PRIME LOGISTICS Q3 2021 Bulletin - The definitive guide to the UK's distribution property market - Gerald Eve
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PRIME LOGISTICS The definitive guide to the UK’s distribution property market Q3 2021 Bulletin Read more geraldeve.com
SUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
Q3 2021: MARKET OVERVIEW
Demand from online retailers, logistics operators and low carbon industries
pushed occupier take-up to another record high of 23.7m sq ft in Q3. This is
hot on the heels of the previous record 22.9m sq ft agreed in Q2 and already
marks out 2021 as the most active year on record. Such heightened activity
has suppressed availability to a record low 4.6% and generated significant and
widespread rental growth. Developers started 6.4m sq ft of new speculative
schemes in Q3 - a record for one quarter - but this space is quickly being
absorbed by space-hungry occupiers. Rising input costs and shortages of
materials and labour are of increasing concern to both occupiers and developers.
23.7 m
sq ft 4.6% 4.7%
take-up in UK prime headline
Q3 2021 availability rate rental growth,
Q3 2021
6.4 m
sq ft 29.5%
of spec distribution warehouse
development total return,
starts in Q3 2021 August 2021
geraldeve.com
SUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
OCCUPIER DEMAND
RECORD DEMAND IN Q3 DRIVES ANNUAL TAKE-UP TO STRONG PIPELINE OF DEALS SUGGESTS
Logistics take-up by building quality
NEW HEIGHTS Source: Gerald Eve FRENETIC END TO THE YEAR
Take-up was a record-high 23.7 million sq ft in Q3 2021, a small increase Million sq ft Online retailers and logistics companies continue
24
of 3% on the previous record quarter in Q2 but a massive 72% above 22 to be acquisitive, but there’s a real depth and
20
the five-year quarterly average. This takes occupier take-up so far in 2021 18 breadth to occupier demand from a variety of
to 62.9m sq ft – already more than any full year in history. Transactions 16
14
sectors, with over 115 individual deals agreed in
were predominantly focused on new stock in Q3: pre-lets accounted for 12 Q3. Retailers making large scale commitments
10
44% of all demand and new speculative buildings accounted for 27%. 8 in Q3 include MH Star, John Lewis, Ocado,
6
This is reflective of the immediate need for good quality buildings and 4 Toolstation, IKEA, Amazon, Marks & Spencer and
the acute shortage of secondhand space. 2
0
Easy Bathrooms. Outside of retailers, film and TV
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 production occupiers were active, as were pharma-
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021
related manufacturers. Looking to the year-end,
INVESTMENT IN LOW CARBON INDUSTRIES AND ONLINE RETAIL New or refurbished (including pre-lets and spec) Secondhand 5-year average
there is over 8 million sq ft under offer across the
DRIVES RECORD-BREAKING DEMAND country within existing buildings and an additional
12 million sq ft awaiting planning permission. Such
Since the onset of the pandemic, logistics occupiers - principally retailers
Q3 2021 take-up by occupier sector a strong pipeline of occupier activity suggests
and 3PLs - have been quick to make long term decisions to invest in Source: Gerald Eve a frenetic end to the year in what could be an
expanding their logistics property footprints. Amazon for instance was
extremely busy quarter for internet retailers.
active again in Q3 and took 10 buildings totalling 2.75m sq ft. However, 6% Other/unknown 2% Services and data centres
2% Film & TV production
demand from the manufacturing sector returned with a bang in Q3,
15% Renewable energy / electric 21% Dedicated internet retail
with green energy, battery production and food manufacturers notably battery manufacturing
active. BritishVolt received planning on their 2.8m sq ft ‘gigaplant’ in 39% Manufacturing 34% Retail & Wholesale
Northumberland (on the site of the former Blyth power station) as did
GE Renewable Energy on their Teesworks site in the North East where 12% Other manufacturing 13% Other Retail & Wholesale
they intend to manufacture wind turbine blades. Smarparc also pre-let 3% Pharma-related manufacturing
1.85m sq ft at SEGRO Spondon in Derby, where it intends to develop a 9% Food & drink related manufacturing 17% Logistics
collaborative hub of low carbon food manufacturing facilities.
geraldeve.comSUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
SUPPLY AND DEVELOPMENT
DEMAND SURGE DRIVES AVAILABILITY TO ALL TIME LOW SPECULATIVE DEVELOPERS CONFIDENT STARTING NEW SCHEMES MATERIALS SHORTAGES DRIVE UP BUILD COSTS
The overall rate of availability fell again to 4.6% in Q3, the lowest There was 15.3m sq ft of development starts in Q3, of which 6.4m sq ft There is a shortage of construction materials, compounded by
on record. The volume of secondhand space on the market fell (42%) was speculative. There were 31 separate speculative starts competing demand from major infrastructure projects such as
for the fourth consecutive quarter, a large proportion of which with an average building size of 208,000 sq ft. New speculative Crossrail and HS2. Additionally, the ongoing shipping disruption and
is old and more suitable for redevelopment than immediate development in Q3 was focused in the Midlands, especially the East implementation of Brexit import tariffs have significantly extended the
occupation. The supply of up-and-built new stock is also low, Midlands, where there is proportionately more land with planning lead times and cost of development. Compared with August last year,
especially in London, the South East and Midlands markets. permission. Newlands, Gazeley, Panattoni, Prologis, Tritax, and Ergo the cost of concrete is 68% higher, imported plywood is 78% higher
Occupiers in desperate need of immediate space therefore have were particularly active in starting speculative schemes in Q3. Such and fabricated structural steel is 75% higher. Major global logistics
very few options. There is currently 13m sq ft of speculative has been the surge in activity since the onset of the pandemic, more developers with enhanced buying power, established contracts and
space under construction, which will go some way to alleviate space has started construction speculatively over the last 12 months stronger order books are in a better position than the smaller, newer
this shortage but these buildings are letting-up quickly. than in any year since our records began in 2006. developers who are struggling to meet development timescales and
need to pass this additional cost on to occupiers through higher rents.
UK rolling annual take-up and availability rate Rolling annual speculative development starts Price of Construction Materials
Source: Gerald Eve Source: Gerald Eve Source: UK Department for Business, Energy and Industrial Strategy
Million sq ft % Million sq ft Index, 2015=100
90 20 20 250
80 18 18 230
70 16 16
210
60 14 14
12 12 190
50
10 10 170
40
8 8 150
30 6 6
20 130
4 4
10 2 2 110
0 0 0 90
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Rolling annual take-up Availability rate (RHS) Speculative development starts 10-year average 5-year average
Concrete reinforcing bars (steel) Imported sawn or planed wood Fabricated structural steel
geraldeve.comSUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
RENTS
PRIME RENTS GROWING AT FASTEST RATE ON RECORD OCCUPIERS REPORT DIFFERENCE IN QUOTING RENTS DEPENDING ON
UK LABOUR SHORTAGE INDEX
DEVELOPER LANDHOLDING Source: Oxford Economics
The wealth of transactional evidence has set new rental
benchmarks in several markets and UK prime logistics rents have The most acquisitive occupiers are willing to pay the new rental market
on average grown by 9.4% so far in 2021 and 4.7% just in Q3 - the benchmarks to secure space in the right location. Principally these are internet
strongest growth on record. The largest jumps in prime rents were retailers and logistics operators, but also recently food delivery companies. Agriculture, mining,
in markets which, over the last five years, have had relatively weak However, occupiers have reported a difference in the rental package offered utilities & water
levels of take-up and below average rental growth. These include depending on the developer’s landholding and development finances. For Manufacturing 2 Other services
markets in Kent, the South Coast, Suffolk & Essex and South instance, the quoting rents offered for buildings on which the (usually larger) 1
Wales. Strong competition from occupiers on new or modern developer has exercised an option to draw-down the land are often lower Construction Health
0
stock has reset the rental tone in these markets. Strong rental than those landlords/developers who have recently bought and developed-
growth was also recorded in London and the South East in Q3 out speculatively. The drawn-down land has a much lower cost of capital and -1
– especially prime west London markets such as Park Royal and no void period priced-in, so landlords can often offer higher incentives and a Distribution
-2 Education
Heathrow where prime rents are now just shy of £20 per sq ft. more attractive rent and be more selective with tenant covenant strength.
-3
Transport Public admin.
Annual prime logistics rental growth OCCUPIERS CONTENDING WITH RISING COSTS AND LABOUR SHORTAGES
Source: Gerald Eve
The recent HGV driver shortage exacerbated by Brexit, a pandemic-
% Accommodation Admin. Services
driven backlog of HGV licence training tests and driver tax reforms has & food
12
10 highlighted the vulnerability of supply chains to demand spikes and
8 the mounting cost pressures facing occupiers. The Oxford Economics Communications Professional services
Fin. Services
6
labour shortage index suggests that mismatches between vacancies and
4
2 available workers are not a major problem across the UK economy overall
August 2021
0 but are impacting several sectors linked to warehouse occupation. The
-2
construction, distribution, manufacturing and agriculture sectors showed
-4 Shaded area shows index below zero (no shortage)
-6 noteworthy shortages in August.
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geraldeve.comSUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
INVESTMENT
PANDEMIC KICKSTARTED SUSTAINED UPTICK IN INVESTMENT PROFIT-TAKERS AND OCCUPIERS NET SELLERS IN 2021 WILL THE WEIGHT OF CAPITAL TARGETING LOGISTICS EASE
VOLUMES AND RETURNS IN 2022?
Occupiers such as Asda and developers such as Henry Boot and
Competition for industrial and logistics assets is fierce and the weight LondonMetric were key vendors in Q3, and it has been these investor The current pipeline of transactions and equity raises suggests a very
of capital targeting the sector continues to drive down yields. This types which have been most active on the sell side all year. Profit- busy Q4 in the investment market as deals are struck before year-
positive yield impact, evident since the onset of the pandemic, drove taking funds who were previously ‘aggregators’ of logistics property, end. This is likely to generate further yield compression, especially in
annual total returns to 29.5% in August, the highest since September such as CBREGi and DTZIM have also sold this year. Oxenwood, the markets with the strongest rental growth prospects. However,
1994. The volume of industrial and logistics assets traded has also Exeter, Trammell Crow and Mirastar REIM were acquisitive in Q3, but returns are likely to regularise next year if capital is drawn back
steadily increased since Q2 2020 and the volume so far in 2021 is far so far in 2021, overseas investors have been the dominant purchaser to the office, retail and leisure sectors. Whilst logistics pricing still
in excess of the long-term average. 2021 is set to be a record year for type – driven by US private equity heavyweight Blackstone. looks attractive against these assets given the strong rental growth
investment, reflective of the increased number of large-scale logistics assumptions, the reallocation of capital to those sectors hit hardest
funding opportunities brought about by the occupier market and the by the pandemic is likely to slow logistics yield compression.
substantial increase in speculative development.
Industrial investment volumes and total returns Q1-Q3 2021 distribution warehouse net investment by investor type Distribution warehouse total return and components
Sources: Property Data, MSCI, Gerald Eve Sources: Property Data, Gerald Eve Sources: MSCI, Gerald Eve
£ billion % £ billion %
18 35 4 35
16 30 30
3
14 25
25 2
12
20
10 20 1
15
8 15 0
10
6
10 -1
4 5
2 5 -2 0
0 0 -3 -5
Overseas Quoted Private UK Others Private Occupiers 2017 2018 2019 2020 2021 2022 2023
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Q2 2021
Q3 2021
Investors Prop Co Investors Institutions Prop Co
Rental growth Yield impact Income return Total return
Rolling annual industrial investment Distribution warehouse total return (RHS)
geraldeve.comSUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
OUTLOOK
Proportion of retail sales online
LOGISTICS SECTOR M&A AND SHORTENED SUPPLY CHAINS THE ECONOMIC RECOVERY IS LIKELY TO FACE Sources: ONS, Gerald Eve
EXPECTED IN 2022 MORE HEADWINDS %
45 FORECAST
Most logistics operators are preparing for what is expected Oxford Economics expects CPI inflation to peak over 4% and remain 40
to be one of the busiest fourth quarters for e-commerce on above 3% until H2 2022 but suggests that structural factors still point 35
30
record. However, many are also looking beyond the immediate against higher inflation becoming embedded given the localised 25
operational challenges and considering strategic mergers to nature of the price rises. However, logistics occupiers and developers 20
expand into the ecommerce sector. Several retailers are making have been disproportionately impacted by recent inflation and many 15
10
plans too, especially those who have had to pay a heavy price are making plans under the assumption that it will become more 5
to secure goods in time for Christmas. Plans for these companies entrenched. Further energy price hikes, compounded by the phasing 0
involve pivoting away from just-in-time management to more out of red diesel in April next year (a key component for developers)
2007
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regional/domestic supply chains and increasing the use of and supply problems, especially for those sectors requiring
With lockdowns Previous trajectory without lockdowns
technology to make operations more agile. semiconductors, are likely to persist into 2022.
Parts of spending consumers expect to permanently shift online
COST PRESSURES AND LABOUR SHORTAGES TO MOUNT FOR CONSUMERS SIGNALLING PERMANENT SHIFT ONLINE IN Source: Retail Economics and Alvarez & Marsal
OCCUPIERS, EVEN PURE ONLINE RETAILERS MANY SECTORS Proportion of respondents (%)
20% 20%
Rising property costs, plus increased operational, labour and As the economy continues to open up, the proportion of retail sales
17%
power costs, have put considerable pressure on already-tight online fell back to 25.5% in August 2021. As we enter the busiest 15%
14%
margins for many occupiers. Even pure online retailers who work time of year for retailers given Black Friday and Christmas peaks, this 13% 13%
on thinner margins than multi-channel models are feeling the is likely to rise to 30% by year-end. This is below the covid lockdown- 8% 9%
impact (pre-tax profit margins for European pure online players induced peaks of 2020, but still illustrative of the permanent shift 5% 5%
are c 1.5% compared with c 5.5% for multichannel, according to online by many consumers. Certain sectors such as homewares and 3%
4% 4% 3%
2%
Retail Economics). Those retailers for whom low prices are a core electricals are likely to be key beneficiaries of this permanent shift,
selling point are going to be unwilling to pass these price rises on to which will continue to put pressure on online retailers and 3PLs to Homewares Apparel Electricals Toys
& games
Food
& grocery
Health
& beauty
DIY
& gardening
Furniture
& flooring
consumers and will be under pressure to make savings elsewhere. reinforce their supply chains to deal with this long term change.
2020 2021
geraldeve.comSUMMARY OCCUPIER SUPPLY AND RENTS INVESTMENT OUTLOOK CONTACT
DEMAND DEVELOPMENT
INDUSTRIAL & LOGISTICS CONTACTS GERALD EVE IN THE MARKET
Agency Scotland Strategic Land Gerald Eve is well-established in the logistics property market and covers the full range of property
London & South East Sven Macaulay Sam Skinner services, from national occupational and investment agency through to lease consultancy and
Mark Trowell Mobile +44 (0)7767 310373 Mobile +44 (0)7880 828020 valuation. Our specialists have been involved in several high profile transactions during the quarter.
Mobile +44 (0)7768 987508 smacaulay@geraldeve.com sskinner@geraldeve.com Please contact them directly for more information.
mtrowell@geraldeve.com
Investment Research
Josh Pater John Rodgers Steve Sharman Jason Print is advising PLP on the letting of the recently- Jon Ryan-Gill is advising Schroders and Trebor
Mobile +44 (0)7782 271355 Mobile +44 (0)7810 307422 Mobile +44 (0)7508 008118 completed speculatively developed Unit 1 (138,000 sq ft) Developments on the development agreement, agency
jpater@geraldeve.com jrodgers@geraldeve.com ssharman@geraldeve.com and Unit 2 (90,000 sq ft) at Ellesmere Port on Junction 8 and investment at Revolution Park, a new 200,000 sq ft
of the M53. net zero development in Wolverhampton which received
David Moule Nick Ogden Ben Clarke planning permission in Q3.
Mobile +44 (0)7905 764910 Mobile +44 (0)7825 106681 Tel. +44 (0)207 333 6288
dmoule@geraldeve.com nogden@geraldeve.com bclarke@geraldeve.com Email Jason to find out more +44 (0)7833 170680 Email Jon to find out more +44 (0)7961 820757
Midlands Callum Robertson Oliver Al-Rehani
Jon Ryan-Gill Mobile +44 (0)7810 655791 Mobile +44 (0)7584 112501 Josh Pater advised Ocado on the letting of Luton 346, a John Rodgers advised M&G Real Estate on the purchase
Mobile +44 (0)7961 820757 crobertson@geraldeve.com oal-rehani@geraldeve.com 346,312 sq ft high spec unit at Panattoni Park, Luton. of Asda’s 316,336 sq ft distribution unit in Belvedere from
jryan-gill@geraldeve.com abrdn for £92.4m, reflecting a net initial yield of 2.43%.
Lease Consultancy Property Asset Management
John Sambrooks Chris Long Angela Duru Email Josh to find out more +44 (0)7782 271355 Email John to find out more +44 (0)781 0 307422
Mobile +44 (0)7919 624512 Mobile +44 (0)7767 618623 Mobile +44 (0)7464 904656
jsambrooks@geraldeve.com clong@geraldeve.com aduru@geraldeve.com
North Rating International View our full-service offer
Jason Print Keith Norman Hettie Cust
Mobile +44 (0)7833 170680 Mobile +44 (0)7836 549774 Mobile +44 (0)7920 267523 Find out how we can help
jprint@geraldeve.com knorman@geraldeve.com hcust@geraldeve.com
South West & Wales Valuation Aviation
Richard Gatehouse Richard Glenwright John Arbuckle
Prime Logistics is the definitive guide to the UK’s distribution property market. Dealing with logistics units of 50,000 sq ft and above, this
Mobile +44 (0)7710 171854 Mobile +44 (0)7944 585528 Mobile +44 (0)7810 181391 research report gives detailed analysis and statistics for 26 key distribution areas – from take-up, stock and development statistics to drivers of
rgatehouse@geraldeve.com rglenwright@geraldeve.com jarbuckle@geraldeve.com occupier demand, growth forecasts and regional outlooks. All previous editions can be downloaded from our website.
Prime Logistics is a short summary and is not intended to be advice. No responsibility can be accepted for loss or damage caused by any reliance on it.
The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP.
© Gerald Eve LLP 2021. All rights reserved.
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