H1 2024 Occupier Market Overview

Amid an improving economic backdrop, momentum in the UK industrial & logistics market picked up markedly during the first half of 2024.

ACTIVITY SUBDUED BUT MEGA DEALS RETURN

While H1 2024 saw below trend demand, the period was very much a game of two halves. For units over 50,000 sq ft, total take-up of 18.5m sq ft in H1 was 4% down on H2 2023 and 34% below the five-year half-yearly average. The market was similarly below trend activity-wise, with H1’s 116 deals comparing with a bi-annual average of 178 deals over the past five years.

However, a notably subdued start to the year weighed heavily on H1’s figures. Following take-up of only 6.9m sq ft in Q1, take-up rebounded to 12.1m sq ft in Q2, the sharpest quarter-on-quarter jump on record and the strongest since Q3 2022. The welcome return of major transactions was key to the bounce, with three mega deals in the logistics heartlands of the East Midlands driving approximately one third of H1 take-up.

Source: LSH Research

MEGA DEALS BOLSTER XL SEGMENT

All size segments saw below trend take-up in H1, although subdued activity in the large and mid box segments weighed most heavily on with overall total, with take-up down 50% and 37% on their respective averages. While activity in the XL segment was also relatively subdued, take-up was only 20% below trend thanks several major commitments in Corby, the largest being DHL’s 1.5m sq ft build-to-suit acquisition at Weldon Road.

EAST MIDLANDS STANDS OUT

Activity was subdued across all of the UK regions in H1, the only exception in terms of take-up being the East Midlands. The region was home to seven of H1’s largest ten deals, with take-up of 7.0m sq ft standing 11% above the five-year average. The South East also showed a degree of resilience, with take-up of 2.0m sq ft down only 16% on trend. In contrast, Greater London was H1’s most subdued region against trend, with take-up of only 138,000 sq ft down 89% on the average and comprising only two deals.

RETAILERS RETURN, MANUFACTURING RETREATS

Following a steep decline in retail-based activity through 2022 and 2023, the retail and wholesale sector bounced back in H1, accounting for 38% of total take-up and 32% above trend. However, this was predominantly thanks to two substantial deals at Magna Park, Corby, Nike’s 1.3m sq ft pre-let at MPC1 and Bleckmann’s 588,000 sq ft letting at the speculatively built MPC3.

Third party logistics and parcel operators also saw relatively healthy demand in H1, accounting for 35% of total take-up and only 16% below trend. Again, two deals dominated, namely DHL’s aforementioned move in Corby and Yusen Logistics’ 1.2m sq ft build-to-suit at SEGRO’s Grange Park, Northampton, which was H1’s third largest.

In contrast, having been key to take-up in 2023, manufacturing accounted for only 14% of take-up in H1, with 2.7m sq ft of activity falling 54% below the half-year trend. Only two manufacturing deals fell into the XL segment, the largest of which was Greggs’ pre-let of 465,000 sq ft at SmartParc SEGRO, Derby.

QUALITY MATTERS

Despite relatively subdued activity, demand for quality space remains a key characteristic of the market, reflecting occupiers’ strong focus on ESG credentials and energy efficiency. Grade A space accounted for a substantial 72% of take-up in H1, far removed from the pre-pandemic average of 52%. By the same token, only 28% of H1 take-up comprised second-hand space, the lowest on record both in absolute and proportional terms.

VOIDS CREEP UP

Inevitably, the calming of demand and a significant influx of new supply has been reflected in rising void periods. For deals transacting in 2023, the average void period across the UK stood at 8.5 months, rising from 7.4 months in 2022. 

However, reflecting an emphasis on quality, transactions for new build spec units showed significantly shorter void periods, averaging 6.6 months in 2023 compared with 9.8 months for secondhand units. Void periods also differ according to size. In the XL segment, voids averaged only 4.0 months from the deals done in 2023, which compared with 9.4 months for mid box units, albeit supply in this segment contains a higher proportion of second-hand space. 

SECOND-HAND SPACE DRIVES H1 SUPPLY INCREASE

Speculative development activity slowed significantly in 2023, an inevitable consequence of higher finance costs and weaker investor sentiment compared with two years ago. At the end of 2023, 14.3m sq ft was under construction across the UK, down 39% from the record high seen at the end of 2022.

The XL segment led the fall in speculative development, while only two regions recorded a year-on-year increase in speculative development, namely Greater London and Scotland. The East Midlands is once again the UK’s most active region for speculative development with 2.6m sq ft underway at the end of 2023.
While more occupier-controlled space is returning to the market, a moderating speculative development pipeline is likely to help keep a lid on supply, placating concerns over possible oversupply.

While supply levels continue to vary considerably across the UK, three regions now possess supply that exceeds two years of average annual take-up: Greater London (2.6 years), the South East (2.2 years), and the South West (2.0 years). In contrast, Wales is the only region where supply remains below one year’s worth of average take-up, standing at 0.9 years. Yorkshire and the Humber follows as the second tightest UK region, with supply equivalent to only 1.2 years of average take-up.

Source: LSH Research

SPEC DEVELOPMENT STABILISES

Economic pressures, including high finance and construction costs, coupled with cautious market sentiment continue to temper development appetite, at least compared with the frenzied period of 2021/22. At the end of H1, UK-wide speculative development under construction totalled 15.0m sq ft, ticking up by 5% from the end of 2023 but 37% below the peak level seen in 2022. The slowdown in development has focused on the large segment, where spec construction is down 50% from its 2022 peak, while development of XL units actually expanded by 49% in H1 2024 to account for almost half the total.

Four regions witnessed a sharp increase in spec development levels over H1. The North East saw 402,000 sq ft of new development starts in H1 with three units progressing at Tornado Way, Darlington. The South East also saw significant growth in spec construction, rising 77% in H1, driven by new starts at MK450 and MK345, Panattoni Park, Milton Keynes. Meanwhile, following a flurry of completions, Yorkshire and the Humber had the sharpest reduction in spec development of any region, falling 65% from the end of 2023.

Source: LSH Research

Looking forward, our analysis of anticipated spec development starts points to a continued slowdown, with only 7.3m sq ft of speculative development expected to come forward over the next 12 months. Although interest rate cuts have started in Q3, the prolonged period of high rates combined with an uncertain economic outlook has made developers cautious. As a result, many are likely to delay breaking ground on new projects unless a pre-let is secured.

Positively, the slowing pipeline should assuage any fears of potential oversupply in the market. Supply is expected to continue to increase over the next year, before gradually contracting from H2 2025 as market sentiment and demand improves.

LAND VALUES LEVEL OFF

Land values have broadly stabilised over the past 12 months, following a severe correction in the market that began in the middle of 2022. According to LSH’s UK industrial land value index, prevailing sentiment indicates that average UK values increased by 3% during H1 2024. However, this overall growth was almost entirely driven by sharp rises in the two markets of Rugby & Daventry and Leicester, both of which saw land values increase by c. 40% in H1.

PRIME RENTAL GROWTH EASES BACK

The pace of rental growth across the industrial sector has eased since the heights of 2021, but remains firmly in positive territory. Across the UK’s 60 key markets, average prime rents for 50,000 sq ft units increased by 7.7% over the 12 months to June 2024, reducing from 8.7%growth witnessed in 2023. However, the pace of growth has slowed appreciably in 2024, standing at an average of 2.3% and the slowest half-yearly rate of growth since before the pandemic.

Across the regions, rental growth varied considerably, with the key markets of the West Midlands recording the highest average rental growth of 14% over the last 12 months. Notably, Hemel Hempstead was the location with the highest rental growth of 26% in the 12 months to June 2024.

Prime industrial rental growth will continue to be supported by occupier demand for quality space with strong ESG credentials, and a shrinking development pipeline. Rental growth rates may show some further easing, but they are nonetheless expected to compare favourably with other commercial property sectors over the medium term.

Source: LSH Research