Keep the faith: UK Industrial and logistics outperforms amid heightened uncertainty

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A wall of overseas capital is ready to be deployed into UK industrial and logistics assets in 2025 as the sector continues to outperform the wider commercial real estate market, according to the latest research from Lambert Smith Hampton.

LSH’s Keeping the Faith report identifies a groundswell of demand and says any knock to sentiment from global economic and geopolitical volatility is likely to be short-lived.

Grade-A space accounted for a record 73% share of total 2024 take-up, with the higher rental costs justified in exchange for driving higher operating efficiencies and commitments to ESG. This year, secondary rental growth will continue to lag prime, with the discount to new-builds rising to another new high.

LSH says the strong emphasis on quality will remain a key theme through 2025, with take-up for the year expected to end up broadly in line with the pre-pandemic average at around 40m sq ft. In 2024, take-up totalled 39.3m sq ft, driven by a resilient Midlands market and Q4 delivering the best quarterly performance since 2023, boosted by major commitments from Amazon, Frasers Group and B&M.

Rental growth, which has played a key role in driving investor demand, looks set to continue, as occupiers focus on quality. Average prime rental growth across the UK’s key markets was 4.6% in 2024 and prime rents are predicted to grow by around 4% in 2025. However, growth will be geographically patchier and may be offset by more generous incentives, says LSH.

2024 ended strongly for investment into the sector, with volume of £2.7bn in Q4 driving the annual total to £8.2bn, the fourth strongest year on record. Industrial and logistics accounted for 33% of the combined volume of investment across the UK’s three core commercial sectors in 2024, significantly ahead of the long-run annual average of 19%. The total volume of investment into the sector also ran ahead of offices for the first time in history in 2024, reflecting comparatively weak investor sentiment in the latter.

LSH says 2025 promises more of the same, with overseas capital ready to be deployed from a mix of existing and new market entrants. It forecasts total returns of 8.4% per annum between 2025 and 2028, putting it ahead of all other core property sectors.

Alex Carr, Executive Director – National Head of Industrial Investment at LSH, said: “Set against a difficult backdrop, yet again industrial and logistics was the top-performing asset class for 2024, and we expect this to continue into 2025. There has also been a big increase in M&A activity, which we predict will provide additional stock to the market. Looking ahead, we may anticipate some modest prime yield compression later in the year and a continued narrowing of the bid/ask spread.”  

Total overseas purchases amounted to £4.4bn in 2024, with net purchases standing 55% higher than in 2023, at £3.4bn. International investors remain dominant at the larger end of the market, striking 16 of 2024’s largest 20 deals, and North America dominated once again, accounting for three-quarters of overseas inflows. 2025 promises to be no different, says LSH, with overseas inflows forecast to account for approximately 60% of volume for the year.

Meanwhile, supply levels have recovered steadily over the past two years, with the UK availability rate ticking up from 5.9% to 7.0% during 2024, equivalent to 1.5 years of average take-up. However, relatively cautious appetite for speculative development will help to keep a lid on supply, with a modest 7.6m sq ft of development starting in 2025, the lowest annual total since 2014. Overall, the UK availability rate is forecast to rise to 7.6% by the end of 2025, before peaking at circa 8% in 2026.

James Polson, Executive Director – National Head of Industrial and Logistics at LSH, said: “2024 was a challenging year for occupiers, which was expected due to the sluggishness of the economy and rising operating costs. But necessity is the mother of invention – our clients need to innovate and drive efficiencies to help drive demand. We have seen this for example with Evri and their ongoing estates management and acquisition programme.

Richard Meering, Senior Director – National Head of Industrial Leasing at LSH, said: “2024 proved to be tough, but there are signs of life returning to the market and we are cautiously optimistic that a better year is in store for 2025. Despite challenges relating to the political environment and increasing competition between sites for power, fundamentals remain sound. The sector and its diverse parts – data centres, logistics, high-end e-commerce – remain a very physical reminder of all that is good in the UK economy. Those that can keep the faith in this outlook, and stay the course, will find plenty of opportunity as we traverse 2025.” 

Download the Industrial & Logistics Market Report 2025 in full here →