PRIME LOGISTICS: Q1 2021

Inside the bulletin, we take a balanced look at each segment of the market and provide you with a brief snapshot of our view of quarterly activity.

Occupier Demand Surges by 37%

In Q1 2021, 14.7m sq ft of logistics space was taken up in the UK, a 13% fall compared to the record Q4 2020, but still 16% above the five-year quarterly average. The impact of Covid, changes in the way we live, work, and shop, and new Brexit arrangements have reshaped logistics supply chain networks, resulting in significant activity in the occupier market.

Occupiers quickly recognised the property implications of Covid, leading to 64m sq ft of demand over the last 12 months – the most active period in our history. Take-up was 37% higher than in the 12 months pre-Covid. In Q1, occupier interest predominantly focused on up-and-built stock, with 72% of activity involving either secondhand or speculatively-built buildings. This contrasts with the previous year (2020) where pre-lets and forward-commitments were more common, highlighting the current urgency of occupier requirements.

A broader range of occupiers emerged in Q1, with manufacturers bouncing back after a quiet 2020. Additionally, new sub-sectors such as green energy production, film and TV production studios, home improvement, and specialist food manufacturing/logistics saw increased activity in taking up space.

Availability Rate Hits Record Low at 5.7%

The combination of occupiers taking up-and-built stock and a significant volume of space under offer resulted in a sharp reduction in supply in Q1. The UK availability rate fell for the fifth consecutive quarter to 5.7% – the lowest overall rate of availability since our records began in 2006. Buildings spent an average of 11 months on the market in Q1, significantly shorter than the average 18 months recorded five years ago.

Recent speculative development has improved the quality of available space compared to five years ago. However, due to high demand from occupiers, there is a higher churn rate of marketed buildings. Some occupiers are concerned about the lack of appropriate space to accommodate their future growth plans.

Developers Prepare for Future Activity

At the end of Q1 2020, there was 37m sq ft of space under construction in the UK across 137 individual schemes, with 34% being developed speculatively. In Q1, 9.2m sq ft of this space started construction, with around half being speculative. This indicates a 28% drop in starts compared with Q4.

Over the last six months, developers have been actively acquiring sites and working on planning applications to capitalise on the current market conditions. In total, over 12m sq ft of planning applications were submitted in Q1, the highest in more than four years. Developers are confident in the logistics market and are preparing for future development activity despite rising land prices and stiff competition.

Strong Post-Covid Growth in Prime Rents

Prime rents increased by an average of 2.2% in Q1, with the most robust growth recorded in London locations such as Basildon, Enfield, Hemel, and Park Royal. Scotland also recorded its first increase in prime rents in over 10 years in Q1. Since the start of the pandemic in Q2 2020, prime rents have grown by an average of 6.2% across the country to a national average of £8.05 per sq ft, with London and the North of England experiencing the strongest growth.

Market conditions have allowed landlords to maintain firm headline quoting rents in Q1. However, some occupiers have successfully negotiated deals, especially for un-fitted-out buildings that cannot accommodate immediate occupation and buildings that have been vacant for over a year. The strong investment market has encouraged some landlords to incentivize tenants through additional months’ rent-free periods to generate income and enhance the investment proposition.

Widening Investor Buyer Pool

Since it became clear that the logistics sector would benefit from Covid, the weight of money targeting the sector has substantially increased. Capital originally allocated to retail or office sectors shifted to industrial, and existing capital focused on industrial assets increased. However, available investment stock remains limited, with few motivated sellers beyond profit-taking owners looking to sell and reinvest capital into the sector. Portfolios played a crucial role in the £1.34bn investment volume in Q1, accounting for 64% of all activity and contributing to almost doubling the average lot size since the pandemic’s onset to over £30m.

These market conditions have significantly impacted capital values, with average prime yields decreasing by an additional 20bps in Q1 alone, and a substantial 63bps since Q2 2020. Looking ahead, as other property sectors stabilise with the gradual lifting of lockdowns and bond yields increase, the downward intensity is expected to ease. Nevertheless, industrial real estate is still anticipated to outperform other sectors in 2021.