Coming into 2021, the real estate market was difficult to predict. Still in a post-Christmas 2020 lockdown, no-one could have known what lay in store for the year ahead, particularly for the logistics market. However, across the board, 2021 has been a stellar year for logistics. Predictions show that this trend is likely to continue.
In December 2020, we reported on an exceptional year and considered where we would be today. In a strange turn of events, following a year of the UK opening back up, we appear to now be on the wave of a new Covid variant which looks set to impact the winter months of 2022. Despite a bleak canvas in terms of Covid, Savills Big Shed Breakfast once again impressed us with a very positive outlook.
The briefing gave us some key positive insights into the current state of play: vacancy rates are decreasing in all markets, deal count across the market is up and at its highest for a number of years, the number of active occupiers in the market has increased to more than 220 companies and higher build-to-suit is expected in 2022 than in any previous year.
2021 has been an extraordinary year for the UK, the continuing increase in demand in the logistics sector has shown how instrumental this area will be in terms of servicing both individuals and businesses in the future and will be key to the success of our economy and an integral area of investment in the UK.
A positive display but there are still challenges to face. With BTS looking to increase to its highest level to supply the current warehousing demand, the lack of building resources and hikes in material costs will likely effect this and potentially slow down the completion of many projects.
Sustainability is likely to be front and centre in 2022, on the back of a year focused on improving green initiatives. With 90% of the carbon emissions in the supply chain being attributed to manufacturing and transport of goods the logistics sector will need to focus on improving its emissions profile. According to the Savills briefing, 1.4bn sq ft of space will need to be improved by 2030 and there will be increased pressure on sustainability in the supply chain in 2022. The British Retail Consortium recently published a Climate Action Roadmap to assist both tenants and landlords in the retail sector to achieve net zero targets. This poses a challenge across the industry but also an opportunity for those who can manage it effectively, particularly as green premiums are establishing themselves in some parts of the investment market. This will surely increase in a progressively more-ESG-conscious environment.
One of the key sustainability measures which will impact the logistic and manufacturing industry is the rise in the requirement for electric vehicles. The need for gigafactories (by which we mean a giant (tending to be millions of square feet) factory producing electric car batteries, from raw materials to finished product, using multiple manufacturing processes, the phrase first coined with regards to Tesla’s US factories manufacturing batteries for their EVs) will see areas of the UK, previously less suitable for the logistics sector, open up to fulfil requirements. However, these sites will need to be placed carefully to ensure that both skills and affordability requirements are adequately met. With an expected 21 million sq ft of gigafactory development expected by 2040 across the world this could be a lucrative area for investors and developers in the UK who can secure such sites.
2021 has also seen a significant rise in overseas investors, making up around 55% of all investment in 2021. The competition across this sector appears to be pushing up the length of lease terms and combined with vacancy rates dropping, logistics and warehousing appears to remain an area of key importance for both investors from the UK and overseas. In the US the decrease in vacancy has been directly linked to an increase in average rents, a positive for investors but a challenge for those in need of more space. Retailers have had a particularly tricky couple of years with traditional bricks and mortar units being swapped for an increasingly online market which requires greater warehousing and distribution centres, so the fight for space is likely to continue. The take up of small units and spaces for new entrants is diversifying the market away from the big names and with that a need for new solutions and innovation across the market will be increasingly important.
As we move into 2022 it is clear that the logistics market will remain a key component of economic growth in the UK. Whilst new challenges will emerge, the sector’s appeal to investors will hold it in good stead and this will no doubt also see it becoming a greener and more progressive industry.
If you are an investor, developer or occupier of logistics space and have any queries or would like to discuss your requirements, including for acquisition, disposal or development, please get in touch with us.