Prime headline rents have increased by an average of 10% over the 12 months to mid-2018 and are set to lift on average by 7.1% and 5.5% pa respectively over the next five years across the west London and Thames Valley industrial and logistics market, according to a wide-ranging JLL report that sets the scene for the industry to embrace intensification on sites and in particular multi-storey development, "flatted factories" and beds and sheds.
Western Corridor Industrial & Logistics Market Report for H1 2018 at the Regent Street Cinema in the West End this morning JLL predicted record highs for industrial space demand, but all-time lows for supply, driving continued soaring rents and yield compression.
Key findings of the report are:
Occupier take-up of logistics floorspace across the Western Corridor totalled 2.8m sq ft in H1 2018, 32% up on H1 2017 and 6% higher than the five yearly half-year average of 2.7m sq ft
Industrial floorspace taken up in West London saw a 25% increase from H1 2017 to 1.6m sq ft, with the Thames Valley increasing by 41% from H1 2017 to 1.2m sq ft
Available supply of industrial space has fallen by 10% over the last 12 months to 7m sq ft, with Grade A space falling by 21% over the same period
Available space in West London has fallen by 12% over the last year to 4.3m sq ft, and in the Thames Valley there has been an 8% fall to 2.7m sq ft
At the midpoint of the year there were just six schemes speculatively under construction in the Western Corridor totalling circa 710,000 sq ft.
Perhaps the most revealing figure, highlighting the strength of demand, are JLL's rental figures for the past year and projections for the coming five years (see chart).
In the last year, prime headline rents in the 13 locations JLL monitors across the Corridor rose by 10% on average. Quoting rents in Park Royal are now £20 per sq ft for prime units when only five years ago these headline rents stood at £13.25 per sq ft. JLL also reports that Battersea has seen one industrial letting - admittedly an anomaly - at £30 per sq ft.
In the 12 months to mid-2018, prime headline rents rose in 11 of the 13 locations with the strongest rental growth recorded in Greenford, Uxbridge, High Wycombe and Park Royal. In Greenford prime headline rents rose from £14.50 per sq ft to £19 per sq ft in the space of a year.
Looking forward, given the supply and demand imbalance, JLL said it predicts significant further rental growth with its model based forecasts of the MSCI Index indicate rental growth of 7.1% pa over the next five years for standard industrial units in London and 5.5% pa for standard industrial units in the inner South East over the same period.
Andy Harding, lead director, industrial and logistics, focusing on future trends said: "There has to be a distinct shift to more instensification of use over the next five to 10 years. With so much demand and limited supply you can only go down or up or look to a combination with other uses."
Tessa English, Associate Director for Research - Industrial & Logistics at JLL, said: “Good levels of take-up across the Western Corridor were recorded in the first half of 2018 and, at mid-year, we believe the market could be heading for a record year overall. However, supply is at its lowest level for three years and we predict that it will continue to fall. Vacancy levels across some locations in the Corridor are likely to reach all-time lows and in some locations vacancy levels could approach zero.
“This imbalance between demand and supply indicates that rental growth could reach record levels across the Western Corridor by the end of this year. In our view, this supports a case for more speculative development, especially in the small to mid-size bracket where there is very little Grade A availability. The area will continue to provide attractive opportunities for investors and developers, and we believe this will remain the case over the coming years. Corporate occupiers will need to take account of these trends when planning their property needs as market conditions are likely to remain challenging.”
The report highlights that strong investor demand for industrial space has persisted across the Western Corridor this year creating downward pressure on yields. Prime yields were 3.5% for West London and 4% for the Thames Valley at mid-year, both 50bps lower than 12 months earlier.
Adam Creighton, associate director in national investment at JLL, added: “This year has seen an insatiable investor appetite for industrial and logistics assets across the corridor and this looks set to continue into 2019. Investor interest in the market has intensified, supported by the strong occupational factors driving rental growth. We believe that there is potential for further yield compression given the weight of capital targeting the sector, the lack of opportunity for investors and the resilience of this core market.”
The research also revealed that Heathrow continues to remain resilient within the market, with similar levels of activity to H1 2017. Rising cargo volumes year-on-year continues to drive the demand for industrial space.
Melinda Cross, director, Industrial & Logistics at JLL, said: “Heathrow continues to be the hub of industrial growth within the Western Corridor. There is good traction at the upper end of the market (70,000 sq ft plus), however, there is a lack of stock in smaller units in the Heathrow market which has resulted in strong rental growth, as occupiers have been left with little choice in the market. Overall, we expect to see a strong end of the year for Heathrow in terms of floorspace take-up, with some size ranges seeing limited stock available given the lack of speculative development at Heathrow.”