Retail occupiers look for small changes in logistics space

Developers are finding it increasingly difficult to respond to the need for new logistics space – despite considerable demand from retail occupiers. EG, using Radius Data Exchange, offers its data-driven insights. Although logistics fared well in the post-referendum property lull, the reduction of secondary stock as a result of the implementation of EPC laws in April has increased the need for more development and refurbishment in the sector. Planning activity for new industrial space reached just 60m sq ft this year, 23% down on last year and 22% behind the five-year average. This has somewhat suppressed take-up compared with the previous five years – down to 19m sq ft in the first half of 2018, implying there is a real lack of supply of the right type of stock. This indicates that planning activity is slowly being stifled when it is needed the most. Investors have momentarily retreated from the national market for big-ticket purchases, with spend down by 44% in H1 2018 from £2.3bn in H2 2017. There has been a proliferation of smaller assets changing hands for lesser sums, driven in part by market dynamics and increased demand for smaller sheds in urban areas to satisfy last-mile delivery. We are likely to see investment appetite branch out into new areas – particularly for new multilet and/or subterranean warehouses, and as the land-supply issue forces developers to be more creative with proposed new stock. The reduced level of occupier activity has pushed absorption rates up nationally, although the South East and West Midlands remain perpetually squeezed in terms of currently available standing stock, compared with the rest of the country. Both regions have recorded increases in percentage of overall take-up over the past five years, along with Yorkshire & Humberside. London and the North West, however, saw considerable declines in average take-up for the same period. As the market continues to be squeezed, logic dictates that new opportunities will open up in different geographies as demand for take-up continues. Retailers continue to lead the way in the sheds market, making up nearly 45% of all activity, driven by consumer demand for shorter delivery times and with many retailers consolidating the type of space they need. We can expect to see this continue into the near future, driven especially by grocery retailing. The anxiety surrounding a no-deal Brexit has led to fears that there may be a spike in short-term warehousing need from all sectors to circumvent any increases in import times. The growing need for last‑mile delivery hubs has meant a rise in the percentage of smaller units in densely populated areas, reflected in both take-up and investment terms. The lack of space in urban areas means there will be more cross-collaboration between different property sectors: office, community mixed-use space and even residential. The intensity of demand, coupled with tightening of stock and – of course – increased land values, means a new type of shed will emerge. Planning activity in the sector has slowed year-on-year – but that’s less to do with demand, which continues to remain high for all types of industrial stock. Across the sector there remains an issue with levels of demand outstripping supply. The change in EPC laws made around 10% of all industrial units unlettable – adding to the shortfall of standing stock as they were either upgraded or converted to alternative use. This has had an effect on investors, with buyers and sellers in the market erring on the side of caution before the true ramifications of the UK’s exit from the EU next March become evident. The future of the sector looks positive and we can expect to see collaborations between the various property sectors to maximise the space that is available. Big sheds will still come through in the Golden Triangle, but for more densely populated areas of big conurbations we can expect to see a growth in multi-level and even subterranean warehouses as a way of managing the impact of population growth and consumer demand. Main image © Rex_Shutterstock