] and the 3PLs working for them.”

Its not just ecommerce making a comeback, Cushman & Wakefield’s head of retail, logistics & industrial UK research Edward Bavister notes: “We’ve noticed a significant up tick in manufacturing take-up which supports our conviction a round re-shoring as a longer term driver of demand.”

Cole Waterhouse managing director David Nutall agrees: “In the Yorkshire market – where we have our Konect 62 scheme – we’ve also observed an uplift in manufacturing and food industry enquiries.”

Savills reports that in the Northwest manufacturers have dominated activity in 2024 accounting for 80% of all transactions.

It seems that getting inflation back to a more normal level and the prospect of interest rate cuts has released the handbrake on transactions – certainly in the last three months.

Knight Frank partner Sam Royle says: “We are currently tracking close to 2 million ft2 of deals in legals in the Northwest alone which will transact in the second half of the year and with the election out of the way we expect to see occupiers and investors make their long-term moves.”

DTRE reports that there is some 8 million ft 2 of existing warehouse space under offer at the end of H1 and Savills notes that of the 1.96 million ft2 being built in the east Midlands 26% is under offer. 

Occupiers need to be aware of potential shortages going forward. Already Collier’s Rosso predicts: “With things picking up we believe that by June 2025 there is going to be a pinch point for good quality space in the big shed market - a lot of surplus space will have been taken up and there is no forthcoming speculative space to replace it.”