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The industrial sector reigning supreme and outperforming other commercial real estate asset classes shows no signs of abating. In terms of total returns and capital value growth it was the top performer by some distance last year, with transactions totalling £9.1bn according to data from Datscha. Demand from investors and occupiers alike looks set to continue, and with a rampant development pipeline underway, the sector has every chance of being this year’s pick of the bunch again.

Online demand takes centre stage

It is indicative of how shopping habits have evolved that retail accounted for just over half of last year’s industrial take-up; boosting their supply chains to meet online demand in the process. This demand is ever-increasing too, as the Office for National Statistics recently revealed that one in every five pounds UK retailers earn from sales is spent online – up from one in ten in 2013.

E-commerce offers a two-pronged attack on warehousing as third-party logistics (or 3PL) companies need further space too to satisfy customers expecting parcels to be delivered faster than ever. Notable occupiers last year included Geodis and XPO Logistics, taking 275,000 sq ft at Optimus Point, Leicester and Prologis Park, Milton Keynes respectively.

The rise of the ‘big box’

Moreover, looking at the country as a whole, if there is one term that’s become synonymous with this booming market then it is ‘big box’, as these sheds were occupied with some verve in 2018 according to Lambert Smith Hampton:

  • 700% year-on-year increase to 5.3m sq ft in the North East.
  • 93% in the East Midlands to pass the 10m sq ft mark.
  • 51% increase in Yorkshire and the Humber.

Investor appetite is perhaps best demonstrated by Tritax Big Box REIT, which expanded its portfolio by eight assets in 2018, as well as acquiring an 87% stake in db symmetry early this year – delivering access to a potential 38.2m sq ft of logistics assets. They were also able to negotiate a 20% uplift in rent with Kellogg’s on a 310,000 sq ft distribution facility in Manchester – the overall headline rental increase for big sheds since 2011. Add to the mix a supply pipeline standing at just 31m sq ft – reflecting a mere vacancy rate of 5.3% – coupled with ten to twenty-year lease lengths; big box warehousing as a sub-sector could not look any more attractive to an investor searching for a secure income stream.

Meeting the demand

Short to medium-term challenges will revolve around the question of whether there is enough speculative development to satisfy current demand levels and, if not, is the remaining secondary stock fit for purpose. In October 2017 the government published its Clean Growth Strategy in a bid to reduce carbon emissions; creating a legally mandated base of an EPC rating grade E on all properties from April 2018 – and indications are that this is likely to be raised to a C rating by 2030. Hollis are well placed to assist clients with this task – a recent example being the refurbishment of a 52,000 sq ft 1990s shed at North Feltham Trading Estate, upgrading the EPC rating from a D86 to an A20. As occupiers increasingly demand high quality future proof warehousing, energy efficiency will undoubtedly play an integral part of any landlord/tenant leasing strategies.