GDP grew by just 0.3% in 2012, and the forecast is that 2013 will be another year of low growth, before a greater expansion in the economy from 2014 onwards. Reflecting this ongoing weakness in the economy, take-up of UK industrial property fell by 25% in 2012, in what proved to be a tough year for the market as a whole.
The drivers of the industrial market as a whole vary significantly. Demand for smaller units is more dependent upon the state of the economy as a whole, which reflects the diverse range of activities undertaken by firms at this end of the market. Although it can also be dictated by factors such as the availability of credit from banks.
However, at the larger end of the scale, demand for units of over 100,000 sq ft is driven by retailers, whether internet, multi-channel or high street, and third party logistics firms (3PLs) – most of whom are servicing contracts from retailers. According to data from our Industrial and Logistics Market 2013 report, manufacturers accounted for 27% of take-up of these large units in 2012, whereas the retailers and 3PLs accounted for 47% of the market.
Outlook for big sheds
2012 was a tough year for UK retailers, with well known brands like Comet, JJB Sports and Clinton Cards going into administration. Their demise has been the result of a combination of factors; primarily, lower levels of consumer spending and a shift away from high streets towards out of town retail parks, shopping centres and the internet.
This has implications for the demand of logistics property. UK consumers are at the forefront of the shift towards internet shopping: the most recent numbers suggest that online sales will account for 13% of total UK sales in 2012. This is the highest and Europe and the higher that the USA. In 2012 8% of take-up of large units was from internet retailers, but with the ongoing move towards the internet, this proportion will only increase.
The growth in internet retail will also affect demand in, what we have termed, the mid-box market. These are units of between 50,000 and 100,000 sq ft, usually close to urban areas, that are being used by parcel firms to service their delivery contracts. As we see a move away from the high street towards the internet, demand for these specialist, smaller distribution hubs will intensify.
The forecasts from Oxford Economics state that consumer spending will increase by 1% in 2013, while not a huge level of growth it is set to be a better year than both 2011 and 2012. Consequently some of the pressure being felt by retailers will ease and this could mark a pick-up in demand for distribution warehouse property in 2013.
Outlook for manufacturing
The prospects for the manufacturing sector are more mixed. Manufacturing jobs continue to be lost and industrial production is forecast to have fallen by almost 2% this year. The expectation for 2013 is for a return to weak levels of growth – sub 0.5%. While demand from manufacturing no longer accounts for the majority of take-up of industrial property, it is still a significant minority and therefore the continued poor performance of the sector should be a concern for industrial landlords.
On a national level take-up of industrial property fell by 25% in 2012 in comparison with 2011. However, the improved economic outlook for 2013 will increase confidence levels among occupiers and should translate into increased take-up of industrial space.
Reflecting a lack of speculative development, levels of grade A stock in many markets continue to fall. There remains little industrial space under construction throughout the UK and with an anticipated increase in demand we could see pressure exerted on rents at the top of the market, in terms of reduced incentives etc. However as the numbers from IPD show, average industrial rents have been in decline throughout 2012 and with large volumes of secondary and tertiary stock available, this will remain the case for the time being.