Publication

Big Shed Prospects: The rental growth prospects for UK logistics

Last year Savills launched a new rental growth projection model which examines the average headline rental growth prospects in the logistics market over a five-year period at a regional level.


Historically, most rental growth models rely on macroeconomic variables such as consumer spending, GDP, unemployment forecasts and so on to then forecast rents into the future based on historical valuation-based indices. Whilst such models certainly have merit linking the demand side drivers to rents, they have very little data covering the supply side metrics of a market, which arguably have a greater impact on rental levels in the logistics market.

Our model can also be deployed in a consultancy basis, where we can work with clients to forecast rents in smaller geographies and for subsets of the markets, such as prime or secondary.

We are delighted to see that our projection for 2024 of 4.9% growth at a UK level is set to be realised, with data from MSCI suggesting the UK will have rental growth of c.5.0% by the time the year-end data is in.

Key variables

Our rental growth model relies on three main components:

  • Understanding future supply: using Savills-held data and in consultation with Savills Industrial Agents, we create a picture of future land supply having regard to current and planned development proposals as well as sites which are under construction.
  • Understanding future demand & availability: studying market-specific relationships between supply and demand, we predict future levels of net absorption and availability.
  • Understanding & projecting rental movements: we study how average achieved headline rents have changed in the past based on a market’s historical supply and demand balance. We then use that relationship to project future rental change into the future.

The model uses all of the data that Savills has at its disposal to forecast average headline rents in a market for all units over 100,000 sq ft and does not differentiate prime vs secondary.

The model also allows for scenario-based analysis of future rents. For example, scenarios could be run whereby take-up is lower than expected, or speculative deliveries are higher than normal and the impact on rental levels can then be assessed.

As part of the process, we have also modelled future vacancy rates to the end of 2025. Significant variations at a regional basis play out; in the West Midlands, where vacancy is already decreasing, we expect this trend to continue. Whereas, given the development pipeline already in place for the East Midlands and North West, we think it is likely that vacancy rates will be largely unchanged by year-end 2025. At a high level, we expect vacancy for the UK to be 6.2% in our optimistic scenario and 9.9% in our pessimistic scenarios.

For our own rental growth scenarios, we run three different models. Our baseline scenario assumes that absorption will be below average in the coming years before rebounding later in the forecast period and that net deliveries will be lower than average in the middle part of the forecast period. Our pessimistic scenario assumes that net absorption will be much lower across the forecast period, therefore, there will be elevated levels of vacancy in most markets for the next five years. Our optimistic scenario assumes a combination of elevated absorption and lower-than-average speculative deliveries, thereby seeing vacancy project inwards earlier than expected.

Given the wider economic and market sentiment and utilising the data at our disposal, we suggest that there is only a 10% chance of our optimistic scenario coming to fruition. Assuming we see the level of new second-hand supply coming to the market return to historical norms, we place a 50% chance on our baseline scenario materialising, with a 40% chance of our more pessimistic scenario.

Rental growth outlook to 2028

At a UK level, our model is providing a range of 3.1% to 4.1% rental growth per annum until 2028, with our baseline scenario seeing 3.4% growth in 2025 before increasing as the decade continues.

At a regional level, again, there is significant variation given the levels of supply and pipeline in some markets – the East Midlands being a good example, where vacancy is currently 10.26% and a confirmed development pipeline of 3.4 million sq ft.

In the North West, where our projections are higher than other core regions, the model is impacted by the fact this region has generally been seeing elevated levels of take-up and is set to see less development, given the fact the development-ready land bank is the smallest of any of the main regional markets.