The new normal

OCCUPIERS WERE committing to securing space during 2024, or at least that is what the statistics seem to be bearing out, with Savills pitching a 28 million ft2 uptake of industrial and logistics space in units of 100,000 ft2 and above, across all Grades – slightly ahead of 2023 and 8% ahead of the pre-covid average.

For DTRE partner and head of Research, Data & Insights Robert Taylor: “Take up is coming in 25.34 million ft2 with a further 7.58 million ft2 currently under offer, pushing that piece ahead of take-up figures in 2023.”

While its not the largest amount of space taken up, Savills director and head of EMEA industrial and logistics research Kevin Mofid notes that it is in fact: “The fifth best year ever excluding the covid years.”

That being said it is not wildly ahead of average figures as in the pre-covid years which saw in excess of 50 million ft2 being taken up. Colliers head of industrial and logistics Len Rosso says: “Take up this year is bang in line with the ten year average.”

The general consensus says CoStar’s senior director of market analytics Grant Lonsdale ‘is that the market has finally ‘normalised’ after the excesses and turbulence of the pandemic years’.

Cain International’s managing director Jon Strang says: “We are not back to periods of performance seen in 2021 and 2022 when everything was going like hotcakes, but the market is not slow either – there has been a material  improvement on 2023.”

Prologis’ EU president Ben Bannatyne echoes this sentiment: “We’re seeing a natural moderation to pre-pandemic levels of customer demand. This recalibration should be viewed in context – while the market has been slower than the unprecedented levels we’ve witnessed in recent years, performance remains robust, particularly in prime locations.”

It is not just prime locations, but also prime property. Argo Real Estate’s head of asset management Mark Kelly says: “Logistics occupiers, if they are going to make a move, want the right product in the right locations with the right ESG credentials.”

In one of the biggest build-to-suit deals of the year, global sportswear company Nike secured  1.3 million ft2 of space at GLP’s Magna Park Corby scheme in Northamptonshire - it took two years to secure a site because it would not countenance a building that could not secure a BREEAM Outstanding rating. Currently less than 1% of the UK’s newly built non-domestic buildings achieve this level of accreditation.

This move was seen across the market not just in build-to-suit deals, research by Savills recorded that nearly a quarter (24%) of all take up in 2024 was for new Grade A speculative space up from 19% the year before.

“It is clear,” says Lonsdale, “that industrial tenants ditched older warehouses for newer ones.” 

This is borne out by the levels of supply in the market and through net absorption rates as well as an across the board rise in rent levels.

According to Mofid: “While take-up is actually robust this is having a negligible effect on supply. Indeed, supply is at its highest since the GFC (Global Financial Crisis) of 2008/9 standing at 60 million ft2.

“What we are seeing is that most of the deals that happened resulted in some form of space coming back to the market.”

With so much space on the market logic would dictate that rents would plateau or drop – Mofid notes that they did not. “The rising rents is a super interesting - history would tell us that as supply rises, rents fall but we are not seeing that, partly because there is a flight to quality. There is more take up of better quality properties.”

These properties command higher rent levels. Colliers head of industrial research Andrea Ferranti says: “Occupiers are coming to terms with the new economic backdrop and its inflationary environment of rising costs. They are willing to pay extra for better quality space where they can lever operational savings through energy efficient facilities as well as benefitting from the reputational advantage of having a highly sustainable building which attracts clients ever mindful of increasingly ESG savvy consumers.

Bend Bird, business development and solutions design director, Yusen Logistics

In February 2024, Yusen agreed a deal with SEGRO for a 1.59 million ft2 highly bespoke, high-tech cross-docked Sustainable Distribution Centre at  SEGRO Logistics Park Northampton, which was designed, planned and negotiated, with no customers lined up to actually use the facility.

In an interview with Logistics Matters’ editor Simon Duddy late last year, Yusen business development and solutions design director, Ben Bird was quoted as saying: “Usually 3PLs get the customer’s buy in and then build the facility. Many 3PLs are looking for funding from customers to help build dedicated facilities, but we are making the investment ourselves.

“The plan is build the site, fill it with new customers and grow the business.” He says that the property strategy is incredibly important especially the fact that the facility will achieve net zero, which is seen as a major USP to attract customers.

“One thing we see, as a provider, is that while people say that sustainability is key to their strategy, logistics and sustainability is often quite far down the to-do list. However, it will jump up very quickly when new EPC requirements come in, you could be looking at higher tax bracket, or maybe not being able to operate for a period of time.”

Introduced in 2015 the Minimum Energy Efficiency Standard (MEES) regulations require properties to have a certain level of energy performance as part of the UK’s overall move to  achieve net zero by 2050 which are measured in Energy Performance Certificates (EPC) graded  A through to G. The Green Buildings Council estimates that a 25 per cent of greenhouse gas emissions are attributable to the built environment.

Any owner, be they a direct landlord or investor of commercial premises, must ensure that from 2030 their properties have an EPC B rating or above. It is unlawful to continue to let ‘sub-standard’ commercial properties unless they are excluded from the MEES regime or has a valid exemption.

By ensuring that their building has the highest sustainability credentials Yusen in effect future proofs its business not only for itself but also for its customers.

Trammel Crow Company’s development director Jaime Hargreaves notes: “The MEES regulations are starting to bite and with rules stating that landlords cannot let or market properties that have Energy Performance Certificates below an EPC C from 2027 that leaves a lot of occupiers in technically obsolete buildings."

According to research carried out by Knight Frank in 2023 approximately 128 million ft2 of UK warehouse space, 18% of all units above 50,000 sq ft, will fail to meet minimum EPC requirements by 2027 and this number triples to 404 million ft2, or 60% of warehouse space, when considering the minimum EPC B requirement by 2030.

Knight Frank notes that newly constructed warehouses generally met top sustainability standards, 82% of the UK’s existing stock built before the year 2000, do not meet minimum EPC requirements.

With fines for landlords of sub standard buildings up to £150,000 per letting, and the costs and operational delays for occupiers of those  properties as they are brought up to standard that could literally make or break a business – it is hardly surprising that savvy occupiers are insisting on only the highest EPC accreditations and are paying for it as well.

CoStar’s Lonsdale points out that while industrial net absorption, the change in occupied space, was strongly negative in 2024, ‘space rationalisation did not affect all vintages of industrial property equally, with the oldest properties faring worst’.

This focus on quality muses Mofid is leading a ‘decoupling of rental growth from vacancy’ and explains very clearly the reason why high supply levels are not affecting rental growth per se.

Adam McGuinness,  industrial partner, Carter Jonas

Carter Jonas’s industrial partner Adam McGuinness notes: “With demand firmly focussed on high quality, well-located, energy-efficient buildings, we are likely to see more ‘stranded assets’ in the logistics sector. In fact, some of these assets may be in relatively good condition but simply no longer meet the criteria demanded by corporate occupiers, creating opportunities to refurbish units in locations where the supply / demand dynamics are supportive.”

Certainly, this is the direction of travel through 2025 and beyond says Argo Real Estate’s Kelly: “We pick up a lot of assets that are 70s, 80s and 90s – these properties have been under funded and under managed and need an asset manager to grab hold and bring up to modern standards – most can be fully refurbished and brought up to secure and EPC A rating even with tenants in situ.”

Subsequent rent hikes for in situ tenants can be offset by operational savings while  vacant units can be re-let at much higher market rents. Argo is currently pushing Unit A Centrepoint in Trafford Park Manchester quoting £15 per ft2 for the 10,000 ft2 property which will boast an EPC A+ rating on completion of the wide-ranging refurbishment that will see LED lighting throughout, roof mounted soar panels, 10% triple layered roof lights, EV charging and end of journey facilities including secure cycle storage changing rooms and showers. Joint letting agents are DTRE and Knight Frank.

The property is part of a 1 million ft2 portfolio bought by Argo Real Estate and joint venture partner private real estate company Deutsche Finance International in July 2023 for £177 million. The joint venture is looking to secure around £400 million of urban warehouse assets in the UK which will be leveraged through asset management to both capture substantial rental reversion potential and by investing capex to improve the environmental performance of the properties.

The large amount of supply, especially second hand stock may come in useful during 2025 for occupiers looking for temporary space as they reassess their situation in the light of the Labour Government’s first Budget which says DTRE’s Taylor ‘knocked the wind out of everyone’s sails’ and put a dampener on business confidence following growing optimism leading up to the General Election in July.

The triple whammy of National Insurance Contributions increases – which took many by surprise - rises in the national living wage and an increase in business rate multipliers has led many to curtail investment decisions. HBD executive director Vivienne Clements says: “Following the Budget, I am aware of one instance of an occupier postponing a relocation decision due to the anticipated additional cost of the employers National Insurance increases.”

Colliers Rosso is aware of other occupiers also pausing decision making due to the budget: “For some it does not make sense at the moment to commit [to taking a new property] instead they may kick the can down the road for two to five years.

For those that do make a move says Tritax Big Box development director Tom Leeming notes. “They may decide not to opt for new space as there is a lot of second hand space in the market that is fitted and racked out immediately ready to go.”

Knight Frank partner and department head logistics and industrial Charles Binks agrees: “Looking to secure modern second hand units already fitted out will help to keep property costs as low as possible.’

He adds: “Some occupiers will come out into the market with enquiries on a stay or go basis to see what terms they can get with an existing landlord. It will be interesting to see what terms and how flexible landlords will be both on new and existing leases.

“Certainly, headline rents will be sacrosanct, but we have already seen 10 year lease terms with two years rent free – 12 months rent free for every five years taken – not that long ago it was only six months rent free.”

One of the outcomes of the budget says colleague Claire Williams head of UK and European industrial research: “will be that for some occupiers, the increasing costs [brought about by the budget] will boost appetite for automation and efficiency improvements. In some cases, implementing these improvements may require upgrading their facilities.

Savills director and head of EMEA industrial and logistics research Kevin Mofid

Mofid agrees: “Yes, business was blindsided by [the budget] but what it does is stimulate  discussion perhaps pushes business towards automation the payback of which will now be much quicker. The decisions taken because of that may end up making business more efficient and productive all good things stimulating the economy further down the line even if it does not bode well for short term deal making.”

He also notes that the Budget may stimulate interest in Freeport locations given the favourable position on national insurance and business rates. “Occupier demand has thus far been limited in these locations, but we expect that position to change as occupiers get to grips with the financial implications of locating in one.”

Freeports allow qualifying occupiers to benefit from tax incentives up to £15 million including 100% business rate relief for five years, enhanced capital allowances, leasehold stamp duty tax reliefs and three years employers’ national insurance relief.

Budget and business sentiment aside, Williams says: “The occupier market remains supported by strong fundamentals, including continued expansion of the e-commerce market and ongoing risks to international supply chains, which are prompting increased use of local suppliers or a need to hold additional stock. These trends continue to drive expansion prospects for the medium to long term. 

Avison Young Principal and Managing Director of Industrial and Logistics David Willmer, adds: "Looking ahead, the increased investment of £3.9 billion in clean energy initiatives, such as carbon capture and green hydrogen production, aligns with the logistics sector's growing focus on sustainability. These measures, combined with the Government’s Industrial Strategy's promise of stability and certainty, could encourage occupiers and landlords to invest in decarbonising industrial buildings and future-proofing operations.” 

CoStar’s senior director of market analytics Grant Lonsdale

Williams agrees and notes: “An improving economic picture overall, with rising real wages, should provide a boost to retail sales volumes. Indeed, after muted activity post-pandemic, there are currently several sizable 3PL requirements. Demand from this segment of the market will, in part, be driven by expansion in retail demand, as well as the drive for efficiencies, ongoing supply chain threats, and the desire to outsource supply chain operations where risks are high, and margins are low.”

Leeming says: “Occupiers looking for suitable new space should be aware that speculative starts in 2025 are much lower than previous years and has been declining quarter to quarter.”

Lonsdale agrees: Our data has been showing falling construction starts throughout 2024 and the forecast for new starts is conservative.”

According to research by Colliers: “Speculative development deliveries of 100,000+ ft2 warehouses significantly declined—from 20 million ft2 in 2023 to a around 9 million ft2 in 2024. Colliers’ data shows that a similar amount will be developed speculatively in 2025. “This reduced pipeline, coupled with resilient occupier demand, is expected to keep availability in check, and will further support rental growth.”

Vacancy rates are expected to top out in 2025 before declining sharply. Sone regions and areas are already looking at shortage of space in certain size ranges and this is expected to exacerbate  through the year and into 2026.