Spring 2023 Industrial Overview

Source:

Carter Jonas

Market:

Industrial & Logistics

Date:

16th March 2023

Take-up in the UK industrial market reduced in 2022 compared with 2021. However, this was largely due to the absence of quality available stock, rather than substantially weaker underlying demand.

Strong competition amongst occupiers for existing and new build product helped maintain rental values despite the deteriorating economic outlook. Average industrial rental value growth peaked at 13.2% in August 2022, according to the MSCI Monthly Index, and has decelerated rapidly. On an annual basis, growth has moderated to 10.3% (12 months to January 2023), but on a quarterly basis it is now 1.6% (three months to January), the equivalent of 6.7% over one year.

Developers have been challenged by sharply rising build costs and supply chain problems, together with the rising cost of debt, and broader economic uncertainty. These factors continue to impact negatively on development activity, and with ongoing healthy occupier demand, the market for prime space will remain tight throughout 2023. We may see more second-hand units coming back to the market as some occupier’s scale back operational portfolios at break or expiry, and insolvencies may well rise, but the impact on the market is likely to be modest.

As developers have retreated, the development land market has struggled, precipitating a readjustment in industrial land values over the last few months, accentuated by the recent upward movement in industrial yields. The Carter Jonas Industrial Index has recorded an average fall in industrial land values across the UK since mid-2022 of 29.3%, although values are still nearly 24% higher than three years ago. However, the market for prime sites is holding up well, and we are now seeing signs of a recovery in land values, with some sites within the M25 recently showing increased bidding tension.

Structural change will continue to drive occupier demand despite the mounting economic headwinds. The accelerated shift to e-commerce brought about by the pandemic has increased demand from retailers and third-party logistics firms, while the UK's exit from the EU single market and customs union is leading to increased inventory holding, resulting in the need for additional warehousing. These factors will help to sustain demand for large distribution warehouses and smaller urban distribution units, although the lack of stock will continue to act as a constraint on take-up.

Occupiers face an uncertain economic environment together with significant costs pressures ranging from wages to energy, as well as higher business rates bills from April. We therefore expect to see only subdued, sub-inflation rental growth during 2023. But the mere fact that we do not expect rents to fall, given the challenging economic outlook, illustrates the resilience of the sector.

We believe that the often-overlooked open storage sector will continue to see huge demand amid a shortage of sites. This follows strong growth over the last two years, most notably for the highest quality ‘class 1’ sites which are available on leases of two years or more.