Warehouse investment the property market’s new boom sector

by Jonathan Adams
Warehouse investment

The office and retail commercial property sectors have taken a battering over the past year to compound what was anyway a clear trend of decline in the case of the latter as more retail moves online. And it remains to be seen how the office sector emerges from the Covid-19 pandemic, with the suspicion we may see a permanent shift in work patterns.

If a significant section of staff who were office-based before the pandemic return to a hybrid model that sees them split their time between home and company office environments, demand for space could well take some time to recover. Some market analysts and observers expect the commercial property market for office space to bounce back even if it takes a couple of years. Others feel 2019 may prove to have been a peak for the market, with the ‘new normal’ meaning a permanent slide in demand.

But one commercial property sector that is booming is that for warehouse space. Demand is being driven by the storage space needs of online retailers, and the growing e-commerce operations of traditional bricks-and-mortar retailers. High street fashion stalwart Next, for example, saw its digital sales already count for more than half of revenues before the pandemic accelerated the shift to online shopping. Others will be investing heavily in trying to belatedly replicate that successful transition to a hybrid offline-online business model.

The result is a record amount of new warehouse space planned to be built across the UK this year as developers invest to meet rising demand. Research conducted by property consultants Knight Frank estimates a total of 40 million sq ft of new warehouse space will come online over the course of 2021. A significant chunk of that is being built-to-order and pre-leased to retailers and logistics and distribution companies.

The surge in new warehouse investment is being fuelled by a £34 billion year-on-year leap in online sales in 2021. The total value of online sales in the UK is forecast to reach £150 billion by 2024, with Knight Frank calculating every billion pounds in e-commerce revenues requires an average of 1.4 million sq ft of warehouse space.

Charles Binks, Knight Frank’s head of industrial and logistics, comments:

“The robust forecast for online retail and increased competition for high-specification and well-located assets is driving development activity. Take-up over the past year has reduced the level of availability and Covid-19 has hampered construction, slowing the delivery of new stock to the market. Supply, particularly of high-quality space, has diminished.”

Growth in warehouse space leasing is more than keeping pace with new development, with the total occupied area increasing by 16 million sq ft last year to 50 million sq ft from 34 million sq ft in 2019.

Knight Frank research associate Claire Williams explains how that rocket-fuelled growth is encouraging warehouse investment. But that there is still a demand to supply disbalance when it comes to high-quality fit-for-purpose warehouse properties. Warehouse facilities conveniently located for urban deliver is in particularly short supply:

“High levels of take-up in developments larger than 50,000 sq ft and the chronic shortage of quality space are encouraging both build-to-suit and speculative development . . . There is a need for more urban warehouse space, located close to the customer, in order to replenish stock in the required timeframes.”

Despite the volume of warehouse space currently being built and due to come online in 2021, the level of demand is still expected to lead to increasing rents over the next five years. That positive trajectory for rental yields stands in direct contrast to a negative outlook for the retail and office commercial property sectors, where the rents that can be commanded are expected to slide.

Warehouses located in and around London and serving the capital are expected to see the strongest annual increases in rents, which are forecast to rise by 3.2%. The southeast and east of England are the other regions tipped for the strongest growth in rents, with both expected to see rises of around 2.6% this year.

This article is for information purposes only.
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