Warning of dwindling supply after strong year for logistics sector

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(l-r) Adam Ramshaw, regional director LSH, Birmingham and East Midlands; Matt Tilt, directory of industrial agency, LSH Birmingham; Oliver du Sautoy, head of research, LSH.

The industrial and logistics sector in the West Midlands had one of its strongest ever years in 2016 – but dwindling supply is a major stumbling block to continued success, according to a report by national commercial property consultancy Lambert Smith Hampton (LSH).

LSH’s Industrials and Logistics report reveals there was a 16.3m sq ft take up across the West Midlands last year – a 21% increase from the previous year.

Much of the increased activity was down to the resurgence of the logistics sector (warehouses of 100,000 sq ft and more), which was up 76% year-on-year and 19% above the annual average.

The report also shows that logistics activity was dominated by build-to-suit properties and new-build space, which elevated grade A take-up in the region to a 10-year high of 5.5m sq ft.

However, the region experienced the steepest drop in supply in the UK, falling 27% year-on-year, despite being the key focus of speculative development.

While logistics supply and the average unit size of a new build unit both increased slightly, reflecting a focus of recent development towards the larger end of the market, the mid-box sector (50,000 sq ft – 99,999 sq ft) was down by one third year-on-year.

The report also points out that there is only the equivalent of 1.5 month of grade A space in units under 50,000 sq ft available, which is the lowest of any UK region. There is, however, more than six months’ supply of grade A logistics.

Matt Tilt, director of industrial agency at LSH Birmingham, said: “The West Midlands Industrial and logistics sector performed strongly last year as take-up rebounded driven by Logistics and Grade A space, rental growth continued and pricing in the investment market stands higher now than it did pre-Referendum.

“Take-up nationally was dominated by Amazon, which took an unprecedented share of the market, but they had less impact on the West Midlands. Greater uncertainty in the economic outlook engendered by last summer’s vote has arguably intensified investor demand for the sector, with tight supply and underlying structural change in consumer patterns elevating the sector into something of a safe haven.

“In order to find a value in today’s market, investors and developers need to be more forensic in their study of the sector; developers and investors would also do well to look at the smaller size bands, 0-50,000 sq ft, where shortages are at their most acute.”

Across the UK, industrial and logistics take-up totalled 99.2m sq ft in 2016, up 3% on 2015 and 6% above the five-year annual average.  Notably these figures reflect strong pent-up demand for quality premises.  Grade A space accounted for a record 34% share of total take-up.

The uplift in demand was driven by a record year of activity in the logistics sector where take-up increased by 6%, surpassing 2014’s previous high and totalled 37.3m sq ft.  Accounting for over 20% of logistics take-up – a record share for a single occupier – and pivotal to the sector’s success, is e-commerce retailer Amazon.

Uncertainty fails to hinder rental growth

Uncertainty surrounding the EU Referendum also did little to hinder rental growth in the sector – an ongoing lack of supply has driven another year of strong rental growth. Across 60 UK markets, prime headline rents increased by 5.3% in 2016, rising from 3.9% in 2015.

In the West Midlands Prime rents grew by 3% and secondary rents by 6% but the North West was the star performer, seeing the strongest growth in both prime and secondary stock.

Lack of stock a frustration for investors

In the investment market, a solid finish to the year took the total volume of UK transactions for 2016 to £5.2bn, down 9% on 2015, but 7% above the five-year annual average. Investors continue to be lured to the sector’s attractive occupier market fundamentals with industrial and logistics accounting for 11.1% of All Property volume in 2016 – its highest share of activity since 2009.