With market conditions painting a variable and volatile picture, Michael Alderton from our Occupier advisory team and Charlie Foster from our investment team examine the prospects for the market in 2025.
Occupier advisory
As we have seen through the Savills requirements index, the level of new occupier requirements in the market has been volatile in 2024 with Q3 2024 being the lowest level on our index since the end of 2022.
As we head into the start of 2025, the Savills Occupier Advisory team is busy and advising corporates across the manufacturing, logistics and retail sectors on projects requiring many differing types of industrial and logistics real estate. As with our observations last year, most of these projects fall into a supply chain reorganisation/restructure, consolidation, and cost efficiency strategies rather than a pure expansion and growth strategy. From a market perspective, this is important as there is often less urgency to conclude deals as new property decisions are more strategic in nature.
Recent changes implemented in the Budget regarding national insurance, business rates and the minimum wage have caused businesses to 'pause for thought' and make opening a new labour-intensive warehouse a tricky proposition at board level. In the long term, we suspect this will drive occupiers to invest in warehouse automation and robotics as, whilst a big initial capital cost, the return on investment will now be much quicker. Freeports with significant financial incentives and cost savings will be on many occupiers' shortlists.
ESG continues to rise up the hierarchy of occupier considerations, but in the current economic climate, the focus is firmly on initiatives that reduce the operating cost of a unit and therefore impact the bottom line
Michael Alderton, Director, South East Industrial
With supply rising to its highest level since 2009, building voids increasing and vacancy hitting 10% in some markets, it is tempting to say that market conditions have tilted in favour of the occupier for the first time in over a decade.
However, with requirements being larger and more strategic in nature (and therefore more locationally specific), and potentially needing more height, power, and greater floor loading for automation, the options occupiers have in order to obtain a building that meets all of their criteria remain small. Indeed, our research demonstrates that many regions and sub-size bands still have less than one year's worth of supply for Grade A units.
For units over 500,000 sq ft, BTS (build-to-suit) will remain the primary route to market and, whilst the outlook for capital markets is improving, and therefore potentially removing one challenge to a BTS deal concluding, BTS will remain a more expensive option for occupiers to deliver a unit that meets their specific requirements.
ESG continues to rise up the hierarchy of occupier considerations, but in the current economic climate, the focus is firmly on initiatives that reduce the operating cost of a unit and therefore impact the bottom line. We should remember that occupiers, when considering the location of a new unit, will also be considering a myriad of other factors including labour availability and retention, but also the transport cost and carbon implication that a new unit will have on their supply chain.
This all suggests that 2025 will play out in a similar fashion to what we have seen in 2024, with a strong underlying level of strategic requirements in the market, but due to their nature, taking longer to conclude and possibly not having the downward impact on vacancy that many in the industry would hope for.
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Capital markets
Whilst 2024 feels like it hasn’t been a vintage year for investment volumes, the reality is that by the time the year-end figures are collated, we expected logistics investment volumes to have exceeded 2023 by a comfortable margin. Certainly, since the end of summer 2024, there has been more stock on the market which has been attracting interest from a wider range of bidders and we starting to see the bid-ask spread narrow. Indeed, since September, £1.8 billion of stock has come to the market which, in time, will create new evidence to support further sales processes.
Industrial and logistics remains a conviction play for many investors going forward and there is a weight of capital – encouragingly from a number of new entrants – targeting the sector which should mean that investment volumes, at the very least, remain stable as 2025 progresses. There are, however, a myriad of factors that could rear their heads and impact liquidity in the market.
The first being rental growth. As our research highlights supply has risen to a level not seen since the aftermath of the global financial crisis and take-up is reverting to historical norms; as a result, units are remaining vacant for longer. The latest output from the Savills rental projection model suggests an average of 4.1% rental growth per annum to 2028, with significant regional variation depending on the prevailing levels of supply and demand. This is a downward movement from our projections last year. Whilst rental growth of 4.1% remains a strong number, we should not expect dramatic outperformance unless vacancy rates start moving inwards and greater tension returns to the market. Markets such as the East of England and the West Midlands have greater prospects for outperformance given their vacancy rates are already starting to head inwards.
We think it is likely that investment volumes will rise in 2025, but more than ever, investors will require a data-led approach to market and stock selection for optimal investment performance
Charlie Foster, Director, Business Space Investment
The second key factor to consider is the cost of debt with the 5-year SONIA swap rate at 3.8% at the time of writing. With inflation proving to be stickier than many commentators initially expected, it is likely that we will not see base rates move inward at the pace many in the market initially hoped for. The latest forecasts from Oxford Economics suggest 100 bps inward movement by the end of 2025, but this could of course change if the outlook for inflation and GDP changes through the course of 2025.
Lastly, the world remains an uncertain and volatile place. January will see Donald Trump return to the White House as president, and all eyes will be on what policies he puts in place with regard to tariffs and global trade. A peaceful solution to the war in Ukraine currently looks a distant prospect and the Middle East remains a tinderbox which could have global impacts at any point.
Overall, there is an increasing pool of evidence in the market which should push undecided sellers to be willing sellers, and assuming global geopolitics doesn’t spiral out of control, we think it is likely that investment volumes will rise in 2025, but more than ever, investors will require a data-led approach to market and stock selection for optimal investment performance.