In our recently released new flagship report, Big Shed Prospects, we examined a bullish and bearish case for the market and suggested that there remain many reasons to be optimistic, albeit with significant potential hurdles to keep an eye on as the year progresses.

We expect online retail, a key driver behind logistics demand, to keep growing, with online retail penetration forecast to increase by 7% year on year, reaching 28.4% by 2027. This growth, using research from Prologis, should equate to additional logistics demand of up to 48m sq ft over the period.

We are also tracking almost 26m sq ft of lease events due in 2024, and with many occupiers looking to upgrade their facilitates to better meet ESG credentials, there should be a significant amount of base-level demand in the market.

The latest data from our requirements index also makes for pleasing reading, as whilst the overall level of requirements fell in Q4, the number of requirements for units over 500,000 sq ft has increased rapidly when compared to the end of 2022. All things being equal, this data suggests H1 take-up in the order of 15–16m sq ft.

However, whilst the initial data coming out for retailer Christmas trading is looking positive, the picture will not be uniform, and the biggest risk on the supply side will be whether we witness a further wave of occupier-controlled space coming to the market or, worse still, company failure that results in the return of second-hand space.

Moreover, we are starting to see buildings stay vacant for longer, albeit not to the levels before the pandemic. However, with BTS deals remaining difficult to transact, we expect that some requirements will divert into existing buildings, meaning that vacancy will drop as the year progresses.

BUILD COST AND PROGRAMME

With a continued difficult and uncertain economic backdrop combined with a challenging debt market, we are starting to see early signs of softer pricing and greater capacity in the wider construction supply chain.

In the logistics sector, where new speculative development announcements have fallen by 34% and BTS by 80%, we are starting to see this excess capacity result in much more favourable build costs, based on recent project tenders.

This is reflected in the latest data from the Savills ProgrammE and Cost Sentiment Survey (S.P.E.C.S), which has shown that build costs in the logistics sector have fallen for the first time since Q2 2020.

With central banks guiding that markets should expect base rates to be ’higher for longer’ economic forecasters are suggesting that we should not expect falls in interest rates until the second half of 2024. This would suggest that construction capacity will remain at elevated levels until this barrier to development is removed as 2024 progresses. It is, therefore, a possibility we should expect further drops in build costs, which in turn may have a positive impact on development viability.

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