Industrial market update Winter 2023

Slowing rental growth

In short: There has been significant repricing in the sector, but robust occupational market conditions amid tight supply are helping to maintain a continued confidence. Fundamentals are more critical than ever taking account of location, quality, pricing and rents. Compared to other options, industrials are still the most compelling asset class to many investors. There is continued investment appetite for mid-box assets, especially around towns and cities, driven by value-add. We expect rents will continue to rise but the pace of growth will slow further.

Vacancy rates remain muted. The bumper market conditions during the pandemic as occupiers and investors alike looked for opportunities has faded. But the fundamentals of this market remain strong across the UK, with net absorption of industrial space bouncing back to positive territory after dipping in Q2 for the first time in 11 years. As the weakness in the economy becomes more apparent, and amid higher financing costs, some companies are delaying their plans to move or expand, but supply is not plentiful, and this will put a lid on vacancies.

But even with this backdrop, the continued popularity of e-commerce, the changing supply chain and the push towards net zero is supporting activity in this market. Vacancy rates remain low at 3.9%, up slightly from 3.8% in September. They are expected to rise further as more supply is released into the market, but as with other property sectors, those delivering best-in-class energy efficient schemes will be at an advantage. Demand for buildings completed to a high specification, and especially those new or redeveloped schemes that meet BREEAM Very Good or Excellent, will be supported by companies setting their own targets and pledges about energy efficiency – for example, DHL has said it will achieve 100% net-zero carbon warehousing by 2025.

In Manchester, the vacancy rate has risen from a record low of 1.5% in 2022, but is still registering just 2.9%. Demand has been strongest for mid-sized box units (30,000 to 80,000 square feet) and last-mile delivery.

Rental growth continues to ease from the peaks registered late last year, but at an average annual growth rate of 6.7% across the UK, it still outperforms all other property sectors. Average rental growth across the South East is at 7.8% according to MSCI to the end of Q3, while annual rental growth in Manchester is at 9.7%, according to CoStar.

Despite being an important industrial and logistics hub, London’s vacancy rate is rising faster than elsewhere as a result of the unwinding of what was very strong demand from occupiers during the pandemic as they sought to keep up with massive consumer demand online. Rising rents in the capital, as well as elsewhere have also inhibited take-up especially amongst smaller firms.

The vacancy rate is at 4.7%, and while rents are still rising, the pace of growth has slowed markedly in the last year, from a high of more than 10% in Q2 last year, to 6.5% in Q3 this year.

Total operational costs for industrial assets are increasingly exerting downward pressure on rents, with higher service charges coupled with energy costs, as well as business rates all rising.

Investment levels pick up slightly. Sales volumes rose in Q3 across the UK, but transaction levels remain well below the very high levels in 2021 and early 2022. In the year to September, sales totalled around £8 billion, compared to £15.6 billion in the previous 12 months.

In Manchester, transactions volumes were boosted by the large sales of combined sale of Trafford Park and Heywood Distribution Park to Blackstone, taking the total values of sales in the 12 months to Q3 to £753 million, compared to a five-year annual average of £517 million. 

As in the leasing market, investment in London has been muted in recent quarters, with relatively higher capital values more challenging in a higher interest-rate environment which makes financing more expensive. In London, yields have also softened since the beginning of the year to more than 4%, with the sub-4% yields achieved in 2022 now uncommon. Our yield sheet is showing industrial yields remaining stable over Q3.

Across the UK, yields have stabilised at pre-pandemic levels of around 4.4% in the South East, and 5.4% across the rest of the UK. This comes after they hardened sharply in late 2021 and early 2022, and then rebounded back in the second half of last year.

Industrial: Key investment transactions

Property Address	Town /City	Date	Building size (sqft)	Yield (%)	Sale Price (£m)	Buyer
374 Ealing Road, Wembley	London	Q3 2023	105,201	–	£52.3m	Blackstone
Auriol Dr, Tera 40, Greenford	London	Q3 2023	330,000	2.9% NIY 5.75% EY	£146m	Valor Real Estate Partners
Europa Trade Park, E16	London	Q3 2023	31,750	4.1%	£22m	City of London
Richardson Way, CV2	Coventry	Q3 2023	485,120	4.5%	£88.4m	Strathclyde Pension Fund

Key statistics:

Industrial Q3 2023 unless otherwise stated	UK	London & South East
*Distribution, multi-let estates and specialised industrial*	*Current quarter (last quarter / 5yr ave)*	*Current quarter (last quarter / 5yr ave)*
Occupier
Availability rate (%)	5.1% (5.2%/5.5%)	5.6% (6.0%/5.6%)
Vacancy rate %	4.0% (3.7%/3.3%)	4.3% (4.2%/3.2%)
Rental growth (12-month growth rate)	6.9% (7.6%/6.7%)	7.7% (8.4%/7.0%)
Quarterly take up (sqft)	11.6m sqft (14.0m/21.6m)	2.6m sqft (2.7m/4.8m)
Supply
Completions (net delivered sqft)	13.5m sqft (7.5m/10m)	1.5m sqft (906,422/1.6m)
Total under construction (sqft)	60.4m sqft (68.9m/56.7m)	14.7m sqft (16.0m/11.1m)
Investment
Quarterly sales volume £m	£2,148m (£1,570m/£2,747m)	£907m (£608m/£1,017m)
Average yield	4.7% (4.6%/4.3%)	4.4% (4.3%/3.8%) *
Prime yield (rack rented) Oct 2023 (Q2 2023)	5.5% – 6.0% (5.5% – 6.0%) Prime regional	4.5%-4.75% (4.5% – 4.75%) Within M25

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