Take up of warehouse space in the UK is set to hit a record 66 million sq ft in 2021 (units over 50,000 sq ft), according to preliminary data from Knight Frank. This is 27% higher than 2020’s record take up of 52 million sq ft, reflecting unprecedented demand from occupiers to secure suitable space, develop shorter supply chains, expand ecommerce fulfilment capabilities and hold higher volumes of inventory to avoid operational disruption.
The preliminary data also show a national vacancy rate below 4% for the first time. Based on current levels of take up, there is around only 6 months-worth of standing stock available. Development activity is yet to catch up with the pace of demand. Supply chain issues and longer lead times for materials is driving longer construction schedules.
There is currently 38 million sq ft of industrial and logistics space under construction, however most of this space is already committed (either on a built-to-suit or pre-let basis) with just 13 million sq ft available. Development is expected to accelerate in 2022, with the strong development pipeline supplemented by a 31% year-on-year increase in planning applications.
The robust take up figures and strong inflation-beating rental growth has seen investors pour £14.3 billion into industrial & logistics assets in 2021, with further deal information being gathered, we expect investment to reach c.£15.7 billion. This would represent a 67% increase in investment volumes compared to 2020’s full-year figure of £9.4 billion.
US investors have accounted for 70% of overseas capital this year, having completed a record £6 billion of acquisitions in the sector. Competition for assets has driven up pricing, with strong yield compression recorded in the past year, average transaction-based yields were 4.4% in 2021 compared to 5.2% in 2020. Prime assets offering a 15-year income, are at yields of 3.5-3.75% at the end of 2021.
Charles Binks, Partner, Head of Industrial & Logistics at Knight Frank, said: “The race for space continued unabated this year, with the growth in the ecommerce market, along with rising demand for advanced manufacturing facilities and other sectors such as film studios broadening the occupier base. The supply of new stock coming through will fail to satisfy demand given that a significant portion has been pre-committed, along with current levels of active requirements in the market. Despite the rise in planning applications, land shortages, planning hurdles and constructions costs are likely to dampen the supply-side response next year.”
Johnny Hawkins, Partner, UK Capital Markets at Knight Frank, added: “Strong rental growth projections, coupled with analogous market conditions in the US and a favourable exchange rate, has drawn a wave of transatlantic capital from American private equity investors. Though the scope for further yield compression is limited, the strong rental growth experienced in the US is now translating to the UK market and investors are attracted by income growth prospects with occupier demand and consumer trends continuing to underpin sentiment.”
Claire Williams, Industrial & Logistics Research Lead at Knight Frank, commented: “The sector’s growth has largely been driven by the ecommerce market, with online retailers, 3PLs and parcel carriers dominating activity. Competition in the occupier market has driven strong rental growth, attracting investors and driving up end values. Investors remain keen to increase their exposure to the logistics sector and this will continue in 2022, but the lack of standing stock available for purchase and the keen pricing for these units will remain a limiting factor. There’s been significant yield compression in both core and non-core locations, and with keen pricing across the board, we expect investors to take on more risk and seek opportunities to add-value.”