The UK industrial and logistics market staged a strong recovery in 2013, with take-up increasing by 24% to 94.2m sq ft from the low point in 2012, and prime and secondary rents growing in many locations. This has been driven by economic expansion, a recovering manufacturing sector and the evolution of occupier requirements in response to the continued growth of e-commerce.
The largest improvement in activity during 2013 was in the medium business unit sector (10,001–49,999 sq ft), where take-up increased by 56% from the previous year’s figure. But this was more a return to normality following the poor levels of activity during 2012.
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Grade A now represents less than 10% ofavailable supply
The lack of development, which now stretches back to 2007/08, has left the market starved of grade A space. The quantity of newly built premises across the market as a whole now represents less than four months’ supply.
The majority of take-up has been focussed on the second hand market as the lack of grade A stock has pushed occupiers to look elsewhere. Grade A take-up hit a record low in 2013 and many occupiers made the decision to satisfy their requirements in the second hand market while suitable stock exists.
Some occupiers have turned to build to suit instead. Build to suit accounts for around 74% of grade A transactions in the logistics size band (100,000 sq ft and above), compared with 18% in 2012.
The gap between prime and secondary rents is narrowing
These factors have led to improving conditions for landlords, with standard lease terms lengthening and, in many instances, the gap between prime and secondary rents narrowing. We expect this to continue during the next 12 months.
Rental growth potential greatest in the West Midlands ...
For the first time since we launched this report, we have reviewed current demand for floor space and compared the results against current availability to identify the regions and sectors that are likely to see rental growth over the next 12–18 months.
The results reveal that the West Midlands has the greatest potential for growth in prime rental values, followed by the South East, Eastern, Greater London and the North West, as a result of buoyant demand and dwindling supply – although this could be held back by the release of land onto the market. Availability in the West Midlands fell by over a fifth during the course of 2013.
... and the mid box sector ...
The mid box market (50,000–99,999 sq ft), which we highlighted last year as an area to watch, remains the sector most likely to see rental increases during 2014. A lack of availability – there are currently fewer than 40 grade A buildings of this size on the market across the whole country – and continued demand for units in the size bracket are putting upward pressure on rents and providing a catalyst for development.
... leading to the return of speculative development
The outlook for 2014 is encouraging. After a number of challenging years since the start of the global financial crisis, the industrial and logistics sector is set to be a major beneficiary of the economic recovery.
Improving confidence is driving demand to the extent that 2014 take-up could exceed the record 101m sq ft posted in 2010. The next 12 months will also see the return of speculative development. We forecast over 2m sq ft of space could be built speculatively during 2014, the highest level seen since 2007/8 – although we question if this will be enough to ease the sector’s supply shortages in certain size ranges.