Shorter leases for industrial space

By Liza Helps Property Editor Logistics Matters

THE SHARE of industrial deals signed with a lease term of between three and five years now accounts for 40% of all leases by number in the last quarter, the highest percentage for 15 years and, for the first time on record, the most frequent lease length.

Possible reasons for the shift include shorter third-party logistics contracts, less need for temporary storage and distribution space post-pandemic, and some occupiers’ reluctance to sign long-term commitments amid weakened business conditions.

But its not just occupiers preferring shorter lease terms, while rising vacancies and void periods have afforded tenants more negotiating power than they had a few years ago, many industrial landlords have come to favour shorter leases, allowing them to capture rental reversion at a time when capital appreciation remains minimal.

Despite average warehouse rents across the UK rising by around 40% since early 2020, most investors believe the sector has plenty of runway for rental growth. Indeed, results and trading updates from listed industrial landlords suggest continuing momentum.

In an April stock market update, Warehouse REIT said it boosted rent income in the first quarter of 2024 by more than 30% after completing 22 leasing transactions. While in February Logistics Matters reported that SEGRO’s annual report and accounts saw a 40% jump rents in 2023 through lease reviews and renewals in its UK properties and is looking at rent growth across its total industrial and logistics portfolio of 53% over the next three years https://www.logisticsmatters.co.uk/SEGRO-backs-warehouse-rent-growth

Although some owners have been able to broadly maintain average lease lengths across their portfolios, CoStar’s data shows they have fallen across the industrial sector from seven years in 2018 to 6.1 years in 2023.

Within the three-to-five-year lease length bracket, there has been a clear move away from five-year leases towards three- and four-year terms, which rose in number by 19% and 5% between 2022 and 2023, while the count of five-year leases fell by 2%.

At the same time, leases longer than five years and with a one-to-three-year term have become less common. As a proportion of all leases, the number of agreements shorter than one year has halved since 2021.