According to the Industrial & Logistics Market 2019 report by Lambert Smith Hampton, 2018 was a record year for industrial and logistics investment volume with £8.4bn of assets changed hands, driving the sector to outperform the rest of the commercial real estate market.
Despite the growing uncertainty around Brexit, the research shows occupiers were active during 2018; although overall take-up was 4% down on a five-year average, it was only slightly below 2017’s total.
UK employment remains a major spot for the economy and has delivered consistently positive news in recent quarters. Wage growth has accelerated to an 11 year high of 3.4%, and a continuation of rising wages and low inflation could spur further spending growth, which could be a significant boost to the UK economy.
The logistics segment stole the show, with UK take-up in units above 100,000 sq ft falling just short of 2016’s record high. It was, however, a different picture at the smaller end of the market. Despite an increase in supply, mid box (50,000 sq ft to 99,999 sq ft) take-up was the worst in nine years after a record year in 2017. The result raises questions about whether the new supply is meeting occupier needs on location and specification.
The report by LSH expects 11.7 million sq ft of speculative development to come forward in 2019, which will go some way towards restoring choice at the larger end of the market. However, the current boom in speculative development is heavily weighted to the logistics sector.
The development response at the smaller end of the market has remained elusive in this cycle, and there is a danger that the critical lack of supply of quality medium-sized and small properties will continue, despite robust levels of demand.
Strong overall results also hide a striking difference in performance between UK regions. Take-up in East Midlands hit a record 14.6 million sq ft, and big box logistics take-up increased 93%. In contrast, take-up in the West Midlands hit a six-year low due to a lack of large logistics deals.
The threat of a no-deal Brexit has resulted in a cautious start to 2019, but if this is avoided, demand could be released with a rebound in activity. Logistics occupiers are likely to take more space as e-commerce continues to grow, though as the sector is heavily reliant on an EU workforce, it could be affected by a growing labour shortage over the coming years.
James Polson, National Head of Industrial and Logistics at LSH, commented:
“The hive of activity across the industrial and logistics sector continues unabated. The driver remains the UK’s evolving ecommerce sector, with investors and occupiers alike clamouring for stock.
“Interestingly, however, there are clear areas to watch. The top of the tree overall performance is masking a weaker underbelly in certain areas. The challenge is clear, to satisfy demand across the entire market by providing the right properties at the right time.”
As consumer shopping habits continue to fuel the growth in ecommerce and the evolution of UK distribution, the market is presenting significant opportunities for developers to create the properties that the sector needs.