Despite more subdued recent leasing activity, prime rental growth set to continue

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As the dust settles on a challenging year for the market in 2023, positive signs are emerging for the UK’s industrial and logistics market, which looks set to outperform once again in 2024, according to the latest Sheds Report from Lambert Smith Hampton (LSH).

Memories of the pandemic-fuelled expansion frenzy faded during 2023 as the market experienced a rapid swing from record-breaking to subdued levels of activity. Take-up for the year settled at 42.3m sq ft, compared to the 60.5m sq ft of space absorbed during 2022.

Though this represents the lowest level of take-up since 2017, volumes in 2023 sit squarely in line with the 10-year pre-pandemic average – arguably a respectable outcome for a year which delivered an unholy trinity of inflationary pressure, sharp rises in borrowing costs and growing geopolitical uncertainty.

In line with broader occupational trends across the entire real estate sector, the industrial market experienced a market flight to quality during last year, with Grade A space accounting for 70% of all take-up during the year. This led to average prime headline rental growth of 8.7% across all markets in 2023, which LSH predicts will settle at nearer 5% during 2024 as occupiers will view increasing rents as fair trade off to secure an optimal location for transport and access to labour.

This continued demand for the most ESG compliant space - along with growing demand from the EV industry, supermarkets and 3PL operators and the return of Amazon into the fray – is likely to drive further leasing activity and rental growth during 2024.

An inevitable consequence of this ongoing flight to quality is the bifurcation in demand for new-build versus second-hand space. A growing aversion to second-hand stock saw supply for this space increase for the first time since 2017, on which basis we can expect rental growth for secondary stock to fall to 4% in 2024 – representing the greatest underperformance on record when compared against prime.

The financial fall-out from ‘Trussonomics’ continued to dampen enthusiasm for speculative development, which saw circa 10m sq ft of new development starts in 2023 (versus a peak of 23.6m in 2022). Q4 2023 saw development starts fall to a four-year low of 2.4m sq ft, although this is likely to be off-set by growing demand for build-to-suit product during the coming year.

Richard Meering, national head of industrial leasing at LSH, said: “Although a lacklustre year for the industrial market, activity levels during 2023 need to be viewed in context. Judged against most metrics, the industrial market performed broadly in line with pre-pandemic averages. The ‘goldrush’ of 2021/22 is now well and truly behind us and 2023 represented something of a crash landing by comparison. But, as we head into 2024, there are plenty of signs that point towards a more sustained recovery. Rising land values, steady rental growth and growing occupier demand should give rise to more positive trading activity during 2024”.

James Polson, national head of industrial and logistics at LSH, added: “Last year’s slow-down in activity doesn’t necessarily equate to a lack of demand as we are seeing plenty of appetite for the best located and most ESG compliant space. Supply chain security in the wake of the Red Sea crisis is also likely to fuel a wave of nearshoring opportunities that could provide an additional boost to the market during 2024 and beyond’.

The economic headwinds which presented themselves during 2023 proved stifling for the industrial investment market, not so much in response to a lack of demand but rather, a lack of willing sellers. Despite this, the sector recorded £6.8bn of investment transactions during 2023, underscoring the relatively strong occupier market fundamentals associated with industrial and logistics.

Alex Carr, national head of industrial investment at LSH, said: “While the market will likely remain constrained compared with the recent boom years, sentiment is improving thanks to expectations of base rate cuts during the year ahead. There is significant dry powder ready to be deployed and this weight of money has the potential to drive a degree of yield compression at the prime end of the market”.

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