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Quickly shifting dynamics

12 July 2023

This interview with warehouse property expert Will Laing highlights how market dynamics between occupier and landlord are shifting and what this may mean for the rest of the year.

LOGISTICS MATTERS editor catches up with Will Laing, associate director at Savills, to talk warehouse property. Laing will also bring his expertise to the Tomorrow’s Warehouse conference, where he will speak in our Warehouse of the Future session.

Simon Duddy: How is the warehouse property market looking this year compared to last year?

Will Laing: From an occupier’s perspective I would suggest that conditions are the most favourable they have been since around 2014. Vacancy and supply have both increased and the tension between supply and demand in the market, particularly over the last three years, has dissipated somewhat meaning that the high levels of rental growth we have seen have started to taper down.

That’s not to say, however, that the pendulum has swung completely in the occupier’s favour. While it is true that vacancy has risen sharply to 5% over the last 6 months, it remains well below the long term average and nowhere near the level of 24% that we saw after the GFC.

Moreover, at a nationwide level there remains significant pockets of undersupply, particularly in sub markets and within different  size ranges. For example, there are only seven buildings on the market over 400,000 sq ft across the whole country.

This, in turn, poses an additional problem for occupiers, particularly those with large requirements. Given the lack of supply in this size bracket, occupiers will have to start looking for land in order to undertake a build to suit. However, since the less than successful mini-budget interest rates have risen sharply and land values have decreased. This means that for a developer viability equations have changed dramatically and delivering bespoke units may no longer make sense unless the rent increases in order to off-set losses elsewhere.

However, demand for warehouses has normalised back to pre-covid levels meaning that developers may cut their cloth accordingly to attract large build-to-suit requirements.

SD: Can you give us some indication of any significant changes we may expect for the rest of the year?

WL: It is likely that 2023 will see significantly fewer speculative development announcements, meaning that the level of Grade A supply, while initially rising in 2023, will then start to fall into 2024 and beyond. Indeed, in Q1 we saw just 2.41m sq ft of speculative announcements compared to 4.22m sq ft in the same period in 2022.

SD: Has the pandemic-driven ‘dash for warehousing’ ended?

WL: Undoubtedly, the pandemic played a significant role in driving up take-up levels in the UK industrial and logistics sector, with online retailers and other firms increasing their requirements to meet pandemic-related needs. However, recent analysis of transactional activity indicates that demand is now coming from a more diverse range of sectors, extending beyond those directly related to the pandemic.

Moreover, at a nationwide level there remains significant pockets of undersupply, particularly in sub markets and within different  size ranges. For example, there are only seven buildings on the market over 400,000 sq ft across the whole country.

That being said, the pandemic has triggered ongoing trends that are still driving the demand for warehousing space in the UK. We are observing an uptick in the number of manufacturers and other companies looking for space as part of a strategy to enhance supply chain resilience through near-shoring. Indeed, 2022 saw the highest amount of warehouse space ever leased to manufacturing related occupiers at 11.5m sq ft. Additionally, while some of the heat has been taken out of the online retail sector in the short term, we believe these occupiers will return to the market when the economic outlook improves, with forecasts suggesting particularly strong growth in the fashion, food and electronics segments.

SD: We see some retailers that have over-extended their property portfolios and are sub-letting properties. Do you expect this to be a trend in the coming years?

WL: Many retailers, particularly online retailers and their suppliers, brought forward their expansion plans due to the onset of Covid-19. As the world has returned to normal they have found themselves sitting on excess capacity in their networks.

At the end of Q1 2023 the level of supply, for units over 100,000 sq ft, stands at 31.96m sq ft equating to a 4.61% vacancy rate. Of this 5.87m sq ft across 31 units is classified as “occupier controlled”, making up 18% of the total supply.

Ultimately, this is having a distorting impact on the supply numbers as many occupiers who are sub leasing space are marketing more units than they plan to leave. They will then withdraw the remaining space once they have leased an acceptable level.

As things stand, the sub-letting of space is confined to certain sub sectors and we do not expect to see this as a trend across the board.

SD: Tell us how the importance of sustainability has changed for warehouse landlords and occupiers?

WL: Sustainability has become an increasingly significant factor for both warehouse landlords and occupiers, due to a heightened awareness of the environmental impact of industrial buildings, as well as the potential financial benefits of sustainable practices. For landlords, green building design and construction can reduce operating costs, boost property values, and appeal to tenants with environmentally conscious values. 

Certification programs such as LEED and BREEAM have become popular in the industry as they provide a recognised standard for sustainable building practices. Meanwhile, occupiers are increasingly selecting sites with sustainable features in order to reduce their carbon footprint and meet their sustainability goals. As a result, warehouses designed and operated in an environmentally friendly manner are in higher demand, with features such as energy-efficient lighting, solar power systems, and green roofs.

Social sustainability, including worker safety, health, and well-being, is also becoming more important, with programs such as WELL promoting human health and wellness in the built environment. However, many existing warehouses fall short of the new sustainability standards. In 2016, new energy efficiency legislation was introduced, prohibiting the letting of buildings with an Energy Performance Certificate (EPC) rating below an ‘E’ from 2018 onwards. The Department for Business, Energy and Industrial Strategy has established a framework to improve compliance and enforcement, with the goal of achieving a minimum EPC rating of ‘B’ for all non-domestic rented buildings by 2030. An interim target of ‘C’ by 2027 has also been set. 

Savills research indicates that 78% of current industrial and logistics supply has an EPC rating of ‘C’ or below. However, simple solutions such as using roof space for photovoltaic panels can make a significant contribution to achieving energy efficiency goals. While these improvements may be legally required, they may also generate a “green premium” for best-in-class spaces, which could include lower energy costs and reputational gains. However, logistics property in some locations may be more challenging to develop due to recent construction price inflation. 

Nonetheless, the industrial and logistics sector is well-positioned to improve its warehouses' sustainability without expending significant amounts of energy.

For more information, visit www.savills.co.uk

Thought leaders and practical takeaways

Will Laing will speak at the Tomorrow’s Warehouse Event on June 8 at Coventry’s CBS Arena.

This is a great opportunity for warehouse occupiers to keep abreast of warehouse property trends, as well as take the opportunity to network with like-minded professionals.

Registration is free and open now - https://tomorrowswarehouse.live/