The East Midlands enjoyed boom times in what was a record-breaking year for the UK industrial and logistics sector, new research from Lambert Smith Hampton (LSH) shows.

LSH's annual Industrial & Logistics Market report reveals that national take-up rose 8% to 103.3m sq ft as a result of robust economic expansion and the continuing structural change in the logistics sector caused by the growth of online shopping.
 
As take-up reached new heights, investment activity hit previously unseen levels and speculative development returned in a meaningful way across the country, the East Midlands saw activity increase significantly too.

Significant upturn for logistics sector

Geoff Gibson, Director of Industrial and Logistics and Head of East Midlands at LSH, said: “The region has enjoyed an exceptional year, with 2014 take-up eclipsing the previous peak of 2013 by 9% to reach 12.2m sq ft. The most significant upturn was seen in the logistics sector, where activity increased by 21%.

“Availability reduced by a significant 5.5m sq ft over 2014, leaving total supply at below 20m sq ft for the first time on record. More than one third of this fall was accounted for by the absorption of grade A stock, which now stands at just over 2m sq ft.

“Despite the shortage of grade A stock across the region, secondary rents in the East Midlands continued to increase at a faster rate than prime rental values. Secondary rents have now risen by 14.2% on average over the past three years, almost double the 7.7% growth seen in prime rental values.”

He added: “The availability rate for the East Midlands as a whole fell below 10% for the first time in over 10 years, standing at 9.6% at the end of 2014. Several locations saw availability halve during the year, with Leicester and Daventry experiencing the most significant reductions in available stock.”

Speculative development on the horizon in Leicester

Leicester saw a continued reduction in stock levels, especially modern mid box units, and a move towards speculative larger buildings. Goodman let 165,000 sq ft at Hinckley Commercial Park to GeoPost and Wilson Bowden agreed speculative funding of two 200,000 sq ft units with M&G at Optimus Point. Crown Crest sold two large 125,000 sq ft buildings in Leicester as it consolidated its operations.

Hardening of rents for Nottingham

Nottingham’s continued lack of supply of good quality buildings has seen a hardening of rents. Although there are 
no obvious signs of speculative development, the city’s business parks offer swift build to suit solutions. Improvements to infrastructure are continuing into 2015, with the widening of the A453 key to providing a more efficient M1 South corridor to the city, potentially pushing up rents.

Derby has seen a healthy and increasing supply
 of good quality development sites. Goodman’s 343,000 sq ft warehouse on Derby Commercial Park will be delivered at the end of 2015. However, good quality existing opportunities are limited, with a general lack of supply through all size sectors pushing occupiers to consider build to suit solutions.

Rents expected to surpass pre-recession heights in next 12 months

The strong recovery in demand nationally has put the supply of industrial stock under acute pressure and started to influence the nature of occupier activity: despite considerable demand, grade A take-up was actually the lowest on record last year.

With economic growth forecast to strengthen and with availability tightening, LSH predicts that prime and secondary rents in many markets will surpass their pre-recession highs in the next 12 months and up to 4.4m sq ft of new space could commence construction on a speculative basis during 2015.

In the investment market, a record £6.6bn of industrial assets changed hands in 2014, highlighting the sector’s positive fundamentals. As prime yields harden, LSH expects investors to move further up the risk curve to secure higher returns and to increasingly consider development to secure scarce stock.
 
Steve Williams, National Head of Industrial and Logistics at LSH, said: “The market has experienced unprecedented levels of demand and we expect this to continue for the remainder of the year, with speculative development satisfying only part of the pent-up demand for grade A space.
 
“Continued restriction of supply will see rents drive on to heights not seen since 2007/08.”