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With many market variables heading in the wrong direction, it's easy to forget that there remain many positive drivers for the market in 2024. Moreover, when you scratch the surface of the data, all isn’t what it seems when it comes to supply and demand
The macro picture
Better-than-expected economic growth
While it has been difficult to shake a sinking feeling looking at economic news in the last year, it is important to take stock of where we are relative to where we expected to be. At the end of the pandemic, the economic forecast for the UK saw a glacial recovery, languishing behind the rest of the G7 economies. In September, however, revisions by the ONS showed that the UK was recovering faster than previously expected, growing by 1.8% between Q4 2019 and Q2 2023, compared to 1.7% in France and 0.2% in Germany.
While the overall growth outlook remains weak, economic risks have decreased dramatically over the last year. Firstly, we appear to have avoided the deep recession that many analysts predicted when economic conditions started to deteriorate. Secondly, while overall growth is set to be relatively flat, the UK’s risk score, as measured by Oxford Economics, has improved over the last six months as risks to the exchange rate and sovereign debt have fallen. The UK benefits from a more favourable demographic profile than much of Western Europe, which will support consumer spending over the medium to long term and allow the economy to achieve higher economic growth rates than many other Western European economies.
The consumer economy has remained resilient
In the near term, there are also reasons for optimism. While consumers have begun to run down pandemic-era savings, we are seeing a swift recovery in consumer sentiment, with the UK consumer sentiment index for September 2023 registering at 98.6 points, its highest level since January 2022, as part of a six-month upward trend. Indeed, consumer sentiment has improved by 7.2% over the last 12 months. Considering the importance of consumer expectations about the future to discretionary spending, it is certainly positive to see this indicator ticking upwards, which may translate to a recovery in retail sales. Retail sales (ex. auto fuel) have remained relatively resilient, falling by just 2.5% in terms of volumes since February 2020, while the value of retail sales has increased by 17.1%, reflecting the negative impacts of the cost of living crisis.
This sentiment feeds through into the job market for the logistics sector. Indeed, analysing online job postings from the Office of National Statistics (ONS) for the transport, logistics or warehouse sector shows that after reaching a trough following the mini-budget, we have seen an uptick in the level of job postings for the sector and it is now remaining stable at the pre-Covid average.
Crucially, energy prices, one of the catalysts for the cost of living crisis, appear to have stabilised. This should reduce pressure on households and free up income for spending in other areas.
The key engine behind logistics demand is expected to keep running
Looking ahead into 2024, e-commerce is set for a comeback, with online penetration set to grow by 7% y/y next year – equating to an increase of 1.6 percentage points, compared to an average of 1.4 percentage points per year since 2017. Indeed, e-commerce penetration forecasts show growth from 22.2% in 2022 to 28.4% by 2027, with revenue increasing by €62.4bn over the period. Using previous research from Prologis, we expect this to equate to additional logistics requirements of up to 48m sq ft over the period. Data from the ONS/Revolut reinforces these trends, revealing that 40% of all Revolut debit card spending occurred online in September. This aligns with the long-term average of 42% per month since January 2020. While Savills exercises caution in interpreting Revolut trends due to its bias toward younger consumers and its rapid growth, we believe that the penetration data reasonably reflects the dynamics between online and offline channels.
The market picture
Nearshoring is impacting our data
After three years of record-breaking demand take-up of units over 100,000 sq ft is expected to reach 29.5m sq ft by year end as occupiers pause for thought. While this represents a 40% decline from 2022 levels, it aligns with the long-term average of 30.3m sq ft.
Spurred by global instability and the need to improve supply chain resilience occupiers are seeking to re-locate their operations closer to final consumers. Recent data from the European Central Bank continues to support this stance. The overarching sentiment is that firms are expecting to become increasingly active in relocating their operations over the next five years to make their businesses more resilient, a staggering 42% of firms noted that they had near-shored, diversified and or friend-shored production in the last five years while 74% said they expected to do so in the next five years. However, the adjustment of trading relations is a time-consuming process due to challenges and costs associated with modifying business models, supply chains, and contracts. While we expect an increase in occupier requirements to enhance resilience, we view this as a more prolonged and gradual trend.
Savills recent European Logistics Census supports the observed trends, with 25% of respondents endorsing the need for re/nearshoring in the next three years. Additionally, 18% cite the need to increase stock quantities to mitigate potential global delays. Analysis of Savills data for deals over 100,000 sq ft further supports these findings, with manufacturing-related occupiers acquiring 7.5m sq ft in the UK this year, constituting 32% of all activity.
Requirement levels stabilise
Savills requirements index also points to take-up rising in 2024. After steadily rising from the lowest levels recorded at the back end of last year, we have begun to see a degree of stability with fewer fluctuations quarter-on-quarter. As we begin to see more stability in the level of demand it leads us to believe we have reached the nadir point and should the correlation of requirements to take-up be maintained we expect take-up to reach in the range of 7–9m sq ft per quarter.
Yes, supply has increased, but let's get under the stats
On the supply side, and at the time of writing, there is currently 50.7m sq ft of warehouse space on the market, reflecting a vacancy rate of 6.87%. Although this represents an 95% increase in the last 12 months, it is a significantly better position than 2009, when supply reached 94m sq ft, and the vacancy rate topped 24%.
Several factors contribute to the rising supply. First, there’s an increase in ’occupier-controlled’ space being formally put on the market, as existing tenants look to sublet or assign space and rightsize their operations. Secondly, a significant amount of speculatively constructed space is set to be completed in 2023, with 17m square feet already completed in 2023 and an additional 11.37m square feet across 55 units is expected to reach completion in the remainder of 2023 and into 2024.
However, if we look at the 31m sq ft of speculative completions the market has seen since the start of 2021, 58% of this has already been leased, suggesting that the prospects for the vacant units remain strong. Moreover, the average void for units that have been leased remains lower than it was before the pandemic at just five months for new units.
Moreover, if we break up the market into its core regions and then examine by size band many segments of the market still have less than one year of supply, suggesting that there remain pockets of undersupply across the country where occupiers will struggle to fulfil new requirements.
It’s also worth noting that higher capital costs will continue to have a ripple effect on the market. We are already witnessing a constrained development pipeline with speculative announcements falling 34% in 2023.
Additionally, build to suit (BTS) transactions have become more challenging to fund, with BTS take-up falling 80% year on year. Should conditions not improve in this part of the market, we anticipate that some occupier requirements for BTS space will divert into existing buildings. Lastly, utilising our market-leading data on the UK logistics market, we have created a model that allows us to project vacancy rates into the future. Our data on lease events show that there are 25.9m sq ft with a break or expiry throughout 2024. If we assume take-up falls to the long-term average of 30m sq ft, an 80% renewal at lease events, elevated levels of new second hand supply come to market and the current speculative development pipeline is delivered with minimal additions, the vacancy will peak at 7.3% before falling to 6.2% at the end of 2024.
We expect to see greater bifurcation in the market
With supply rising to its highest level for a decade and take-up reverting to pre-pandemic norms, it is interesting to see that rents for prime units are continuing to rise. In fact, so far this year, prime rents have increased by 5.8 per cent, compared to just 0.3 per cent for secondary space. What’s more, 2022 saw take-up for second hand stock account for just 22 per cent, the lowest figure ever recorded.
While there has always been a gap in rental tone, this has grown considerably in the last 16 years from £1.60 per sq ft in 2007 to £2.40 per sq ft in 2023, an increase of almost 50 per cent. At present, average prime and secondary rents sit at £9.32 and £6.95, respectively, signifying the biggest differential on record.
Wider issues
Global issues continue to focus minds
Geopolitical issues continue to weigh on the minds of large corporates, not just because of their impact on consumer confidence and spending, but also as it can often feel that the world is lurching from one crisis to another. When taken in the aggregate, all these issues are placing even greater emphasis on global supply chains and their perceived fragility.
Surveys continue to suggest that occupiers are considering initiatives to nearshore or reshore elements of production and their supply chains closer to point-of-sale markets, which in creates a ripple effect in the wider logistics property market. As 2023 draws to a close, we have witnessed this in our data with manufacturing-related take-up accounting for 31% of total take-up, the highest level ever reached.
Another recent development not caused by global tensions, but related to the climate crisis has been the steady decline of water levels in the Panama Canal due to a localised drought. This has meant that the largest containerships are unable to pass through and capacity is constrained by up to 40%.
This will add time and cost on to any journey, and whilst the impact will be most keenly felt in the USA, there will be residual impact between shipments between the West Coast of America and into Europe.
Whilst it is hoped any drought is short-lived and solutions can be found it is a clear reminder that as the climate crisis continues, there will be events outside of anyone’s control that impact global supply chains, giving further credence to the argument that more production should take place closer to the intended sales market.
What impact would a change of government have on the planning system?
Closer to home, and with the opinion polls giving Labour a strong lead in the polls, it is worth considering how the planning system may evolve under a Labour government.
Whilst manifestos have yet to be published, party conference season in the autumn of 2023 gave some insight into how things may change. Most of the rhetoric has revolved around the residential sector and the message to ’get Britain building again’. However, there have been some positive signs for the industrial and logistics sector. Indeed, Keir Starmer even used the word ’warehouse’ in his speech at the Labour Party Conference.
Firstly, Labour has said it would work with local authorities to deliver stalled local plans, which would at least give developers more certainty in relation to longer-term strategic sites.
Secondly, a term was added to the planning lexicon in the form of the ’grey belt’, suggesting that the Labour Party is committed to bringing forward some development on poor-quality green belt sites, which has the potential to mean sites on the fringe of urban areas could come forward for development.
Lastly, the Labour Party has said it would update all national policy statements relevant to Nationally Significant Infrastructure Projects within the first six months in government. It also outlined plans for a new National Wealth Fund that would co-invest in projects that are seen as necessary to the energy transition and Britain’s industrial future, but which fall outside of energy production. Labour's five missions reveal that the new fund would invest alongside the private sector in gigafactories, clean steel plants, renewable-ready ports, green hydrogen and energy storage.
Investment in these projects would most likely take place on land that has currently been earmarked for industrial or logistics use but also create supply chains in their hinterland that would be a positive demand driver for the traditional warehouse space needed to service such operations.