UK Big Box Q3 2024 Market Update

Welcome to our latest update for big box Q3 2024 which provides market data and insights on the logistics market in the UK.

Recent key macroeconomic data broadly indicate an improving economic outlook from a growth, inflation and interest rate perspective. 

Having grown by just 0.3% over 2023, GDP growth has strengthened this year. In Q1 GDP rose by 0.7% and in Q2 by 0.5%. Although the latest monthly data suggest that some of that momentum has eased, with no growth in July followed by growth of 0.2% in August, the latest average of new independent forecasts compiled by HM Treasury still points to overall growth of 1.0% this year followed by 1.2% in 2025. The same forecasts suggest that the annual rate of CPI inflation, which decelerated to 1.7% in September, will settle around 2.5% over the final quarter of this year and 2.2% over the final quarter of 2025. In addition, the latest Consensus forecasts highlight that Bank Rate is predicted to fall further over the next couple of years with a median forecast of 4.75% at the end of this year, 3.50% at the end of 2025 and 3.00% at mid-2026.

In the market, the take-up of grade A industrial and logistics space across GB in units of 100,000 sq ft and over totalled 4.7 million sq ft in 21 transactions over Q3 2024. This was well down on the 8.3 million sq ft posted in Q2, but that quarter had recorded the highest take-up since Q1 2022. The quantum of floorspace transacted in Q3 was still marginally higher than in Q1 2024 (4.6 million sq ft) and higher than the same quarter of last year (3.9 million sq ft). 

The level of transactions in Q3 brought the total for the first nine months of this year to 17.6 million sq ft, 32.6% higher than the same nine months of 2023. This suggests an improving market from a demand perspective and highlights that the market should see higher take-up than 2023, subject to at least 3.9 million sq ft transacting in Q4.

The largest individual transaction in Q3 involved B&M Stores taking a 674,264 sq ft speculative unit at Ellesmere Port in the North West. The three largest transactions in the quarter accounted for 35.6% of the total take-up.

Regionally, the East Midlands recorded the largest amount of floorspace taken up at 1.7 million sq ft in seven transactions, and the West Midlands accounted for another five transactions totalling around 842,000 sq ft. As a result, 55% of all take-up occurred in the Midlands, once again highlighting the area’s relative resilience as a core market. The North West delivered the second highest regional total at around 978,000 sq ft in three transactions.

The Greater South East market, comprising London, the South East and Eastern regions, posted four transactions totalling around 865,000 sq ft with three of these in the Eastern region and one in the South East. The South West and Yorkshire and Humberside each recorded one deal. 

In terms of broad sectors, retailers accounted for the highest share of Q3 take-up (34.2%) boosted by the largest deal of the quarter to B&M. Take-up by logistics operators accounted for 29.2% of take-up, including three separate transactions involving Evri, the parcel delivery operator. Manufacturing companies comprised 21.5% of take-up and ‘other’ types of businesses made up the remaining 15.1%. Within these totals some 13.7% of floorspace transacted was linked to e-commerce with two deals involving retailers and one involving a third-party logistics contractor. 

Overall, therefore, the number of transactions and amount of floorspace transacted over Q3 point to a slowdown on Q2 but take-up over the first nine months of the year was materially higher than the same period of 2023, despite deals continuing to be characterised by protracted decision-making. The fact that three transactions out of 21 accounted for around 36% of all floorspace transacted highlights the significance of deals at the larger end of the market; and, in our opinion, current demand is most robust for larger facilities.

At the end of Q3, the supply of space available on new leases totalled 43.6 million sq ft across GB, of which 19.3 million sq ft was available in completed new speculative buildings with another 10.3 million sq ft immediately available in existing Grade A secondhand buildings. There was 12.2 million sq ft of new space under construction speculatively and a further 1.7 million sq ft under refurbishment.

The amount of space available on new leases rose by around 4 million sq ft compared with mid-year, a jump of 10.3% over the quarter. Although the amount of immediately available new space was lower than mid-year, second hand space was up, as was space under construction or under refurbishment. Reflecting the hike in overall availability, the availability rate including space under construction and under refurbishment, rose from 9.5% at mid-year to 10.4% at the end of Q3, while the availability rate for the immediately available stock rose from 6.9% to 7.1%.

In addition to the space available on new leases, a further 5.7 million sq ft was available by way of assignment or sub-leases. This represented a fall of 19.7% from the corresponding level at mid-year (7.1 million sq ft).

Reflecting these demand and supply dynamics, the overall rate of rental growth moderated over Q3 to 0.3% following growth of 1.7% in Q2 and 1.3% in Q1. On a 12-month basis growth was still a reasonable 4.1%, but the rate of growth has decelerated. 

The value of industrial investment transactions across GB totalled slightly over £2.0 billion in Q3, the highest quarterly level since Q3 2022. This brought the total transacted in the first nine months of the year to £4.67 billion, 11.5% higher than that posted over the corresponding period of 2023. Although investment supply is still limited, Q4 has seen a slight increase in the amount of stock introduced to the market and we expect this to support a higher level of investment transactions over the quarter.

Investor sentiment towards the logistics sector remains positive and there is plenty of money chasing stock as highlighted by the depth of bidding on some recent assets - which has involved two or three rounds of bidding - and by some aggressive pricing for the ‘right’ product. One example of the latter is the Do & Co 172,000 sq ft distribution unit at Heathrow which was sold by SEGRO to Pontegadea for £65.5 million reflecting a net initial yield of 3.65% and a capital value of £381 per sq ft.

In our opinion, prime yields remained unchanged over the quarter at 4.75% for London, 5.00% in the South East and 5.25% for core regional markets, but pricing has started to trend stronger on the latest trends. The key factors in this respect have been the continued belief in the resilience of the logistics market, based on the long-term demand and need for space, and an improvement in the macroeconomic outlook including strong growth, low inflation and expectations of further reductions in the Bank Rate over the next couple of years.

Overall, therefore, we think that both the occupational and investment markets remain robust with ongoing occupier demand and need for large facilities, despite protracted decision-making, and improving economic indicators. We expect 2024 occupational take-up and investment volumes to exceed their respective totals last year and to continue on their upward trajectories in 2025. 

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