With take-up standing at 25.9 million sq ft as of Q3, 16% ahead of last year’s figure, activity is clearly still happening across numerous sectors. This shows the continued depth of the market even with the well-publicised headwinds. Also, with an additional 7.4 million sq ft of speculative pipeline currently under construction occupiers still have choice.
So far this year, the logistics market has shown both resilience and adaptability despite ongoing challenges. Now with November’s Autumn Budget looming, while uncertainty remains for occupiers there is also opportunity for both strategic growth and innovation.
Supermarket sweep
A good example of this is the recent activity by UK supermarkets. Currently growing faster than other sectors within the logistics market, we’ve already seen Tesco acquiring three distribution centres (DCs) in three years, M&S’s new 1.3 million sq ft dedicated food distribution centre, along with a number of live 3PL led supermarket contracts.
Constantly evolving their supply chains, this has seen investment in automation and future proofing to service customers both in store and online.
While some of these acquisitions have been about modernisation, a lot of the build-to-suit (BTS) led development is the culmination of years of strategy now coming to fruition.
In fact, both the M&S and Tesco DC’s will not be operational until 2028, proving that occupiers are looking beyond short term headwinds with the anticipation of longer term benefits.
Automation vs. Labour
Part of the motivation for supermarkets, and other occupiers, to upgrade legacy stock is to enhance efficiencies and ultimately reduce costs. Automation has long been seen as a solution for rising labour costs and availability. Yet, obstacles remain, including the capex required for fit-out and the implementation of infrastructure.
Occupiers now have to consider the payback period for such investments, versus labour wages and increased national insurance contributions. Existing buildings, particularly those that are Grade B or second hand may not have the attributes to meaningfully integrate and invest in automation. Plus there is the power to consider, which, even if there is availability in the grid, still takes significant time to connect.
These considerations mean that typically the BTS route will be the most viable from an operational perspective, but rising inflation continues to impact build costs making financing these more difficult and increasingly risky. However, the ongoing uncertainty in the funding market has now led occupiers to consider pursuing their own freehold opportunities including the purchase of existing buildings and even sites for self-delivery.
Continued cost pressure
‘Big box’ occupiers are set to be hit by new business rates as part of the upcoming supplemental multiplier to be applied to properties with a rateable value over £500,000. At present, we are seeing consolidation being explored as a strategy to reduce footprint, which could see occupiers move towards more localised functions or even towards freeport-led zones where they can benefit from savings longer term.
There are also lease reforms and the proposed ban on upward only rent reviews. On the surface this seems like a positive result for occupiers, but if implemented could impact rents and lease lengths. This will limit the opportunity for longer term BTS and occupiers heavily investing in fit-outs as short leases would ultimately make these projects unviable.
Future plans
Although some occupiers may be closing sites, this does not necessarily mean they are in difficulty. Rather, they are seeing it as an opportunity to realign their requirements and proactively asset manage their estates. Landlords are also becoming acutely aware of cost pressures so are speculatively fitting out buildings to help expedite decision making.
We are seeing an additional level of scrutiny on costs and the subsequent impact on viability assessments. This has, in some cases, led to greater occupier caution which has seen some businesses holding off committing to an acquisition while they monitor and evaluate the cost implications of relocations against existing operations.
Ultimately, it’s hard to see what’s coming down the track, but in the ever dynamic logistics sector we are observing occupiers implementing clear strategies for their business and continued servicing of customers.
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