2022 FORECAST
On the limit
2022 will continue to see very strong demand for industrial and logistics space as the sector continues to benefit from the fundamental shift in the way we shop, as well as supply chain disruption. In fact, the theme of the year will be around to what extent the limits that are imposed on the sector will impact on occupational and investor demand – whether that’s around the level of good quality buildings, labour, goods, energy, investment stock, or indeed the sharp pricing that we are now seeing in the sector.
The invisible hand
At the time of writing, Big Box take-up for 2021 was at 47 million sq ft - up on the 38.4 million sq ft recorded in 2020, and another record year. All this, with some of the year still left to run, and occupiers keen to get deals across the line. This momentum is expected to continue in 2022 as retailers and 3PLs continue to expand their occupational portfolios.
Transacted YTD 2021
TAKE UP BY SECTOR
AGE OF INDUSTRIAL STOCK
While demand has been strong for a number of years, there is little sign of a tail off in activity. The structural drivers of demand in the sector continue to underpin occupier demand in the medium term – with the exponential growth in online retail sales seemingly finding a post-pandemic level of 26%, compared to 19% pre-pandemic. Demand at the larger end continues to be dominated by Amazon, although activity for smaller big box units (sub 200k) – including increased activity from Amazon – is driving the market. The majority of UK regions will continue to see demand well above average during 2022.
Sustained strong demand over recent years has driven down availability across most major markets – and in some cases, we are likely to see those occupiers looking to expand their occupational floorprint stymied by a lack of suitable grade A space. Despite there being a large volume of space under construction, much of this is already pre-let, built to suit and/or experiencing delays during the construction process. This has created low void rates, with a very small proportion of large new developments completing before letting.
This tight supply picture will continue to put upwards pressures on land values, underpin appetite for speculative development, drive refurbishment of older stock – with the change in MEES expediting this – and see a focus on intensification. Berkeley and Segro will complete on the UK’s first multi-storey warehouse during 2022 in Brent, while the relocation of London’s wholesale markets to Dagenham will progress during the year, freeing up more central sites. We will continue to see a geographical diversification of development, with occupiers willing and needing to look ‘off-piste’ - and, indeed, this may come with the added benefit that competition for labour is likely to be less intense.
% CHANGE IN INDUSTRIAL FLOORSPACE
Source: VOA
This all points towards significant upward pressure on rental values, with bidding wars likely to be common for prime sites. Analysis of asking rents via Costar suggests an increase of 10% y-o-y during 2021, while according to MSCI, 2021 saw record levels of growth at 5.9%, with 2022 expected to slow slightly to a still heady 4.9%. This sets the sector apart against other traditional commercial real estate, driving investor appetite.
This all points towards significant upward pressure on rental values, with bidding wars likely to be common for prime sites. Analysis of asking rents via Costar suggests an increase of 10% y-o-y during 2021, while according to MSCI, 2021 saw record levels of growth at 5.9%, with 2022 expected to slow slightly to a still heady 4.9%. This sets the sector apart against other traditional commercial real estate, driving investor appetite.
AVERAGE ANNUAL RENTAL GROWTH
Evolution
2022 will see an increase in the diversity of demand, particularly at the smaller end of the market. We have already seen demand for dark grocery space increasing off the back of the growth in rapid grocery delivery services such as Getir Gorillas, Gopuff, Zapp and Jiffy. Their business model aims to guarantee within a 10–15-minute window, leading to a demand for space to house their products in urban areas. We have already seen this in London and the South East – with Getir taking small units at Slough Trading Estate and Segro Park, while Gorillas have signed an agreement to use Tesco facilities.
Business’ need to decarbonise will not only drive change in the built environment but, potentially more importantly, drive change in supply chain distribution and last-mile logistics. This will mean much more than just longer lorries1. We will continue to see the electrification of fleets in this market, larger cities driving ‘no net additional traffic’ rules, and innovative (or even traditional) methods of transportation - CEVA logistics, in collaboration with the NHS are trialling deliveries to hospitals via the Thames.
The decarbonisation of the sector will drive additional growth for industrial space. The technological and green revolution being a particular catalyst, from gigafactories, data centres, battery storage and green energy manufacturing to more niche (but fast-growing) activities such as vertical farming.
In particular, the conversion to electric vehicles – powered through clean sourced energy - is a key facet to the UK’s zero carbon agenda. Advanced electrical engineering is a growth driver to industrial demand and gigafactories, that produce electric vehicles and their batteries, are vital to the future of the British car manufacturing industries, as well as fuelling the clean HGVs of the future. Britishvolt has selected Blyth in the North East to locate the UK’s first Gigafactory and Coventry for its HQ, while Nissan and its battery partner Envision have also announced plans to build a gigafactory near their existing plants in Sunderland.
The proliferation of cloud computing and the advent of the internet of things will continue to drive increased demand for data centres, which have seen considerable growth recently. This trajectory is expected to continue, with estimates indicating growth rates of 10% per annum over the next five years.
Weight of capital
There continues to be a strong weight of capital looking to be deployed in the sector, as investors seek to take advantage of the strong occupier fundamentals in the market. During 2021, the volume of investor demand continued to put significant downward pressure on yields – with the yield gap between all offices and industrial now at 170bps. GLP’s recent acquisition of Gormley House on Waxlow Road is expected to be finalised with a 1.12% yield, indicating the extraordinarily competitive market conditions. This yield compression, in addition to strong rental and capital value growth, has driven total returns to exceptional levels of 27.5%.
ONLINE RETAIL SALES, CAPITAL VALUE GROWTH
The weight of capital targeting the industrial sector continues to increase, driving down pricing to previously unimagined levels, resulting in a 170bps gap to offices, and indeed 40bps below central London offices. The interest in the sector continues to be driven by the structural fundamental shift in the sector, and the prospect for further rental growth, and yields are likely now so low that the prospect for further compression is limited – especially if we are to see anything other than a small increase in interest rates.
As discussed elsewhere, the sector is indicative of conditions aligning to enable investors to look beyond the capital and wider South East for growth opportunities.
REFERENCES
1https://www.gov.uk/government/news/greener-longer-goods-vehicles-could-be-rolled-out-from-next-year