A year of challenge and frustration
08 February 2024
Logistics Matters Property Editor Liza Helps examines a difficult year for occupiers, developers and investors in the logistics property sector, and asks, is 2024 looking any better?
CHALLENGING IS the word used by almost everyone describing the logistics property sector during 2023 – and frustrating. But the question is will 2024 be any better?
For Knight Frank’s head of industrial and logistics Charles Binks, he certainly hopes so: “2023 saw the market reaping the rewards of Truss Economics, which was really reflected in a lot of speculative development being put on hold, take up down and investment falling off.”
He concedes that the market was moving in that direction anyway but adds ‘the mini budget accelerated the whole process causing a much more dramatic shift [than should have happened].’
The situation is made more pronounced by following the pandemic which developer Panattoni’s development director Oliver Bertram succinctly summarises as the ‘sugar rush of the Covid years’, with its unprecedented levels of take up.
While take up is back to pre-Covid levels (considered normal) the fact that they are up to 50% down on 2022 makes startling reading. The latest JLL figures for Grade A warehouses over 100,000 ft2 puts take-up at 21 million ft2 for the full year - some 64% of that posted in 2022, while CBRE in its latest Real Estate Outlook 2024, pointed to take-up volumes being half that of 2022.
Stoford’s joint managing director Dan Gallagher says: “The occupier market was definitely tighter during 2023.”
“2023 saw the market reaping the rewards of Truss Economics, which was really reflected in a lot of speculative development being put on hold, take up down and investment falling off.”
Colliers head of logistics and industrial Len Rosso agrees: “Unless there was a crushing reason to do so then occupiers went on hold, adopting a wait and see position.”
This was hardly surprising with inflationary pressures accelerated by geopolitical events forcing interest rates to push out, leading into a rise in the cost of finance and a cost of living crisis to kick in, leading to consumers tightening their belts and a subsequent drop in spending all round.
SHW’s partner Alex Gale notes: “No one is ever going to thank a CFO for the cost of a new build at the top of a market when the economy is not so good.”
Binks concurs: “Post the mini budget a lot of big capex was put on hold as there was just too much uncertainty.”
There were a few instances of deals being pulled out of totally but in general it was more common to see delays in signing off with companies kicking decisions down the line.
Prologis UK regional head Paul Weston notes: “Enquiries and indeed the full transactional cycle tended to take longer, with customers taking time to analyse their needs and options.”
Avison Young’s principal and managing director Robert Rae adds: “Where companies could they did not commit to major expenditure in 2023.”
However, in the last few months as the macroeconomic outlook has stabilised, it seems occupiers are feeling more confident in taking up space.
Cushman & Wakefield head of UK logistics and industrial Richard Evans notes: “Our Q3 stats pointed to early recovery within the occupational market, with a significant increase in the volume of space under offer.”
“We are being more strategic with what speculative development we bring forward and will be considering options. I’d like to say we will bring forward new speculative space in the right locations to meet a more tempered occupier demand compared to what we saw during the Covid years.”
These deals seem to have solidified through to the final quarter of the year with JLL head of logistics Ed Cole reporting: “The Year finished strongly with Q4 posting both a higher number of transactions and significantly more floorspace transacted than the previous quarters.”
Certainly, according to Savills head of EMEA industrial and logistics research, Kevin Mofid: “The requirements data is trending in the right direction.”
While that may be all well and good, there is the issue that the same macroeconomic conditions that caused occupiers to hold back, also caused developer and investors to do the same.
Weston explains: “A rise in interest rates resulted in yields moving out while construction costs remained stubbornly high, resulting in reduced land and building values. Together, these factors resulted in a slow down in new development starts.”
Tritax development director Tom Leeming notes: “As yields moved out and values dropped, it became difficult to make investment appraisals stack up for many.”
Citivale’s development director Alex Reynolds adds: “A lot of developers/investors became nervous about pushing the button on building speculatively for that reason, especially if they acquired sites at the height of the market.”
Citivale struck a joint venture with investor Partners Group to form Greenbox, securing sites at half the price of those 12-18 months ago. It is bringing forward 800,000 ft2 at Greenbox Thirsk and has secured a site in Darlington for a further 400,000 ft2 development.
For Colliers head of industrial and logistics research Andrea Ferranti, the slow down has been pronounced in comparison to where it was say 12-18 months ago. “Due to construction starts slowing dramatically, there will be a much lower level of speculative delivery going forward.”
Cole says: “I don’t think the speculative development tap has been turned off as it was in 2010, just that there has been a conscious decision to not press the [construction] button.”
SEGRO’s head of national markets Dan Holford adds: “We are being more strategic with what speculative development we bring forward and will be considering options. I’d like to say we will bring forward new speculative space in the right locations to meet a more tempered occupier demand compared to what we saw during the Covid years.”
According to Savills speculative development announcements have fallen by 34% compared to 2022, meaning that the total development pipeline for the UK now stands at 12.63m ft2 due for delivery in 2024 and early 2025 – half that brought forward in 2023.
Right now that may not be a problem with Savills noting that supply has doubled over 2023 and is close to 50 million ft2. Mofid says: “The combination of 18 million ft2 of speculative completions in 2023, of which 28% has already been let, and a notable rise in the level of occupier-controlled space on the market, has seen supply rise by 90% over the last 12 months, reflecting a vacancy rate of 7.15%.”
The level of speculative completions has meant that Grade A supply has increased to 58% of the total, the highest level Savills has ever recorded.
Ferranti says: “Supply will increase further over the first three to six months of the year, but we forecast a pinch point for prime warehouse space between Q4 2024 and Q1 2025 as a result of speculative supply starting to slow down.”
Real estate analyst CoStar’s director of market analytics Grant Lonsdale says: “This may result in a window of opportunity for occupiers to secure new space on potentially preferential terms as new completions outweigh projected demand, pushing vacancies up.”
Knight Frank senior research analyst Deidre O’Reilly agrees: “It may be a good time to look for space in the first half of 2024 but don’t expect a reduction in the rent - that is still sacrosanct for landlords - instead there may be more relaxed lease terms and longer rent free periods.”
Unfortunately, for occupiers, this opening is only short term and investor developers which have space on the market such as Griffen with its 103,679 ft2 speculative unit at Griffen Park Desford are not unduly concerned. Chief investment officer Bruce Bailey remarks: “There is a sentiment that there is a bit of oversupply but there is not a lot of new speculative space coming forward.”
The company recently secured a 128,048 ft2 letting to Caterpillar and is contemplating further speculative development on the scheme to start construction this year.
Tritax had the opportunity to stop the speculative development of its 500,000 ft2 Kettering 500 warehouse at its 2.3 million ft2 Symmetry Park Kettering scheme in the East Midlands when construction contractor Buckingham went under in the Autumn.
Leeming says: “We could have done it but there are only one or two 500,000 ft2 buildings being brought forward in the country and they take almost a year to deliver and when it does at the back end of 2024, the market will be in a different place and there will probably be even less stock in that size bracket.”
According to Savills latest Big Shed Briefing, while no region has been immune from rising supply, there remain many markets that still have less than one year of supply, particularly for units over 300,000 ft2.
It is likely that the big investor developers will be able to progress with speculative development as they are well funded. Construction starts are planned for some very big schemes but these will still take a while before they are occupier ready. These include Panattoni’s £700 million redevelopment of the former Honda site in Swindon known as Panattoni Park Swindon. Demolition works are due to start in February to bring forward 11 buildings totalling 7.2 million ft2. SEGRO has started ground works at its 3.5 million ft2 strategic rail freight interchange (SRFI) in Radlett and construction is continuing at LCP and Oxford Properties’ 734 acres 8 million ft2 West Midlands Interchange SRFI near Wolverhampton. GLP has secured planning for two units of 1 million ft2 and 500,000 ft2 at its 400-acre Magna Park Corby scheme in the East Midlands.
It is likely that other investors and developers will bring forward schemes and possibly speculative development towards the end of the year. There has been a significant repricing in the market.
According to Rae: “Land prices have come off a short term high which saw figures in the region of £2.2 million an acre in Coventry, to around £1.3 million an acre. Effectively dropped back 40-50%.”
GLP’s Bruce Topley notes: “For some UK pricing has been overcorrected compared to mainland Europe, making it look pretty cheap [for international investors].”
The UK could see a surge in interest which of course could lead to more development and choice for occupiers through 2025/2026 – if they can hold off until then.
The repricing unfortunately has not resulted in rents levels falling, as has been previously mentioned rent levels are sacrosanct to landlords. Jaynic development director Ben Oughton says: “With the investment market being so tricky, and yields moving, investors and landowners have had to secure total returns via rents. If you want a building you have had to pay a bit more for it.”
“Land prices have come off a short term high which saw figures in the region of £2.2 million an acre in Coventry, to around £1.3 million an acre. Effectively dropped back 40-50%.”
While Lonsdale notes: “The average rent for a big box distribution warehouse stands at £9 per ft2 following 40% growth since Q4 2019.”
He adds that there is good news: “The pace of rent growth is unlikely to be repeated in the next four years (rent growth cooled to 8% in 2023, down from 11% last year). However, we do not expect to see rents fall.”
In the main those occupiers that have taken the plunge in the past year have opted more and more for a flight to prime especially to buildings incorporating the highest sustainability credentials, not only as these are usually far more operationally efficient but also because sustainability is now part and parcel of what a ‘good’ company should be striving for.
Oughton says: “Every occupier is now fully tuned to the ESG agenda. Five to ten years ago it was just an aspiration, now it is a necessity.”
Weston agrees: “For both investors and customers, it’s a fundamental part of the decision making process.”
JLL lead director EMEA logistics and industrial research Jon Sleeman adds: “It’s not just the economy that is a driver of demand, upgrading supply chains in terms of ESG is now a big factor.”
He sums up the year by saying: “What we have seen in the market can be described as a resetting from take up to land prices – whether it will be business as normal only time will tell and we have a General Election this year as well…”