Our market

While demand for warehouse space in the UK comes from a diverse occupier base, the need to fulfil growing e-commerce sales is a particularly important driver. Covid-related lockdowns resulted in online sales reaching 37.8% of total UK retail sales in January 2021. While this fell back to 26.0% of total sales in March 2022, as physical shops reopened, it compares with 19.1% in February 2020, demonstrating Covid-19’s role in accelerating online growth (source: ONS).

Non-retail businesses such as manufacturers are also increasingly using warehouses for e-commerce, allowing them to sell directly to end customers.

Covid-19, post-Brexit border friction and the uncertain geopolitical environment are increasingly forcing businesses to focus on the resilience of their supply chains. To help insulate them from future shocks, some companies are holding higher stock levels and looking to source or manufacture products closer to home, further boosting demand for warehouse space. Savills’ Logistics Census 2022 showed 25% of respondents will need more inventory space due to supply chain changes and onshoring.

This level of demand and shortage of supply means that rents are rising for all types of occupier, ranging from online retailers and 3PLs through to manufacturing and automotive businesses and physical retailers and grocers, and they are signing longer leases to secure the space they need.

Strong occupier demand

UK take-up (m sq ft)

Occupier take-up of industrial and logistics space in 2021 reached a new high of 78.0 million sq ft, beating the previous record in 2020 by 29% (source: LSH). Retail and wholesale businesses were again highly active and comprised 39% of total take-up. However, there was also strong activity from third-party logistics providers and distributors, whose take-up increased by 26% to 14.2 million sq ft. Regionally, the North West saw the strongest growth in take-up, at 86% above the five-year average, with increases across all size segments. Most other regions were also substantially ahead of the five-year average, with only Scotland underperforming.

Attractive investment market

Industrial investment volume (£bn)

2021 saw record investment volumes in the industrial and logistics sector, reflecting conditions in the occupational market. Total investment volume reached £15.2 billion, nearly double the previous high in 2018. Industrial property accounted for 27% of all UK real estate investment, up from 18% in 2020 and above a long-run average of 13% (source: LSH). Of this, £10.5 billion was invested in distribution warehouses.

Multi-let volumes were £4.7 billion, the highest since 2018. Prime yields for industrial assets compressed further, at 3.50% for South East industrials (-50 bps year on year), 3.75% for rest of UK industrial (-75 bps year on year) and 3.25% for distribution warehouses (-50 bps year on year) (source: LSH).

Constrained supply

UK availability by size-band (m sq ft)1

Record take-up has driven availability to new lows. At the end of 2021, available supply was 52.3 million sq ft or just 1.0 years of average take-up (source: LSH). This has encouraged speculative development, although this is concentrated in big boxes (over 0.2 million sq ft), which offer economies of scale. In 2021, 63% of new space was speculative, with 37% build to suit (source: JLL). The speculative pipeline at the year end was 18.6 million sq ft (source: Savills) but such space tends to let quickly, often during construction.

Build inflation and land costs may limit future development, although prime sites are still being brought forward.

Continuing rising rents

Industrial rental growth has been strong in 2021

The acute demand and supply imbalance means that market rental growth has been especially strong over the past year, with the MSCI Quarterly Index showing rental growth of 8.7% across all UK industrial in 2021. However, rental growth has been distinctly varied across the regions, with London the best performer, showing an increase of around 13% over 2021, compared to Scotland showing 3%.

Additionally, rental value growth has been much stronger at the prime end of the market, especially amongst prime big box logistics rents, which grew by 18.5% in 2021 (source: JLL). Lower average rents across many of the UK regions should insulate these markets from affordability constraints potentially beginning to take effect at the prime London segment of the market.

Most forecasters assume that market rents will grow in 2022, although geopolitical uncertainty drivers such as the war in Ukraine and the energy price shock mean that it is ultimately unclear how 2022 will evolve. While rental growth has been uneven across the UK, there remains plenty of scope for continuing growth over the year ahead, including within prime areas and other markets where growth has been more muted so far, reflecting ongoing strong competition for space, with LSH forecasting average rental growth across the UK in 2022 ranging between 12% to 14%.