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The UK’s ‘Warehousing & Storage’ sector expanded at a compound annual rate of +2.6% to £29.5bn over the five years to 2023. UK supply of units above 50,000 sq. ft. increased by +14% in H1 2023 to stand at 72.5 million sq. ft., reflecting both high levels of speculative development and second-hand space coming back to the market. While all size segments recorded an increase in supply in H1 2023, the XL segment was the biggest contributor to the uplift, up by a +31% in H1 2023.
Trends & Outlook
Investment market. Investment volumes showed signs of recovery in Q2 2023, following the H2 2022 fall-out and subsequent re-pricing. Total volumes in Q2 2023 reached £1.6bn.
ESG. 3PLs are competing to enhance their environmental credentials to secure new retailer contracts, resulting in a surge in demand for larger, more energy-efficient logistics facilities.
Flexible options. Economic uncertainty and higher borrowing costs mean many occupiers will be reluctant to take on additional or more costly facilities. Flexible storage options can allow a firm to de-risk their operations, avoid long-term lease commitments or excess space, and hire space according to their requirements in terms of quantum of space and length of time required.
Cost of finance. Challenges surrounding the cost of finance and construction along with the market dynamics are weighing heavily on development appetite. Speculative development under construction at the end of H1 2023 totalled 21.4 million sq. ft., falling -9% from the all-time high at the end of 2022. A deterioration of activity during the period was attributable to persistently high inflation and a steady stream of interest rate hikes over H1 2023.
‘First Mile’ assets and energy infrastructure. Investors are becoming increasingly aware of the opportunities in the ‘First Mile’ of the supply chain. However, investment in power infrastructure will be needed if these locations are to continue attracting industrial and logistics occupiers. The need for power and labour has become of heightened importance for logistics operators. Locations that used to be centres of heavy industry and manufacturing often have large sites available, with latent power supply as well as availability of labour. These factors could help these locations rise in prominence as hubs for both production and First Mile logistics.
Power constraints. There is a limited, and rapidly diminishing, amount of capacity available via the UK electricity grid, and heightened demand for the adoption of renewable and clean energy has sent applications for wind and solar grid connections skyrocketing.
ESG. Occupiers’ increasingly discerning attitudes around quality, ESG credentials, and energy efficiency were reflected in grade ‘A’ space accounting for 73% of take-up in H1 2023, above the five-year average of 66%. Meanwhile, only 5.1 million sq. ft. of second-hand space was transacted in H1, the lowest half-year total on record.
Minimum Energy Efficiency Standards (MEES). Knight Frank analysed the latest EPC data to see how warehouses within England and Wales are performing in respect to MEES regulations. Its analysis estimates that currently around 18% of warehouse space (units exceeding 50,000 sq. ft.), equivalent to c.138 million sq. ft., will fail to meet the minimum EPC grade ‘C’ by 2027.
Content for the full free report:
Supply – geographic breakdown
- Online retail
- Flexible terms
- Build costs
- ‘First Mile’ assets and energy
- Power constraints
- ESG pressure
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