Lambert Smith Hampton’s (LSH) Industrial & Logistics Market 2019 report highlights strong 2018 results but beneath the headlines lies a growing imbalance in supply.
2018 was a record year for industrial and logistics investment volume, according to LSH’s Industrial & Logistics Market 2019 report. £8.4bn of assets changed hands, propelling the sector to outperform the rest of the commercial real estate market.
Occupiers were also active during 2018; although overall take-up was 4% down on the five-year average, it was only slightly below 2017’s total which shows real resilience given growing anxiety around Brexit. 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.
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.
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.”
Looking ahead, investors looking to drive performance will now be banking on rental growth alone, as rising land values and record low yields mean that the era of yield compression has largely come to an end. However, with favourable rental growth prospects vis-à-vis other property sectors, UK industrial and logistics is still forecast to outperform the wider market over the next five years.
The threat of a no-deal Brexit has resulted in a cautious start to 2019 but if this is avoided, pent-up 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.
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.
LSH’s market-leading experts are happy to discuss any of the topics, challenges and opportunities highlighted in the Industrial & Logistics Market 2019.