Logistics: strengths, weaknesses, opportunities and threats amidst rising uncertainty (2024)

Strengths in occupier market

Strength remains in the occupier market, with warehouse space being sought by an increasingly diverse mix of tenants. While online penetration rates fall and some e-commerce operators push pause on their expansion plans, occupiers including film studios, data centre operators and advanced manufacturing firms are taking space. While this trend has been most notable in London and the South East region, it is also taking place elsewhere in the UK. Preliminary take-up figures show that H1 2022 is down 39% from H1 2021.

However, the vacancy rate has compressed over this period highlighting that the market remains constrained by low levels of supply. Vacancy rates are at historic lows and the limited amount of space available continues to drive competition and rental growth. Positive rental growth continues, though the rate of growth has begun to slow. While annual rental growth is up to 12.1% in the year to May, from 11.9% in the year to April, month-on-month rental growth has slowed from 2.0% in March to 0.9% in April to 0.7% in May.

Weaknesses in consumer demand

Weaknesses stem from faltering consumer demand, slowing e-commerce growth, as well as inflationary pressures and geopolitical uncertainties. These factors are impacting order volumes, business confidence, and thus plans for expansion and upgrading of facilities. The availability of labour is also limiting operators' options for relocation, in the core logistics markets, rising demand for warehouse facilities has been accompanied by increased labour requirements. While a weakness for core markets, this may offer opportunity for non-core markets that can offer better labour availability.

Opportunities in evolving supply chains

Opportunities in the sector are also coming through evolving supply chains, the need for resilience, changing trade relationships and reshoring (due to falling wage disparity, rule of origin and technological advances). As operators seek to minimise risks associated with supply shortages and protect against price spikes in shipping costs, they are looking to source goods from UK suppliers and hold additional capacity.

Advancements in technology, coupled with a diminishing cost advantage for offshore manufacturing (due to rising shipping and overseas labour costs), as well as a desire for greater sustainability and a need for supply chain resilience, are enabling and encouraging a reshoring of component manufacturing. This presents opportunity for UK’s manufacturing and assembly sector to expand, and with manufacturers moving away from a “just in time” supply model towards more of a “just in case” model, there is an increased need to hold more stock.

In terms of locations where we see opportunity, locations recently granted Freeport status now offer a favourable tax environment. Their business rates relief could be particularly valuable given the revaluation coming in April ’23, when rates are likely to rise, significantly for some, with average UK rents up 30% over the revaluation period. Freeports are well-positioned to attract labour-intensive industries, such as manufacturing, due to the National Insurance relief (zero rate secondary NI contributions). Inflationary pressures and changing supply chains should support demand in these locations.

Rising fuel prices combined with consumers wanting on demand deliveries, support demand for facilities near large consumer bases, such as those within London and the SE region. Sustainability is also becoming more important, particularly with rising energy costs. For developers and landlords able to bring forward greener, more sustainable assets, there is opportunity to capture this rising demand and to ensure their portfolios are future-proofed.

Now is the opportunity for investors to reassess and rebalance their risk and returns, to reconsider their exposure and risk profiles as the market adapts to an environment of heightened inflation and uncertainty.

Threats in an increasingly polarised market

Threats are also heightened, with increased polarisation in the market. Assets in secondary locations or of secondary quality have recorded strong yield compression over the past couple of years. However, as interest rates rise, investors may reassess whether the premia on these assets are commensurate with the relative risk posed. A large proportion of the sector’s tenant base comprises smaller operators, some of these 3PL tenants may be dependent on single contracts, and this could pose a source of vulnerability in a challenging economic environment, with increased risk of void.

As sustainability becomes more critical (from both an investor and occupier perspective), there is a risk that older/secondary assets become stranded or need significant capital outlay, they may also face weakened tenant demand. This issue is not a temporary or cyclical one and tightening regulations on EPC certificates, will drive the need for upgrades over the next eight years and beyond. The Department for Business, Energy and Industrial Strategy (BEIS) is to set a minimum EPC rating requirement of C by 2027, with a B rating required by 2030.

Read more or get in contact: Claire Williams, Industrial and Logistics

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