Industrial market update Winter 2024

In short: Capital growth is gaining momentum amid resilient rental growth and stable yields.

Increased supply is pushing up vacancy rates, and this may continue into next year, but demand is still strong for well positioned buildings with good ESG credentials, especially as companies look to ensure their supply chains meet net-zero criteria. 

• The vacancy rate in the logistics sector continues to creep up. It has risen to 5.8% in November, up from 5.6% in Q2. There has been some consolidation among retailers which has pushed up vacancy rates, as has the supply of new stock into the market. Some 41.6 million square feet of logistics space is currently under construction.  
• The vacancy rate for light industrial units is at 3.1%, up from 2.4% at the start of the year and is forecast to rise to nearly 4% by the end of next year, while the vacancy rate for specialised industrial property is at 2.8%. 
• The continued popularity of e-commerce and the requirements for net zero along supply is underpinning this market, which is now running back in line with pre-pandemic trends. 
• As in the office market, buildings which can boast net-zero or green credentials are outperforming, as clients are keen that their supply chains back up their ESG goals. 
• 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. 
• Rental growth for logistics space continues to ease, down from the highs registered last year when the demand/supply balance was much tighter.  
• Across the UK, annual rental growth for distribution warehouses is at 5.1% – and it has been at this rate for the last five months. However, this marks a decline from the double-digit growth registered at the start of 2023, according to MSCI data.  CoStar’s data also shows a slowdown in rental growth, but puts logistics rental growth at 5.5% pa in November 2024. Rents are being pushed downwards by rising operational costs, including rising energy costs and business rates.   
• The rise in rents in London registered over the summer has receded slightly in recent months. The annual rise in rental growth peaked at 8.7% in June, but has since fallen back 7.6%. Smaller units in sought-after locations in well-connected markets in north and west London, such as Ealing, are still in demand, and supply is relatively tight.  
• In Manchester, increased delivery of new space, coupled with recent negative net absorption in the market has pushed the vacancy rate for logistics to 5.8%. This is expected to peak next year at around 6.5% as the strong fundamentals of the Manchester market, and its location as a key distribution hub leads underpins take-up. The vacancy rate of light industrial units is lower at 3.1%.  
• Very strong activity in the Manchester market pushed up rental growth to double-digit figures in 2022/3. The rate of rental growth has since slowed to 5.2% year on year, still above the national average.  

• Investment activity has picked up after a slow start to the year – Industrial sales totalled £8 billion in the year to November, less than half the £19.4 billion in investment in the year to March 2022. 
• Across the UK, pricing has stabilised, with industrial equivalent yields sitting at around 6.24% (compared to 4.0%-4.5% in early 2022) and shows a 227bps premium over gilt yields. 
• Our yield sheet is showing industrial yields remaining stable. Prime logistics yields are at 5.25%-5.5%.  
• However, recent softening in gilt yields (in October and early November) are likely to put upward pressure on industrial equivalent yields, with further softening expected to materialise as rental growth also eases. 
• Total returns for distribution warehouses were at 6.4% in October, -22% in June 2023.  
• Activity has been concentrated in best-in-class big box logistics and multi-let industrial, especially in the Golden Triangle in the Midlands around Nottingham, Birmingham and Northampton. For example the purchase of Coventry Logistics Park by Strathclyde Pension Fund from JP Morgan for £140.4 million. The market in the North West has also been active, including a key purchase of Stockport Trading Estate by M&G for £23.4 million at a 4.3% yield. Another notable transaction in October was the purchase of the Victoria Industrial Estate in Park Royal, Ealing. Imperial College London acquired the 10-acre site for £115 million from SEGRO. 

Industrial:Key investment transactions

Key statistics:

Source: Cluttons, CoStar, MSCI * Yields for industrial in South East, MSCI. 

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