As the months have passed in 2022, it is clear to see that sentiment in economies the world over has changed dramatically. Whilst inflation was already starting to rear its head at the start of the year, the situation in Ukraine has amplified the situation further, largely through higher energy and food costs.

In the UK, consumer confidence has fallen to the lowest level since records began, and whilst retail sales are still showing increases in value, the volume of sales has been declining steadily since October 2021, according to data from the ONS.

Whilst governments have been implementing policies to aid the consumer, the reaction, in the most part, has been for central banks to start raising interest rates, and in the UK, rates now stand at 1.25%, with further rises seen as an inevitability. Perhaps most relevant to our sector is the current trajectory of online sales, which now stands at 25.9% of all retail sales, the lowest level since before the onset of Covid-19.

Given this economic backdrop, history would tell us cracks in the occupational market would start to appear, but at the time of writing, there is little to suggest this. Indeed, in the first half of this year, Savills has logged over 200m sq ft of occupier requirements, a fall of just 2% when compared with the first half of 2021. Against the backdrop of supply chain resilience and the need to hold more inventory, we continue to see strong demand, as our latest data demonstrates.

Take-up

With 15m sq ft of new leases signed in Q2, making it the second best Q2 on record, it is pleasing to report that take-up for H1 22 has reached a new record of 28.6m sq ft surpassing last year's total of 24.5m sq ft and exceeding the H1 average by 90%.

Given low levels of vacancy, it is interesting to observe that build-to-suit take-up has accounted for 54% of all of the space transacted so far in 2022, the highest proportion this segment has ever accounted for. Whilst the level of speculative take-up remains strong, accounting for 7m sq ft of demand so far this year, the bigger story is the fall in demand for second-hand units, which accounted for just 21% of take-up, proportionally the lowest level ever recorded. Whilst partly a supply issue, second-hand units will have lower ESG credentials, and given the rising costs associated with running warehouses, it comes as no surprise that occupiers are gravitating to better quality buildings with better ESG features.

The biggest story remains just how diverse the current occupier base in the sector is. With online retailer take-up falling back to 18% of the total, down from 35% last year, other occupier groups have more than compensated. Whilst 3PL’s have continued taking space and account for 25% of 2022 take-up, there has been a resurgence in demand from the manufacturing and automotive sector, which have taken 7m sq ft, which is 11% more than the whole of 2021.

Supply and Pipeline

With a number of speculative completions in the first half of the year and the rising demand for BTS units, supply has increased by 1% in 2022 to 18.4m sq ft, which reflects a vacancy rate of just 3.01%. Whilst this is the first vacancy up-tick we have seen for 18 months, it should be viewed in the context of the five-year average for vacancy, which sits at 5.9%. We are tracking 16.46m sq ft of speculative development due for delivery in 2022 and 2023 and expect new announcements to tail off given the wider economic context.

_{Read the articles within Big Shed Briefing below.}