Occupier advisory

As we have seen through the Savills requirements index, the level of new occupier requirements fell during 2022 before rebounding in 2023, albeit not to the levels witnessed during the height of the Covid-19 pandemic.

As we head into the start of 2024, the Savills occupier advisory team are busy and advising corporates across the manufacturing, logistics and retail sectors on projects requiring many differing types of industrial and logistics real estate. For the most part, these projects fall into a supply chain reorganisation/restructuring, consolidation and cost-efficiency strategies rather than a growth strategy. From a market perspective, this is important as there is often less urgency to conclude deals as new property decisions are more strategic in nature. Notwithstanding this, Savills is working with a number of new entrants and businesses who are keen to establish a footprint in the UK logistics market.

Savills research data demonstrates that supply and vacancy have risen over the last 18 months which, on the face of it, would suggest that for the first time in almost a decade, market conditions are rebalancing and starting to tilt in favour of the occupier rather than the landlord.

At a high level, this is broadly correct, but it is important to get under the data, as in our experience, occupiers’ requirements tend not to be that flexible when it comes to geography or size, particularly when dealing with new long-term strategic assets. Indeed, as our data demonstrates, for most geographies for units over 400,000 sq ft, there remains less than a year’s supply of existing buildings, meaning that options are limited and therefore a BTS is the likely method of servicing a new requirement – which leads us on to a key issue currently facing the market.

BTS take-up has fallen by 80% in 2023, and whilst demand for such units is lower, it certainly hasn’t evaporated as the numbers may suggest. What we are now witnessing is the volatility of the capital markets start to impact the occupational market as developers struggle to balance competing factors to a) put a deal together and then b) maintain the terms of that deal as we progress to an exchange.

Occupiers rightly will want to examine their options when faced with such unpredictability, which means that any deal will take significantly longer to complete. Moreover, the reality may be that whilst some occupiers will be able to move forward with their requirement others will take the view that they will make do with what they have until the market settles down. We are increasingly seeing and advising occupiers to seek to satisfy requirements via existing buildings – where these exist – rather than BTS.

This all suggests that 2024 will be an interesting year, and I suspect a good one for the take-up of existing buildings, but with base rates not expected to move inwards until the middle part of 2024, it would suggest that BTS take-up is not set for a vintage year.

Capital markets

Whilst 2023 feels like it hasn’t been a vintage year for investment volumes, the reality is that by the time the year-end figures are collated, we expect around £8bn to have been transacted, which, whilst reflects a sharp fall from the dizzying heights of 2021 (£21bn) and 2022 (£17bn), it’s not that insignificant a year when looking at the longer-term average.

If the last twelve months can be characterised as a year of uncertainty for investors, then there is little on the horizon to suggest that the next twelve months will be very different as inflation is expected to remain very much a live issue, with interest rates predicted to remain ’higher for longer’.

So, what will 2024 bring for the logistics and industrial capital markets?

The sector remains one of the preferred asset classes to invest in and maintain exposure to, so it comes as no surprise that sellers were reluctant to dispose of their prized industrial and logistics assets over these last twelve months. That said, as 2024 progresses, it’s likely that some investors will come under pressure from a myriad of external forces, fund redemptions, maturing loans (refinancing), and LTV breaches, while others may need to recycle their portfolio to raise capital for their development pipeline or indeed, meet their ESG targets.

Given many banks’ reluctance to step into the market, as was the case after the GFC, we expect to see the market with elevated levels of stress (‘pressure’) rather than distress, suggesting that while we won’t see a flood of sales, there will be a steady level of transactions as a result.

Those faced with having to refinance might opt to ‘extend and pretend’; however, the sceptics among us question how realistic this strategy is going to be over a short term, especially with no meaningful yield compression anticipated.

We do, however, expect to see more conviction from investors as base rates start to fall and Gilt yields stabilise, which suggests that prime yields will start to edge back downwards based on the fact that historically, a 300 bps spread is maintained between the 10-year government bond and the prime yield. There is a case to be made, however, that the traditional spread could be narrower in the years to come as many markets, as detailed in our rental growth forecasts, are expected to see elevated rental growth due to falling development rates and higher than normal absorption levels.

In terms of active capital, we are starting to see shifts in this space with UK institutions returning to the market after being priced out for a number of years, along with a handful of new international pension houses looking to capitalise the softer pricing and capitalising on a favourable currency exchange.

Overall, however, we expect the market will continue to be dominated by overseas, particularly North American investors, and that their focus will be on purchasing standing assets. So, whilst we should expect overall investment volumes to be broadly similar in 2024 to 2023, we are not expecting a swath of speculative funding announcements or, indeed, any great shifts in the market that will make BTS deals any easier to stack up. Time will tell!

Further Information

Big Shed Prospects 2024

The bull view

The bear view

The rental growth prospects for UK logistics

Key takeaways

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