24 November 2022

Key Takeaways - Nicola Copsey attended the ‘Current Trends in Sheds and Industrial Developments’ webinar

Commercial Real Estate Senior Associate, Nicola Copsey, attended the ‘Current Trends in Sheds and Industrial Developments’ webinar. The event described the most recent movements in the industry. Below are her key takeaways:


To help slow my heart rate after the shock defeat of Argentina at the hands (or rather feet) of Saudi Arabia and the damaging effect that has had on my fantasy football team, I dialled in to the webinar on Current Trends in Sheds and Industrial Developments, where the speakers were Lesley Males, Chris Hobday, Tom Malcolm Green and Mat Rogers from Avison Young. Little did I know that the shocks would continue! Here is a short summary of the webinar.

Demand

  1. The demand for Big Box space (over 100,000 sq ft) remains strong but has declined compared to last year. By the end of 2021 there had been take up of over 50 million sq ft of grade A Big Box space, and we will not surpass this in 2022
  2. The demand is driven by a critical lack of supply
  3. Take up of grade A Big Box space is highest in the East Midlands, followed by the West Midlands, given its strategic location (within a 4 hour drive of much of England)
  4. In London, levels of take up in 2022 are 50% of those seen in 2021 (partially due to a lack of supply)
  5. 3rd party logistic providers dominate take up, largely due to the increase in online shopping which escalated during the pandemic. Although retail sales are declining, especially over the past few months due to the cost of living crisis, the requirement for space by 3rd party logistic providers will continue as internet sales as a percentage of total retail sales are expected to hit 30 – 35% in the coming years

Type of Property

  1. Design and Build (compared to existing builds and speculative builds) has an increasing share of the take-up for 2 key reasons:
    • Occupiers are becoming more specific in their requirements for space, especially as the importance of ESG increases
    • Speculative builds are becoming more expensive because of the increasing costs of materials and labour. Some developers aren’t committing to lettings until buildings have PC’d due to uncertainty over costs

    Lack of Supply

    1. There is only 24 million sq ft of grade A Big Box availability nationwide
    2. 52% of this supply is under construction
    3. The critical lack of supply is expected to continue into 2023 and is causing reduced occupier take up
    4. Key cause of the lack of supply is the slow planning system, even where a site is non-contentious
    5. Other causes are supply chain and material issues, labour shortages and the costs of getting materials to site

    Economic uncertainty

    1. UK investment volumes declined sharply in qtr 2 and 3 2022 because of economic uncertainty. AY reported one purchaser pulling out of a deal post-exchange and forfeiting a deposit of between 12.5 and 25 million pounds
    2. However cash buyers who don’t need to rely on debt may be able to take advantage of a slow in demand
    3. Overseas buyers may be in a better position due to a weaker pound. The highest levels of overseas investment in 2021 came from North America, and this trend is set to continue in 2023 when overseas investment is expected to be higher than domestic investment
    4. Industrial rental growth is still outstripping CPI inflation and the growth is expected to continue
    5. The speakers were not too concerned by the ongoing economic uncertainty because there is a backlog of demand. So even if some investors hold off, there will be others to fill the void
    6. Occupiers wanting to expand are generally holding off at the moment, however other reasons for taking space (i.e. relocation and moving to buildings with increased efficiency in light of energy costs) are still pushing up the demand

    Emerging sectors

    1. Vertical farming i.e. the practice of growing crops in vertically stacked layers- due to environmental pressures and population growth, this is expected to be an emerging sector. M&S and Tesco have trialled vertical farming, and there was investment of 800 million USD in 2021 which is expected to grow each year, especially in light of the war in Ukraine
    2. Open storage (e.g. not built upon) - there has been an increase in demand for higher quality open storage (with security and lighting) since the logistic issues caused by Brexit and the pandemic. Enquiry levels in 2022 are already double those since 2021
    3. Data centres- for those with access to the internet, 40% of our waking day is spent online. By 2025 the total amount of data consumed globally is forecast to treble compared to today. The installed base of storage capacity is forecast to increase, growing at a compound annual growth rate of 19.2% from 2020 to 2025. London is the data centre capital of Europe, but some boroughs are out of capacity for the next 8/9 years because of a shortage of power needed to run them. This may encourage an increase in the use of renewable energy sources

    ESG

    1. The built environment is responsible for 38% of global emissions and 35% of its power consumption
    2. There is an increasing use of renewable energy, particularly PV panels. Not only does this have a positive environmental impact, but it can create a revenue stream when sold back to occupiers which also benefits occupiers because of the cheaper rates of energy
    3. By 2030, the minimum energy efficiency standard in relation to let non-domestic buildings is set to increase to a B rating. Currently, 90% of properties on the EPC register are below B so there is a huge amount of work to be done by 2030. To upgrade every property on the EPC register to a B rating would cost an estimated £30.5 billion (£334,000 per property)
    4. Part of the issue is that the industrial sector has much older stock compared to retail and office sectors. 40% of industrial stock is 40 years and older, with 8% being built pre-war
    5. On the positive side, the average EPC rating of industrial properties has increased by 3% per annum since 2016 when MEES was introduced

    Summary

    1. Strong occupier demand continues but economic situation creating uncertainty
    2. Growing sectors could create opportunity in future years
    3. Retrofitting - out with the new and in with the old

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