Vacancy rates set to remain low for industrial & logistics space despite take-up normalising

According to Savills, vacancy rates at a nationwide level for industrial & logistics space (units of 100,000 sq ft +) are unlikely to exceed 7.5% in 2023, despite a normalisation in take-up rates to pre-covid levels.

New research from Savills takes data on pipeline, lease events and occupier failure and combines these with varying scenarios of occupier take-up in order to project vacancy rates into the future. With warehouse supply steadily rising over the last year, combined with an above average development pipeline and a normalisation of take-up, many investors and developers have been questioning where vacancy rates may peak.

Utilising its market leading data on the UK logistics market, Savills has modelled potential future vacancy trajectories to the end of 2025. The most likely scenario suggests, that at a nationwide level, vacancy will rise and peak at circa 7.5% in Q4 2023, before steadily falling to 6% by the end of 2025. The trend, however, is not universal and reflects a more nuanced picture at a regional level.

A key contributing factor to the rise in supply is the elevated level of speculative completions due this year. As things stand Savills expects 18.1 million sq ft across 79 units to complete in 2023, with 43% of this concentrated in the East midlands and Yorkshire. In Q2 alone, just over 9 million sq ft is due to the market, which will naturally see vacancy rates rise across the country.

Kevin Mofid, head of industrial & logistics research at Savills, comments: “The creation of this model is the culmination of almost a decade’s worth of data collection and analysis of the UK logistics property market. By bringing together all of the different datasets that we hold on the market, and using our wider agency knowledge, we are able to run scenarios that examine what market conditions could be in the future. Given current uncertainty in the market it is pleasing to see that our model shows that it is highly unlikely that vacancy conditions will return to levels seen during the global financial crisis (GFC) when vacancy reached almost 25%. In fact, it is most likely that vacancy levels will not even breach the 10 year average of 9.8%.”

Savills notes that moving into 2024 there will be a heavily constrained speculative pipeline. Pre-Covid there were, on average, 1.6 million sq ft of speculative announcements per quarter, which rose to 4 million sq ft during the pandemic. So far in 2023 there has been 2.7 million sq ft of announcements, a significant decrease in the same period last year, which was as high as 7.9 million sq ft.

At the same time, Savills has seen occupier requirement levels for new warehouse space steadily decrease in 2022. Yet, supply chain resilience, energy supply and ESG aspirations will mean that demand is still set to come from a variety of sectors in 2023. Looking at Savills requirement index, demand has rebounded by as much as 57% in the first quarter of 2023, suggesting take-up will start to rise in the second half of the year.

Richard Sullivan, national head of industrial & logistics at Savills, adds: “Although we have experienced a decline in take-up figures, coupled with an increase in speculative development, this is unlikely to have an overly negative impact on the market. Instead, what we are seeing is a return to pre-pandemic levels. Our projections suggest that we are still likely to see pockets of undersupply, which in turn will keep upward pressure on rents. What’s more, we have seen a bounce in occupier requirements in the first quarter of the year. This suggests that take-up should reach up to 35 million sq ft this year, which is still in the upper echelons of what we would have seen prior to Covid-19.”