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INDUSTRIAL
OVERVIEW
Summer 2022
To discuss the industrial market in further detail, contact our sector specialists
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Andrew Smith SIOR
National
Partner
07919 326085
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Mike Wilson
SIOR AssocMember
South East
Associate
07880 378174
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William Rooke
East
Partner
07899 081027
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Alison Williams
South West and South Wales
Partner
07917 041109
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Chris Hartnell
North
Partner
07800 572007
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Jon Silversides
South Midlands / M40
Partner
07720 537141
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Frederic Schneider SIOR
International
Partner
07733 124489
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William Waterhouse
South East
Senior Surveyor
07789 113846
Source: Carter Jonas Industrial Index
31.6%
37.2%
(11.1% per annum)
Our Summer 2022 Industrial Overview monitors prime headline rents and land values in 50 key industrial locations across the UK. It also highlights the Carter Jonas Industrial Index, which tracks the change in rents and land values across the market.
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Alfie Agnew
London
Surveyor
07788 362 185
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Darren Letherby
Bristol
Partner
07393 259956
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George Lynch
Bristol
Associate
07557 742 765
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Ed Cawse
Bristol
Surveyor
07425 632476
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Sam Cooke
Midlands
Associate
0121 3899675
"... prime industrial headline rents have continued to increase sharply"
Headline rental growth
during H1 2022
+9.0%
Occupier demand remains strong across a broad spectrum of business sectors. However, there is a continued shortage of immediately available high specification industrial stock in many markets. With developers facing rising building costs and supply chain challenges, we do not expect a significant increase in construction levels, and the lack of stock will continue to act as a constraint on take-up.
Prime rental trends
Land value growth
during H1 2022
+20.3%
Prime rent: Based on 10,000 (GIA) sqft brand new unit in a prime location, with 45-50% site cover and 10% office content, and a lease term of 5-10 years.
Land value: Based on land with an unrestricted B1(c), B2, & B8 planning consent with a 45-50% site cover and in a prime location. Also based on no abnormal cost for any environmental issues, site levelling or s.106 (CIL) commitments etc. All data correct as at June 2022.
The supply/demand imbalance has continued to place strong upward pressure on rental levels. This is reflected in the Carter Jonas Industrial Index, which shows that prime industrial headline rents have continued to increase sharply, by 9% during the first six months of this year.
However, the H1 2022 growth rate is a marked deceleration from the stellar 20.8% recorded over the previous six months to December 2021, and the total increase of 31.6% over the last 12 months has significantly outpaced the level of general inflation. This is in sharp contrast with most other mainstream commercial property sectors, where rents have failed to keep up with rapidly rising inflation, or have continued to fall.
Looking regionally, the Midlands saw the fastest rise in prime headline rents in H1 2022, at 17.5%, followed by the South West / Wales at 9.9%. London, the South East / East, and Yorkshire & the Humber / North East / North West saw increases within a range of 5-6%. Rental trends by geography are illustrated in Figure 3.
Source: Carter Jonas
Source: Carter Jonas
Source: Carter Jonas
9.0%
6
months
44.4%
(7.6% per annum)
12
months
3
years
5
years
Industrial land values have risen at a significantly faster pace than rents over the last five years, as Figure 2 illustrates. This trend continued during H1 2022, with an average increase in land values across our monitored locations of 20.3%. This means that land values have increased by more than 50% over the last year.
Prime land value trends
Looking at the regional breakdown, the Midlands saw the most rapid rate of land value growth during the first half of this year, at over 38%. This was followed by Yorkshire & the Humber / North East / North West, at 19%. London, the South East / East and the South West all saw similar rates of growth at 13-16%. These trends are illustrated in Figure 4.
UK average
Source: Carter Jonas Industrial Index
6
months
12
months
3
years
5
years
56.4%
85%
(22.7% per annum)
118%
(16.8% per annum)
20.3%
Source: Carter Jonas
UK average
Occupier demand remains very strong, and continues to be driven by the ongoing long-term, shifts in the logistics sector. We believe this structural change will continue to drive demand despite the mounting economic headwinds. Indeed, we are still seeing plenty of enquiries and highly competitive bidding for units in many instances.
Outlook for rents
However, we would also sound a note of caution, as the sector will not be immune from the slowdown in economic growth, the income squeeze on households, and historically low consumer confidence, which will impact retail sales volumes, particularly for discretionary spending. Recent rates of rental growth at levels well above inflation have reflected the intense competition for the limited stock and sites available, but were never going to be sustainable over the long term.
Rising business costs will also impact on the prospects for rental growth. In particular, the rating revaluation will add significantly to costs for industrial occupiers from 1 April next year. The revaluation is based on the change in rental values between April 2015 and April 2021, and as the overall tax take from business rates should not increase in real terms, it is the performance of industrials relative to the rest of the commercial market over that period that is important. The MSCI Quarterly Index reports industrial rental growth of 25.7% between these dates, compared with 12.5% for offices and -14.1% for retail. This suggests a significant increase in typical industrial business rates from next year.
Corporate occupiers are also facing significant cost increases across the board, most notably energy costs. Ongoing supply chain issues and labour market constraints add to the picture. Given the more uncertain outlook for the UK (and global) economy over the next year, we expect this to feed through to a further deceleration in the rate of rental growth.
However, we expect some upward pressure on rental values to be maintained due to the ongoing supply/demand imbalance. We therefore expect to see a continued slowdown in the rate of growth, but the market is unlikely to go into reverse.
"... we are still seeing plenty of enquiries and highly competitive bidding for units in many instances"
We have been charting extremely strong and unprecedented industrial land value growth over the last five years, and especially so over the last 12 months. However, the outlook for land values is less clear cut than for rents, and the occupational and land markets appear to be diverging. Indeed, we believe the development market is now at a turning point, and a correction appears to be under way.
Outlook for land values
A primary cause of this correction is the recent strong rise in building costs. This is illustrated in data from the Department for Business, Energy and Industrial Strategy, which shows that construction costs are currently rising by circa 27% per annum. Rising interest rates and the ongoing shortage of labour and supply chain issues for materials are adding to the problem, and suggest a very challenging environment for developers. These issues are likely to persist in the short term.
This is now starting to have an impact on the market, and we are already seeing examples of last-minute ‘chips’ to pricing, most notably where a site has been under offer for more than three months.
The recent period of strong growth in land values is now almost certainly behind us, and values have most likely already peaked in many locations, although we are yet to see this feeding through fully to transactional evidence. However, the very best prime development land should still attract significant premiums.
"Construction cost inflation alongside other market pressures will likely flatten the growth in land values"
"Structural change will continue to drive occupier demand, but the sector will not be immune from mounting economic headwinds"
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Nick Waddington
National
Partner
0121 824 0771
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Adam McGuinness
National
Partner
0121 824 0770
Source: Carter Jonas
Prime rent and
land value figures
Prime rent: Based on 10,000 (GIA) sqft brand new unit in a prime location, with 45-50% site cover and 10% office content, and a lease term of 5-10 years.
Land value: Based on land with an unrestricted B1(c), B2, & B8 planning consent with a 45-50% site cover and in a prime location. Also based on no abnormal cost for any environmental issues, site levelling or s.106 (CIL) commitments etc. All data correct as at June 2022.
Industrial take-up was more subdued in H1 2022 compared with the exceptionally strong levels seen during 2021. However, we attribute this to the low supply of immediately available high specification industrial stock in many markets rather than a downturn in underlying occupier demand, which remains strong across a broad spectrum of business sectors.