The slowdown in warehouse development predicted by Colliers is coming to fruition, with only 16 units sized between 100,000-200,000 sq ft currently under construction and four megasheds of 500,000+ sq ft.
Colliers is tracking just less than 8m sq ft of available logistics space under construction or due to break ground soon, however with occupiers preference for take up of new grade A space still prelevant the Industrial & Logistics specialists at the firm are predicting a pressure on new supply during the next 12 months which will sustain rental growth in prime locations.
“Occupier demand has been sustained in the first quarter of 2024,” stated Andrea Ferranti, Head of Industrial & Logistics Research at Colliers. “With 5.8 million sq ft of warehouse space already taken up in the first three months of the year, in line with the last quarter, despite the continuing economic uncertainties, it’s clear that demand remains resilient.
“Although investors’ conviction towards the industrial sector is strong, elevated borrowing costs continue to challenge financial appraisals, making it challenging for speculative funding deals. Construction costs have stabilised, providing some certainty on that front, however we do not forsesee a generalised uptick in speculative development until there is clear evidence that borrowing rates are reducing.
“With occupiers increasingly searching energy-efficient space to future-proof their property portfolios for changes in legislation, there will be a shortage of vacant grade A space available, meaning that rents will continue to push on.”
With the completion of 4.7 million sq ft of speculative warehouse space in Q1, availability for warehouses sized 100,000+ sq ft reached 43 million sq ft, placing vacancy rates at 7.2%, up from 6.8% last quarter. This equates to circa 15 months of supply when analysed against the 10-year annual average take up.
Some of the biggest occupational deals of the year so far include the 1.2 million sq ft pre-let agreed by Yusen Logistics at SEGRO Logistics Park Northampton, where Colliers is the leasing agent. The second largest deal also occurred in the Midlands with Greggs signing a pre-let at SmartParc SEGRO Derby for circa 500,000 sq ft of warehouse space. Another significant letting was in the South East, with the former Amazon warehouse, Hemel465, in Hemel Hempstead taken by Brakes.
The latest MSCI data shows a continuing, yet slower, trend in rental growth increasing an average of 1.1% across the UK in the first quarter of 2024. Although this is half the growth rate witnessed in Q4 2023, in London there was slightly stronger growth with assets achieving a 1.5% growth in Q1, albeit still down from 2.4% in Q4 2023. This year Colliers is forecasting an average industrial rental growth of 3.7%.
Len Rosso, Head of the Industrial & Logisics team at Colliers added: “Whilst occupiers have understandably been more cost-conscious of late, we are aware of several large warehouses under offer by well-known households’ name, which will support market activity over the next few months. We anticipate that 2024’s occupier demand will mirror the level of activity seen last year, as occupiers continue to optimise their logistics networks.
“Whereas in 2025, once we see interest rates starting to decrease, and the elections conclude providing political certainty, we will witness consumer confidence returning which will release the pent-up demand from occupiers, and provide reassurance to investors and developers to start the next wave of projects.”