In 2023, Savills launched a new rental growth projection model that examines the average headline rental growth prospects in the logistics market over five years at a regional level
Historically, most rental growth models rely on macroeconomic variables such as consumer spending, GDP, unemployment forecasts and so on to then forecast rents into the future based on historical valuation-based indices. Whilst such models certainly have merit linking the demand side drivers to rents, they have very little data covering the supply side metrics of a market, which arguably have a greater impact on rental levels in the logistics market.
Our model can also be deployed on a consultancy basis, where we can work with clients to forecast rents in smaller geographies and for subsets of the markets, such as prime or secondary.
We are delighted to see that our projection for 2025 of between 3.1% and 4.1% growth at a UK level is set to be realised, with data from MSCI suggesting the UK will have rental growth of c.4.0% by the time the year-end data is in, which is at the upper end of our projections.
Key variables
Our rental growth model relies on three main components:
- Understanding future supply: using Savills-held data and in consultation with Savills Industrial Agents, we create a picture of future land supply, having regard to current and planned development proposals as well as sites which are under construction.
- Understanding future demand and availability: studying market-specific relationships between supply and demand, we predict future levels of net absorption and availability.
- Understanding and projecting rental movements: we study how average achieved headline rents have changed in the past based on a market’s historical supply and demand balance. We then use that relationship to project future rental change into the future.
The model uses all of the data that Savills has at its disposal to forecast average headline rents in a market for all units over 100,000 sq ft and does not differentiate prime vs secondary.
The model also allows for scenario-based analysis of future rents. For example, scenarios could be run whereby take-up is lower than expected or speculative deliveries are higher than normal, and the impact on rental levels can then be assessed.
As part of the process, we have also modelled future vacancy rates to the end of 2027. Significant variations at a regional basis play out given where current supply and pipeline levels are. In the East Midlands, where supply is highest and vacancy currently sits at 10.1%, we can expect to see a gradual fall to 7.5% as the market continues to see take-up well above average. In the South East, however, where take-up remains well below historical norms, it is likely that vacancy will remain around the 9% over our forecast period. Taking the UK as a whole, however, we can expect vacancy to trend down to 7% in our baseline scenario and 5.5% in our upside scenario.
For our own rental growth scenarios, we run three different models. Our baseline scenario assumes that absorption will be below average in the coming years before rebounding later in the forecast period and that net deliveries will be lower than average in the middle part of the forecast period. Our pessimistic scenario assumes that net absorption will be much lower across the forecast period, therefore, there will be elevated levels of vacancy in most markets for the next five years. Our optimistic scenario assumes a combination of elevated absorption and lower-than-average speculative deliveries, thereby seeing vacancy project inwards earlier than expected.
Given the wider economic and market sentiment and utilising the data at our disposal, we suggest that there is only a 20% chance of our optimistic scenario coming to fruition. Assuming we see the level of new second-hand supply coming to the market return to historical norms, we place a 60% chance on our baseline scenario materialising, with only a 20% chance of our more pessimistic scenario materialising as we continue to see absorption levels rebound.
At a UK level, our model is providing a range of 2.3% to 3.5% rental growth per annum until 2029, with our baseline scenario seeing 2.7% growth in 2026 before increasing as the decade continues.
At a regional level, again, there is significant variation given the levels of supply and pipeline in some markets — the East Midlands being a good example, where vacancy is currently 10.5% and a confirmed development pipeline of 1.75m sq ft.
In the North East, while supply has increased in line with other regions in recent years — pushing availability up from the low of 2.3% in 2022 — the market remains one of the tightest across the UK. The softening on the demand side has also been less pronounced in the North East compared to other regions. As a result, our model indicates relatively strong rental growth driven by these tight market fundamentals.