There is no doubt that the mood music has shifted in the industrial & logistics sector following September’s mini-budget, which saw prime equivalent yields move out by 175bps to 5 per cent. Since then, many investors have hit the pause button as they wait it out for further price discovery and stability within the real estate market. Consequently, funding for speculative development has all but ground to a halt.

Many  landlords will not necessarily see this as a bad thing, as this is likely to curtail any potential oversupply. However, with vacancy levels at 3.96 per cent and the majority of occupiers seeking Grade A space (only 22 per cent of take-up during 2022 was for second hand units), it is going to require a significant number of new schemes to come to the market to disrupt the current supply dynamic.

Despite the current macroeconomic landscape, speculative take-up during 2022 was the highest since 2011, with a record breaking number of speculative developments announced. As it stands, nearly 20.8 million sq ft is due for delivery in 2023/24, but whether this all materialises remains to be seen.

Pricing aside, this time for reflection and hesitancy is also a result of the increase in build costs, which has seen contactors and sub-contractors largely dictate terms and all but eliminate fixed-term pricing. This has been compounded by myriad supply chain issues which saw lead times for materials move out exponentially. Although, this has since improved, the lack of labour has also impacted a number of  projects.

Looking ahead, however, it is possible that we will see build costs start to taper as development starts to slow. There has already been a return to competitive tendering as contractors look to fill their order books to off-set any uncertainty 2023 might hold.

From an occupational perspective, while requirements during the second half of last year didn't reach the levels seen during the pandemic, take-up in 2022 was still the third best year on record. What’s more, Savills data shows that the average void for speculative units remains at just one month post practical completion.

All things considered, is now a good time to press the button on speculative development?

For those willing to take the risk, it could lead to big rewards, heightened by significant falls in land values, continued rental growth in locations with a constrained supply of Grade A stock, and hopefully, a more favourable built environment.

Ultimately, we believe that there are opportunities to be had for investors willing to finance a spade in the ground.

Further information

Contact Will Cooper or Richard Fletcher-Brewer

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