Logistics

A wealth of demand drivers

2024 saw a positive occupier demand story in the UK industrial and logistics sector, with take-up rising from the recent low seen in 2023. In 2025 and beyond, demand will be shaped by a variety of economic, political and technological drivers.

Having fallen post-pandemic, internet retailing as a proportion of total retail sales has been rising again (from a low of 25.4% to 27.7% in October 2024). Although we are past the period of rapid transition to internet shopping, a gradual shift online is likely to continue in 2025. Population growth (a rise of 600,000 people is projected in 2025) and further rises in real household income will all mean increased demand for logistics and last mile distribution hubs - particularly as online retail requires more warehousing space than in-store - and this should be reflected in occupier requirements.

The government’s commitment to deliver more housing (see the Housebuilding section) will impact the industrial and logistics sector in a number of ways over the coming years. Not only will the construction activity itself create industrial occupier requirements (notably for Industrial Outdoor Storage), but the increased housing stock will generate more demand for logistics space (in addition to population growth, due to the greater online retailing demand). There is also a potential supply impact, with housebuilding creating greater competition for sites.

Another key plank of the government’s agenda is accelerated infrastructure delivery, which will also generate industrial demand. The availability of power from the national grid will be a strong driver affecting locational demand - we cover electricity generation and transmission here.

Supply chains will continue to evolve in 2025, and we expect to see more retailers outsource logistics functions to 3PLs, who can use their expertise to reduce their costs and delivery times; and increase their reliability and sustainability credentials.

Logistics warehousing operations will be further transformed by a variety of technologies, including robotics, AI, and IoT. Adoption of technology may be accelerated by labour market pressures. Not only is labour in short supply in many parts of the UK, but costs are also increasing, with wages rising in real terms, a trend forecast to continue in 2025. In addition, the National Living Wage is due to increase by a significant 6.7% in April, and employers' National Insurance contributions will also rise. The re-emergence of Amazon as an occupier taking large units will further compound the labour market pressures in certain areas.

Supply and rental prospects

Vacancy rates have increased over the last two years, as take-up fell back from pandemic-period highs, although much of this is secondary space that has returned to the market. With demand firmly focussed on high quality, well-located, energy-efficient buildings, we are likely to see more ‘stranded assets’ in the logistics sector. In fact, some of these assets may be in relatively good condition but simply no longer meet the criteria demanded by corporate occupiers, creating opportunities to refurbish units in locations where the supply / demand dynamics are supportive.

With a positive outlook for demand in 2025 and relatively little speculative supply coming through, we think vacancy will peak during the year and begin to decline. Development activity should be boosted by a combination of economic and political stability, further modest interest reductions, falling vacancy (particularly for quality stock), easing build cost pressures and robust demand, together with continued above-inflation rental growth. In addition, there is scope for industrial investment yields to see some downward movement in 2025.

Competition for land is likely to intensify. For example, demand for data centres is increasing dramatically, requiring significant amounts of power as well as sites. These were recently classified as Nationally Significant Infrastructure Project (NSIPs), and thereby benefit from streamlined planning processes. Industrial and logistics is also in competition for land and power with residential and many other growing uses such as life sciences.

It is positive that the draft National Planning Policy Framework (NPPF) includes the requirement for local planning authorities to identify strategic sites to meet anticipated needs, and encourages sustainable economic growth in key sectors. These include freight and logistics, as well as data centres, laboratories, gigafactories, and digital infrastructure. The government’s shift towards more development in poor quality green belt land (the so-called ‘grey belt’) could also open up new sites, although the impact is likely to be limited.

Overall, we think that with greater competition for sites, combined with other positives such as further rental growth, we are likely to see some recovery in industrial land values in 2025.

Average rental growth for UK industrials, as measured by the MSCI Annual Index, is likely to have been little over 5% for 2024, ahead of UK offices and retail, although below the exceptionally strong performance of the pandemic period (growth averaged 9.1% per annum over the three years from 2021 to 2023). We expect a further modest deceleration in average industrial rental growth, which we forecast at 4.4% in 2025, but this will still outperform the all-property average (2.8%). Certain sub sectors such as mid box and urban estates will continue to see strong rental growth above the sector average.