Economic backdrop


The phased re-opening of the economy over the spring and summer months has fuelled a strong economic rebound, but high inflation, new COVID variants and the ending of the furlough scheme could all create challenges in H2. Nonetheless, industrial and logistics property demand should continue to be boosted by structural changes that have been accelerated by the pandemic.


UK GDP increased by 4.8% in Q2, following a lockdown-induced contraction of 1.6% in Q1. The largest contribution to growth came from consumer spending, which rose by 7.3% in Q2 driven by the re-opening of non-essential shops, restaurants and hotels. However, the economy remained 4.4% smaller than its pre-COVID peak of Q4 2019.

The recovery is expected to continue into H2, albeit at a slower pace, as the initial boost provided by the reopening of the economy fades. Pantheon Macroeconomics forecasts that growth will be about 1.5% in both Q3 and Q4, taking GDP back to it pre-pandemic level around the turn of the year.

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Amidst a strong rebound in activity during Q2, sectors most closely connected to logistics property demand have proved especially robust. Reflecting surging demand for online retail services, the output of the postal and courier services sector was 21% higher in Q2 than its pre-COVID level, making it the fastest-growing part of the UK economy since the start of the pandemic. Meanwhile, the main drag on the recovery is in other sectors, with accommodation & food services and arts, entertainment & recreation remaining more than 20% smaller than their pre-COVID levels.

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While growth is set to continue, high inflation and the withdrawal of government support packages such as the Coronavirus Job Retention Scheme could impact the trajectory of the recovery over the coming months.

Rising prices have become a growing global concern, as an inflationary cocktail has been created by the reopening of economies, increasing energy costs and spiralling commodity prices. UK CPI stood at 2.0% in July, while in the US it has risen to over 5%.

The Bank of England’s Monetary Policy Committee (MPC) has said that it expects CPI to hit 4% this year, before falling back closer to its 2% target in 2022. Nonetheless, a period of higher prices could erode households’ spending power and slow the recovery.

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The winding down of the furlough scheme at the end of September is another potential bump in the road. The scheme has been broadly successful in limiting redundancies during the pandemic, and the unemployment rate has fallen since the turn of the year; dropping to 4.8% in the three months to May after hitting a relatively low peak of 5.2% at the end of 2020.

However, 1.9m people remained on furlough at the mid-point of 2021. While many of these will return to work, some redundancies are inevitable and unemployment could be pushed back upwards by the year-end. Job losses are likely to be concentrated in sectors with high levels of furloughing, such as hospitality and retail; and not in logistics-related sectors, which have had relatively low furlough rates.


The longer-term impacts of the pandemic may take years become clear, but behavioural changes triggered by lockdowns appear to have persisted despite the recent reopening of shops and businesses. The online share of retail activity remained elevated at 26.7% in June which, while down from a peak of 36.1% in February, still represents a step change up from pre-pandemic levels.

The surge in online retail activity over the last 18 months has generated a huge increase in demand for parcel delivery services, with the Royal Mail reporting that parcel volumes were up 32% in the 2020-21 financial year. This has in turn fuelled occupier demand for logistics space.

An accelerated transition towards online retailing appears to be underway, and this will continue to drive increased logistics market activity. Capital Economics forecasts that industrial property demand could be boosted by an additional 15% over the next decade, taking the total volume of extra industrial space required in the UK during 2020-2030 to 110m sq ft.

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While the next phase of the recovery will be slower than the initial bounce-back in Q2, the successful roll-out of the vaccination programme should provide confidence that further lockdowns can be avoided and that a robust consumer-driven rebound will continue in H2. However, there will be challenges to be navigated before the economy finally gets back to its pre-COVID size.

Over the longer term, the post-pandemic era is likely to see consumer and business behaviour reshaped in ways that will continue to open up opportunities across logistics and industrial property markets.

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