14 December 2021/ sale_industrial_guide

What does the future have in store for the UK industrial sector?

With supply chains facing disruption and logistics firms looking for the right storage and distribution solutions in the UK, the industrial sector is at a moment of transformation. At CoStar’s recent webinar exploring the future of the UK industrial sector, the panel of experts discussed some of the biggest issues it will face in 2022.

2021 has been a record-breaking year

By almost all metrics, 2021 has been a record-breaking year for the industrial sector. Fuelled by supply chain disruption and the ramping up of online and ecommerce-based businesses, demand for warehouse space has broken records. According to a recent report from Knight Frank, investment in UK warehouses has already reached a record £6 billion – more than double the £2.7 billion recorded at the same time last year.

Partly driven by this extreme demand, rent prices have sharply risen. Notably, there has been a dramatic rise in demand to rent big box units. And, with inflation taking a hit on smaller construction firms and projects, warehousing supply seems likely to remain limited in the short-term.

Online orders are transforming industries

The tipping point for these peaking prices has been the growing proportion of online sales. In January of this year, online sales made up nearly 40% of all retail sales, overwhelming much of the already disrupted supply chain infrastructure.

In order to meet this spike in demand, retailers and logistics firms have been scrambling to scale up their storage spaces. As many as 49 so-called ‘mega-sheds’ were constructed last year to respond to the growing demand, with a similar amount expected this year. While such constructions may have carried higher risk of standing empty even only five years ago, such is the frenzy for warehouses today that void periods have been shrinking continuously over the year.

Planning for the future

The surplus of demand, as well as tightening EPC (energy performance certificate) regulations, mean that businesses looking for purpose-built premises are having to pay a premium. Some firms may look to re-purpose existing facilities to suit modern ends, but it will be challenging to future-proof these spaces.

Rising construction costs are driving up the prices for purpose-built, EPC-ready facilities. According to a survey conducted by Turner & Townsend, 84% of survey respondents report that these rising costs are a major challenge to the future of warehouse construction. This same survey found that 79% of respondents agree that demand for warehouse space has failed to keep pace with demand, forcing some firms to turn towards creative solutions to their storage needs.

The panel identified multi-storey warehouses as a potential solution to continued construction setbacks. While such projects themselves bring a level of additional risk, ongoing supply chain issues suggest that these larger facilities could prove to be an effective way for businesses to re-shore much of their production.

Plan for sustainability and EPCs

By far one of the most pressing issues constraining the purchasing and building of new spaces is sustainability. In particular, changing EPC regulation that holds warehouses to higher environmental standards. Warehouse developers and owners are continually having to upgrade their current sustainability credentials.

But if demand for warehouses is already extremely high, demand for energy-efficient and sustainable warehouses is even higher. These facilities come at both a premium, and often demand among the highest rental values.

With investing into warehouse construction only increasing, the panel paid particular attention to how constantly evolving EPC regulation may impact investors. Investors who move quickly to re-arrange or offload facilities that don’t meet the current regulation will likely find this transition easier and will avoid much of the worst of the potential repercussions.

Restrictive planning is hurting sectors

A major problem the logistics, ecommerce and construction sectors are facing is UK planning regulations. Whether these regulations apply to housing or warehousing, strict planning legislation is only continuing to make a challenging situation worse. With new builds facing often steep challenges to approval, not only are primary sectors such as retail and logistics being impacted by the unavailability of extra storage space, but potentially even policy-driven ambitions such as the re-shoring of production may encounter problems.

Education will continue to be a major part of future discussions between affected industries and legislators. With ecommerce only set to expand drastically over the coming years, the current level of storage stock will continue to pose major problems to sectoral and national economic growth.

On the education side of things, it was also pointed out that many of the hurdles new builds were facing came from a level of misconception about the reality of modern production. No longer are warehouses the creators of ‘secondary value jobs’, but drivers for well-paid work. Many modern warehouses, for example, contain within them offices and other essential sides to business operations, making new builds important features in driving regional growth.

Financing innovation

Among many firms, there appears to be a concerted effort to bring production back to domestic markets from abroad. And while these companies are facing many hurdles as it currently stands, many investors are also looking towards the re-packaging of existing productive spaces as a potential solution to this issue.

With demand sky high, and remote working also becoming the norm for many, investors may turn to the re-purposing of office space into storage stock as a viable solution. Institutional investment bodies are rewarding parties for achieving sustainable goals, so as these sectors look for creative solutions to supply chain issues, this may prove to be a catalyst for the sustainable re-purposing of existing space.

One thing is for sure though: innovation is needed when it comes to finding the right solutions to these existing problems. While continuing education and dialogue with policy-makers must continue, the frenzied demand for warehouse space and slowdown in smaller construction is only set to drive rental prices across the UK higher. Whether the future of storage comes through the management and repurposing of existing spaces or through another avenue, it’s clear the current issues facing relevant sectors will hold back growth until they are resolved.

If you’d like to learn more about the future of commercial property, check out our other tenant guides for expert insights.