An economic soft landing remains the most likely outcome, but significant risks remain in place.
The macro picture
There are significant risks to the current economic recovery. The recovery hinges on inflation remaining low, allowing central banks to continue cutting interest rates. We outline the reasons why interest rate cuts are important in the bull case, with the opposite being true if interest rates remain high.
Risks of higher inflation are likely to come through a few avenues. Firstly, through additional supply chain disruptions. As the last few years have shown, global supply chains are prone to disruption. Geopolitical tensions in the Middle East have continued to rise in 2024, threatening the international shipping lanes that pass through the region.
Labour’s policies, which may help stimulate the economy, also run the risk of reigniting inflation. Higher wages for public sector workers, government borrowing-financed increases in government spending, and higher demand for materials from increased construction activity will potentially have a significant impact on inflation.
In addition to reducing the potential for interest rate cuts, this will also reduce disposable incomes for consumers and negatively affect consumer sentiment. This could drive a similar issue to what we saw in 2022 and 2023, with retail sales volumes declining dramatically in response.
One way that Labour avoided raising income tax on 'working people' was to increase employers' contributions to NICs. While this does not directly affect employees, it does increase the cost of labour, which will disincentivise new hiring and wage increases. Additionally, tax threshold freezes mean that lower-income households are expected to feel the greatest strain as inflation remains high.
As we have previously noted, there are several risks to the global economy. Firstly, geopolitical risks in South-East Asia, Eastern Europe, and the Middle East, all of which could have a serious negative impact on global trade and, by extension, logistics demand in the UK. Compounding this, the election of Donald Trump for a second term as president of the United States is expected to follow the same trends as his first presidency. After spending the election promising to place tariffs on imports to the USA, their imposition and an ensuing trade war could have a serious negative impact on trade between the USA, the UK, and the rest of Europe. Additionally, this is likely to have a significant inflationary impact as tariffs increase prices in the USA, and countersanctions have a similar impact in the UK and Europe.
The market picture
Will higher supply lead to softer deals?
There is no denying that supply and vacancy across the UK industrial and logistics market has risen to levels last seen following the global financial crisis. At the time of writing, there are 263 separate units on the market, with a further 46 under construction speculatively. This is up 28% year-on-year and 192% from the record low point of Q2 2022.
In the East Midlands, we have witnessed vacancy rise from 0.59% to 10.26% in little over three years. A similar story emerges in Yorkshire, where vacancy has risen to just over 12% from a low of 0.63% in the first quarter of 2022.
Whilst the take-up of existing units has, on the whole, been robust in 2024, void periods are heading back to the levels witnessed before the pandemic. Indeed, the void period for a new unit in 2024 has reached twelve months, up from three months in 2022, and the void for a second-hand unit has reached 14 months, up from ten months in 2023. It is likely that as 2025 progresses, the average void period will increase further to take into account how long a unit has remained vacant for before a deal occurs.
Depending on who the landlord or developer is, and how patient the funding capital is, will have a strong determining factor on the rental tone prospects for any given unit. For now, many are holding out for terms favourable to the landlord, but the higher supply goes and the longer the void period is, we may start to see some break ranks in order to “get bums on seats”.
Company insolvency rates continue to rise
One factor that has caught the market off guard has been the amount of second-hand space that has come to the market in recent years, either through lease breaks being exercised or the occupier in occupation making the unit available through sublease or assignment. This phenomenon was initially expected to be a short wave as 2022 rolled into 2023 but has continued as we now head into 2025. Indeed, since 2022, there has been an additional 21 million sq ft of second-hand supply added to the market than we would ordinarily expect.
An additional factor that is also impacting the levels of supply is the level of company insolvency. Data from the ONS shows that prior to 2022, company insolvency was running at around 15,000 companies a year and has since risen to around 25,000 companies per year.
Extracting data on companies relevant to industrial and logistics shows that whilst insolvencies have risen across the board in the manufacturing, retail and transportation sectors, it is the retail sector which has been hardest hit with insolvencies, rising from 1,687 companies in 2020 to an expected 3,696 in 2024. Whilst the companies going out of business may well end up returning warehouse space to the market themselves, the ripple effect will impact companies upstream and downstream who could be manufacturing or distributing products in the supply chain.
Don’t expect a surge in build-to-suit (BTS) deals
Whilst we have seen inward base rate movement and stronger sentiment, generally in capital markets, this alone won’t automatically translate into higher take-up levels in the BTS segment of the market.
Whilst overall requirement levels for larger BTS units remain strong, there remain a myriad of externalities at play which all need to be considered by occupiers, such as the cost of fitout which has also risen.
Moreover, many BTS requirements currently in the market are driven by more strategic reasons rather than business growth. Ultimately, this means that whilst a BTS transaction may occur, smaller and older units will be returned to the market as part of the consolidation process meaning overall net absorption is modest.
Wider issues
Business rates will weigh on occupiers’ thinking
Following on from the Budget, the government has published the Non-Domestic Rating (Multipliers and Schools) Bill concerning the provisions for giving business rates relief to smaller retail, hospitality and leisure properties from 1st April 2026, funded by an increased multiplier for any property with a rateable value of £500,000 or more.
According to the Rating List, there are 2,564 warehouse or logistics buildings in England & Wales which have a current rateable value above £500,000; with 1,939 of these having a floor area above 100,000 sqft and with the new revaluation due from April 2026 more properties may pass into this ‘above £500,000’ category.
The bill makes a provision for ‘up to’ a 20 pence deduction from the annual business rates multiplier in England for all Retail, Hospitality and Leisure properties with rateable values up to £51,000. This would translate into around a 40% reduction based on the current multiplier, which mirrors the proposed retail, hospitality and leisure relief being granted next year. In order to fund this, the bill proposes to add ‘up to’ 10 pence to the multiplier, working out to around an 18% increase on the current multiplier for any property with a rateable value of £500,000 or more. If for example a property’s rateable value is £10 million from 1st April 2026 the rate payer would expect to be paying around £1 million more each year.
Taking a 500,000 sq ft building in the East Midlands with a current rateable value of £2.95 million, the proposed changes would see additional business rates of up to £300,000, taking the total bill to £1.93 million a year.
Whilst this doesn’t push occupiers fundamentally away from taking larger units, we suspect there will be a desire to take taller units and utilise the cube in a fuller capacity as business rates are paid on area, not volume.
Automotive industry struggles to adapt to a new future
The global automotive industry remains in a state of flux as legacy producers struggle to adapt to the switch to electric vehicle (EVs) production. The rise of affordable Chinese EVs has meant that legacy manufacturers have seen sales plummet, and production output has declined accordingly.
The Society of Motor Manufacturers and Traders has highlighted that UK vehicle production has fallen by almost 11% so far in 2024, and UK-produced car exports are down by almost 14%.
Already this year, Vauxhall has announced the closure of its commercial vehicle production plant in Luton, and Nissan, which employs 7,000 people at the UK’s largest car manufacturing site in Sunderland, is in a perilous position, having seen global sales slump.
Since 2007, the automotive sector has leased 31 million sq ft of warehouse space in the UK, but the estate of the wider supply chain will run much further. Unless legacy manufacturers can get to grips with an EV future, it seems unlikely that the automotive sector in the UK will be a key driver of warehouse demand moving forward.