Occupiers Providing Optimism

Like many other real estate sectors in the UK and the Continent the industrial market has experienced a rather unstable autumn, winter and spring. The cost of debt is as high as it has been for nearly 15 years and the Bank of England is only likely to increase rates in the short to medium term.

However, we need to focus on the positives in the current market and take comfort from recent occupier trends which will underwrite reversionary value in the months and years ahead. We should also remind ourselves that the recent low interest rates are unprecedented and the commercial property market has remained resilient over the long term.

CBRE’s 2023 European Logistics Occupier Survey concludes that many logistics occupiers across Europe are still in need of further space and most businesses will press ahead in acquiring new space. Similar can be said for the UK based on various major letting transactions seen in the market.

It is helpful to understand what is driving these tenant requirements. We have identified some of the key motivations below:

1. Supply Chain Disruption – The most obvious and notable cause was the COVID-19 pandemic. Manufacturers and suppliers could not keep up with rapidly changing consumer demand quickly enough. Also remember the 2021 Suez Canal fiasco which held up $9.6 billion of trader per day (equating to $400m and 3.3 million tonnes of cargo an hour, or $6.7m a minute)? Supply chains are becoming more localised in order to withstand unprecedented ‘shocks’ and still meet sky high end user expectations. An increase in secondary and even tertiary warehousing is on the rise to combat future disruptions.
2. Nearshoring – In a similar vein many tenants are slowly relocating all or parts of their production lines closer to their final destination. For decades manufacturers have off-shored their factories, particularly to the Far East. However, given recent political uncertainty in China, and increasing tensions between the West and the East, many businesses are seeking to bring as much as they can closer to home.
3. Technology – There is very little price difference in robots across the world. This arguably erodes any advantage of manufacturing a great distance from your customers. Of course, there will always be other significant overheads to consider, labour costs and rent being the most pertinent examples, but the consistency of price in the raw manufacturing kit is certainly making tenants think more closely about where to base themselves.
4. ESG – Social impact and sustainability standards are becoming more and more prevalent with tenants. Tenants want new energy efficient spaces and want their sheds to be future proofed so far as they can be. Consumers expect suppliers to reduce their carbon footprints. Suppliers need all the help they can get from landlords to achieve these best in class standards and landlords have their own agenda too. Building owners face increasing legislative targets which means they cannot let their existing buildings fall too far behind the energy efficiency levels of new buildings or they face the risk of not being able to let them at all.
5. Business Growth – Tenants want to grow. Tenants need quality assets to be able to grow. There is a theme emerging of tenants partnering with investors and developers at the earliest possible opportunity in order to secure land and build out assets to forward plan their growth strategies or even create build to suit space which they can move into on a turnkey basis. There are opportunities out there for the landlord/developer market to tap into across the tenant spectrum.

Whilst the challenges of interest rate hikes, cost of materials and lack of land supply will continue to test developers and institutional investors, it is clear that the above occupier demands are not going to suddenly disappear. Twenty first century tenant habits and forward thinking mindsets, coupled with a lack of available space (ironically ever reducing as a result of these evolving tenant demands), are reasons for the investor market to remain optimistic.