The industrial property sector has been largely unaffected by the Brexit vote with 7m sq ft of logistics space being taken up in the third quarter – in line with the five-year average – and robust occupier and investor demand across most regions, according to Cushman & Wakefield.
E-commerce is a significant driver of this activity with strong demand for logistics space in urban fringes as occupiers seek last mile fulfilment. Retailers, supermarkets and third-party logistics providers are all very active in this market and particularly keen on modern, big box space.
But demand is also robust for mid-size and cross-dock facilities in both prime and second-tier locations as occupiers seek to optimise their distribution networks across the UK.
Development has increased to meet this demand with Grade A available space up 17% in 2016 to date following several years of declining supply. This is in part due to more speculative development, particularly in the South East, Midlands and North West, where demand is strongest.
Following a strong start to the year in the East Midlands, with significant deals to Amazon, Ted Baker and John Lewis totalling 1.7 million sq ft, market uncertainty has led to take-up in Q2 and Q3 falling below the five year average. Letting activity is expected to pick up in Q4 with a number of large requirements actively looking in the market for new space. Availability has risen by 23% in 2016 due to new completions and stock returning to the market. In particular, grade A availability increased by 58% to around 5 million sq ft, its highest level since 2009.
David Binks, Partner, Industrial & Logistics at Cushman & Wakefield, commented: “Despite the slowdown both before and after the referendum, there have been a number of strong transactions, and in particular at Magna Park, Lutterworth with Wayfair acquiring 258,000 sq ft, and CML taking 105,000 sq ft in second hand refurbished buildings.
He continued: “Grade A availability has increased significantly following the completions of two speculative buildings at Optimus Point as well as two more speculative buildings on Interlink Business Park, one of which has now been let. Demand for new space remains strong and Q4 has already seen a number of significant deals, notably Amazon has continued their acquisition programme of space by agreeing to take 297,000 sq ft Grade A speculative unit at Daventry Distribution Centre.”
Investors have also been seeking opportunities outside the established M1 and M6 corridors with interest particularly strong along other primary routes – notably the M4, M5, M62 and main trunk routes across the Midlands. Despite the rise in availability, most regions are struggling to keep up with demand and as a result, Cushman & Wakefield expects further upward pressure on rents moving into 2017.
Whilst investment demand for logistics space is strong, with overseas buyers competing hard with their UK counterparts for limited opportunities in prime locations, some regions may face upward pressure on yields going forward as investors demand higher premiums to compensate for greater economic uncertainty caused, in part, by the Brexit vote.
Simon Lloyd, Partner, Industrial & Logistics at Cushman & Wakefield, said: “The UK is at the forefront of the growth in e-commerce which is accounting for an ever-increasing amount of sales – a trend which is forecast to continue.
“This has led to many companies re-organising their operations and setting up separate warehouses – often in multiple regional locations – specifically to deal with internet sales. Together with the rapid growth of a number of online-only retailers such as Amazon and Wiggle, this has ensured the robust market we are now seeing.
“Also, the renaissance in UK manufacturing over the last 5-10 years has accounted for an increasing share of the industrial/warehouse market, although it is still a smaller market than for warehousing. In some regions, this growth has been led by the automotive sector. But there has also been growth in many other sectors such as pharmaceuticals, engineering and food, resulting is many more skilled jobs.”
