Occupiers are working towards optimising their distribution networks to service the ongoing appetite for online commerce, as consumer demand for fast online deliveries and greater product variety remains a key driver for industrial take-up. That’s according to Colliers International’s latest Q3 analysis which highlights a record year for activity in the industrial sector, with take-up at the end of Q3 2020 already 10.7% ahead of the full-year total for 2019 (33.8 million sq ft: Q1-Q3 2020).
”Occupiers are faced with a conundrum where a less favourable macroeconomic environment is accompanied by a strong upsurge in consumer appetite for fast online deliveries,” said Len Rosso, Head of Industrial & Logistics at Colliers International. “Not only that, consumer preference for a greater product variety is met by unpredictability around inventory planning and this is all unfolding in a very low supply environment across all UK regions. In this respect, demand continues to be driven by strong occupier desire for grade A space with take-up for design & build and speculatively-built space accounting for 52% and 21% of the total, respectively.”
Colliers’ data shows a record number of deals completed in the 500,000 sq ft+ size band, with 17 distribution warehouses transacted so far this year. On the other side of the spectrum, more than 60 units sized between 100,000 and 200,000 sq ft were taken up. This compares to a total of 77 units acquired during the entire 2019 and with three months of the year remaining, Colliers expects this size band to exhibit stronger annual demand by year-end.
Andrea Ferranti, Head of Industrial & Logistics Research, adds: “Demand dynamics often differ depending upon the occupier type. Businesses with a strong online presence and/or in-demand products are often able to make long-term capital investments to scale up. This has been the case for Amazon, for example, which has accounted for more than 30% of total take-up so far this year, and Pets at Home which has agreed terms for a purpose-built 670,000 sq ft warehouse in Redhill Business Park. Conversely, other businesses such as Third Party Logistics providers (3PLs), often absorbing extra capacity from retailers, have increasingly been looking for greater flexibility and rent affordability to navigate through this heightened uncertainty.”
Overall supply continues to be under pressure resulting in a national vacancy rate of 6.2%. Moreover, most of the UK regions show between 1.0 and 1.5 years’ worth of supply, due to strong demand for speculatively-built space. This is expected to provide more comfort to those developers that are planning to provide the sector with more Grade A space over the coming months.
Given the contraction of supply and better than initially envisaged occupier demand, Colliers is forecasting annual rental growth for distribution warehouses of around 1.2% this year, with London and the rest of South East’s rental growth expected to outperform at 1.7% and 1.8%, respectively.
Len Rosso, concludes: “Looking forward, sentiment towards the sector remains positive and we expect an increasing number of occupiers to bolster their efforts to implement their online strategy. This will act as a demand stabiliser as consumer spending is expected to contract over the coming months.”