Warehouse landlords cash in as rental market heats up on pending supply crunch

by Jonathan Adams
warehouse investment

The UK is heading for a warehouse space crunch with the sharp rise in online shopping habits driving demand from e-commerce retailers. Research conducted by property consultants CBRE estimates that with just 7.1 million sq. ft of logistics space available in the UK as of the end of September that equates to the lowest ever vacancy rate on record – just 1.53%.

The tightness of logistics warehouse space supply, vacancy rates were around 5% this time last year, is seeing warehouse landlords cash in. The Times reports several companies forced to open bigger distribution hubs and expanded logistics networks have agreed to pay up to 20% above the asking price to secure warehouse space.

Jonathan Compton, senior director for UK logistics at CBRE comments:

“Supply levels are now critical, particularly in the northern belt that straddles the M62 motorway.”

While e-commerce was already quickly and steadily taking market share from the traditional bricks-and-mortar retail sector, the Covid-19 pandemic and resulting restrictions that saw many physical stores forced to shut down for extended periods, accelerated the process. The result has been a sharp upturn in demand across the warehouse rental market over the past 18 months. Online retailers, parcel delivery and online groceries delivery operations have also seen their logistics needs grow rapidly since spring 2020.

The shift in consumer habits is reflected by CBRE data that indicates 39% of all the warehouse space leased over the most recent quarter was taken up by online retailers. However, the lack of spare capacity in the warehouse rental market means the number of new lease agreements being signed is falling. Demand isn’t but there simply isn’t much spare capacity left available for lease.

That saw the amount of warehouse logistics space leased between July and September fall to 10.9 million sq ft across 36 deals compared to the 13.6 million sq ft leased over the same quarter a year earlier.

Warehouse investments are benefiting with CBRE estimating the rent per sq ft for high-quality warehouse space around the M25 has risen to £18 from £16.50 a year ago, pushing up yields. The attractive market conditions have drawn more investment cash to the sector with funds and developers pouring over £3 billion into new properties between July and September. That’s already taken total investment for the year above the £8 billion record set in 2020.

CBRE estimates that a total of 13.75 million sq ft of new warehouse logistics space was under construction over the third quarter.

This article is for information purposes only.
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