Industrial & Logistics

A continuation of macroeconomic headwinds will weigh on occupier activity, creating an increasingly polarised market. Prime assets will retain appeal, but the performance of secondary assets is likely to be more challenged. With little change to the investment environment anticipated in the short-term, the stalemate between buyers’ and sellers’ expectations of price may start to break for some, albeit volumes will remain subdued.

Key Takeaways

1. Amidst ongoing macroeconomic headwinds creating uncertainty, take-up will remain subdued. Third-party logistics (3PLs), counter cyclical players such as discounter retailers and nearshoring businesses are expected to lead demand.
2. Despite a material reduction in occupier expansion, only moderate vacancy rate rises are anticipated in the year ahead as the volume of space under construction continues to decrease.
3. However, the market will become increasingly polarised. While prime assets are still expected to deliver rental growth, the performance of secondary assets will be more challenged.
4. As green features become the norm for new facilities and rise up the agenda for many occupiers, rents and marketing voids of non-compliant properties are expected to come under increasing pressure in 2024.
5. With market dynamics unlikely to change, investment activity in 2024 will remain muted versus recent record-breaking years. Given the sector’s increasingly nuanced performance, investors are encouraged to undertake more granular analysis as part of their due diligence.

Slowing demand could create an increasingly polarised market 

Demand dampened by macroeconomic headwinds  

Against a backdrop of high inflation and rising interest rates, logistics occupiers have taken a cautious approach to expansion in 2023. Throughout the year, the volume of take-up has been around half that seen in 2022. Decision-making has also been affected by uncertainty, with deals taking time to progress.  

Contributing to the reduction in take-up, there has been a shift in demand to smaller and mid-size big box units. Typically, the smaller lots are being taken by 3PLs, this sector now accounting for almost 40% of all take-up. Looking to the year ahead, we anticipate 3PLs will maintain expansion plans, meeting the demand of companies seeking to outsource supply chains to achieve savings and greater flexibility in their transportation solutions.  

Despite ongoing economic challenges, almost 10m sq ft of big box logistics space remains under offer, indicating market resilience. Together with 3PLs, in 2024, countercyclical players such as discounter retailers or nearshoring businesses are expected to lead demand. While many have taken a ‘wait and see’ approach throughout 2023, it is likely that pressure to make business decisions will increase in the year ahead.  

Slowing development will moderate vacancy rises  

Vacancy rates have risen throughout the course of 2023, now standing above 4.5%. This has in part been driven by subdued demand, but also by an increase in available stock. In Q3 alone, 3.5m sq ft of newly completed speculative space became available. 

Increases in supply have provided occupiers with more choice, and as a result, some are seeking to relocate to more appropriately suited units. We anticipate the volume of secondhand stock returning to market will increase in 2024, which in part, is as a result of this trend.  

However, the development pipeline has slowed for three consecutive quarters and is 25% down year-on-year. This downward trend is expected to continue into 2024, particularly in the speculative space being delivered. As such, we expect only moderate vacancy rises, with rates continuing to drift back to pre-pandemic levels.  

Rental performance will be increasingly polarised  

Prime rental growth is still evident in several regions, albeit at moderated levels versus recent record-breaking years. Figure 10 highlights the direct relationship between vacancy rates and rental growth in the logistics sector. In line with the moderate vacancy rate rises forecast, we anticipate a continued slowdown of rental growth.  

Figure 10: UK logistics average rental growth vs vacancy rate

Note: Data points on chart represent an individual quarter’s performance since Q2 2011 with rent on an annualised basis.

Source: CBRE Research

Despite slowing development, the additional stock delivered will still contribute to an increasingly polarised market. While prime assets are expected to continue to command rental growth, it is likely landlords of secondary assets will need to provide increasing incentive packages to attract prospective tenants.  

CBRE’s latest survey highlights the increasing importance of ESG amongst occupiers. Features such as charging points for electric vehicles, or photo voltaic panels, are now becoming standard for new developments. In 2024, rents of non-compliant properties are likely to come under increasing pressure. 

Investment activity to remain subdued versus recent record-breaking years, but selective opportunities will arise

Industrial and logistics pricing has remained stable throughout 2023. However, with willing buyers’ and willing sellers’ expectations of price unaligned, the market has fallen into a stalemate and investment has slowed. Year to date investment into the sector including all transactions has totalled £7.1bn, significantly below 2022 levels.  

Looking ahead, the base rate is now expected to be held throughout H1 2024 – with gradual downward adjustments thereafter. Consequently, pricing recovery is likely to take longer than initially expected. With little change to market conditions anticipated throughout 2024, investment activity will remain subdued versus recent record-breaking years. This said, a steady supply of assets is still expected to come to market as many look to fulfil business plans.  

Investors seeking to establish or further develop their exposure to the sector in 2024 are advised to undertake thorough due diligence. Within the last year logistics performance has become increasingly nuanced, bids should be informed by the target market’s individual supply and demand dynamics.

Figure 11: UK real estate investment by I&L and I&L % of total investment

Source: CBRE Research

Advanced manufacturing a national growth priority

Reflecting economic headwinds, the manufacturing PMI has been contracting since summer 2022. While weak economic growth looks set to continue into the year ahead, with Brexit now implemented and an upcoming election, opportunities for the manufacturing sector could be on the horizon.  

Steps to encourage investment have already begun. In this year’s Spring Budget, the government announced plans to launch 12 Investment Zones in key industries that support national priorities. In July, South Yorkshire was named as the first Zone, focusing on advanced manufacturing the area has secured £80m of initial investment, and is set to create more than 8,000 jobs by 2030. However, according to Make UK less than a third of the industry believe special economic zones are an effective means of generating economic growth, with many often located outside of target areas.  

So, what would move the needle? According to Make UK and RSM, 44% of companies believe the current UK tax and regulation systems are unfavourable and more than a quarter say it is worse than other major competing countries. Moreover, 87% believe they are at a disadvantage compared to international competitors because the UK lacks an industrial strategy. 

While it is likely that logistics occupier activity will remain subdued in the year ahead, as economic conditions improve the strategies set out at the next election could have a meaningful impact on the real estate strategy of manufacturers and their expansion plans.