Take-up surges 20% for large industrial

By Paul Norman - Friday, May 11, 2018 11:21

Take-up of large industrial space (50,000 sq ft plus) hit 11.5m sq ft during the first three months of 2018, 20% higher than the previous quarter and 5% above the five year quarterly average, according to Gerald Eve’s latest Prime Logistics quarterly bulletin.

Occupational activity was driven by large deals, with transactions for buildings over 100,000 sq ft in size accounting for 85% of take-up in the quarter. This increased the average deal to 189,000 sq ft – the highest recorded since Q1 2007.

Retailers, and especially the budget supermarkets such as Aldi and Lidl, took 43% of all space during the first quarter, usurping manufacturing – which was responsible for 34% of take-up in 2017, but only 16% in Q1 – as the dominant sector.

Mark Trowell, partner at Gerald Eve, said: “After what was a slightly disappointing end to 2017, the rebound in occupational activity – the highest quarterly take-up for a year – again demonstrated the strong ongoing demand that continues to underpin the logistics sector.

“The shift from manufacturing to retail as the dominant force highlights the breadth of demand that logistics property benefits from, while the average deal size – the largest for 11 years – is yet another sign of the market’s strength, with occupiers willing to commit to major holdings.”

The positivity in the leasing market was reflected in rising development activity, particularly for speculative projects, with such starts surging 51% to 2.8m sq ft during Q1 – well above the five-year average of 1.5m sq ft and outstripping purpose-built schemes for the second quarter in a row. Availability rates nudged downwards to 6.2%.

Josh Pater, partner at Gerald Eve, added: “In ‘normal’ market conditions, the rate of speculative development would be a cause for slight concern, especially with the average size of such schemes hitting 134,000 sq ft. But with supply remaining incredibly tight in most markets, and speculative development focused on the most in-demand locations, the outlook for these projects is positive.

“The level of speculative starts is less a sign of market over-enthusiasm, and more a rational response to the low availability rate and years of below-average development causing a genuine scarcity of suitable space in many of the UK’s most vital logistics locations.”

Given the low availability rate and strong start to 2018, Gerald Eve is forecasting rental growth of 3.4% over the course of the full year, with the biggest increases to be seen in London and the West Midlands.

Investment

Strong fundamentals continued to underpin interest from investors, with a weight of capital targeting the sector in spite of increasingly keen prices and a generally limited supply of investment-grade assets.

Gerald Eve said the fierce bidding over this stock has driven prime yields as low as 4% in the most in-demand locations. UK institutions, overseas investors and REITs have been the largest net purchasers of distribution warehouse property so far in 2018.

John Rodgers, head of capital markets at Gerald Eve, said: “Prime logistics remains a compelling proposition, and investors’ ongoing enthusiasm for the sector can be seen in the competition for assets when they become available to buy.

“As such, with buying opportunities remaining scarce, there is a premium being placed on large-scale portfolios that give investors critical mass in a short period of time. The lack of stock also tells its own story, with existing holders eyeing future capital and income growth rather than profit-taking through sales at current price levels.

“In the medium-term, it seems likely that values will be supported more by growth in rents than further significant levels of yield compression, especially in an environment where interest rate rises seem likely. Pent-up tenant demand will drive rental rises, and this is a key element of the fundamentals that will continue to attract capital to the sector.”

First produced in 2006 (analysing the 2005 market), Gerald Eve’s Prime Logistics focuses solely on industrial warehouse properties of 50,000 sq ft or more in size.

pnorman@costar.co.uk

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