Sharp drop noted in warehouse demand

Investors have deployed 25% more into the sector in the year to date compared with the same period in 2021.

The report showed that 11.6 million sq ft of space was occupied in Q3 2022. While this is 28% lower than the previous quarter, the figure nonetheless represents a 40% increase on the pre-pandemic Q3 average. Moreover, a total of 43.9 million sq ft of space has been occupied over the first nine months of 2022, which greatly exceeds the five-year average.

Activity has been buoyed primarily by demand from third party logistic providers, well positioned retailers, and the manufacturing sector, together accounting for 67% of the space occupied in 2022 so far. 

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Despite a worsening macroeconomic climate, Q3 sector investment volumes reached £2.9 billion, taking the total investment volume in the first nine months of 2022 to £12.7 billion exceeding the £10bn recorded during the same period last year by more than 25%.

Construction levels also remain high, driven in part by the market undersupply, with developers commencing the construction of 5.9 million sq ft of space in Q3 2022 with the South West, South East and West Midlands the leading locations. This is a marked increase on the 2.8m sq ft that got underway in the previous quarter. 

At market level, robust demand and constrained supply, especially for good quality second-hand stock, continues to support the elevated rental returns, especially as there are question marks over whether everything in the speculative construction pipeline will be built given the current high costs for financing and construction. Grade C stock is likely to become increasingly marginalised as ESG considerations are now a crucial factor in site selection, unlike in historical downturns when occupiers would not want to pay a premium.

Cushman & Wakefield head of UK Logistics & Industrial Richard Evans (pictured), says: “Despite the current economic outlook, occupier demand remains robust, and whilst undoubtedly the market will slow, it remains well placed to weather the macroeconomic storm. Following unparalleled post-pandemic growth some compression is inevitable and probably necessary.”

Edward Cornwell, international partner in the UK Logistics & Industrial Capital Markets team, Cushman & Wakefield, adds: “We expect transaction velocities to slow, but a short-term adjustment in pricing levels may reopen the market to those who were previously priced out and lead to a more attractive entry point for capital as the market stabilises.”