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5 Things You Need to Know About Big Box Logistics In Q2 2024

Cautious optimism has returned to the Big Box logistics market in the last three months, with some big requirements providing a boost to take-up numbers and the slowdown in development completions ensuring that the vacancy rate is now on the turn.  DTRE expects this positive momentum to carry on through the remainder of the year.


Take-up in the second quarter has reached 6.35 million sq ft, which is up 11% quarter-on-quarter and at the halfway stage of the year, 2024 is in-line with 2023’s 12.1 million sq ft. The second quarter has seen some big occupiers finally sign for space, such as Nike taking 1.3 million sq ft at GLP’s Magna Park Corby scheme, which has boosted the overall take-up number. We also witnessed 7 deals for units of greater than 300,000 sq ft – which is more than any other Q2 outside of the Covid years. 

As a result, we are now seeing some take up momentum for units between 300-400,000 sq ft, which at the turn of the year accounted for nearly a third of all Grade A supply. Deals at Ergo 354 in Fradley (Super Smart Services), Unit 1 Orwell Logistics Park (EDF Energy) and MPS9 Magna Park South Lutterworth (CEF) have all helped in both boosting take-up and reducing the vacancy rate.

However, take-up of units between 100-300,000 sq ft was just 2.3 million sq ft in Q2 - that’s 29% down on the pre-Covid average. Furthermore, second-hand units of between 100-200,00 sq ft saw virtually no lettings at all, which we believe reflects the preference for newer, sustainable, and future-proofed assets.

The DTRE Big Box Vacancy Rate stood at 7.2% at the end of Q1, but we are pleased to report that has trended downwards over the last three months and now stands at 6.8% at the end of Q2 with 4.26 million sq ft of take up of standing stock, reducing overall supply to just over 51 million sq ft. The ‘split’ is now 21 million sq ft ‘New/Spec Built’ and 30 million sq ft classified as ‘Second Hand’.


We can also report that the continued slowdown in new speculative completions, and this, coupled with the existing unsatisfied occupier demand will ensure that downward pressure on vacancy rates will continue for  12 months at least given the structural delay required to implement new build starts on site.

Currently there is approx 8 million sq ft of existing warehouses under offer and whilst it’s difficult to forecast the extent of further second-hand or grey space being added to the market, there’s only 960,000 sq ft across 6 units of new development, all between 102,000 sq ft and 240,000 sq ft, that will reach practical completion by the end of Q3. As a result, we expect the vacancy rate to compress further to 6.3% by the end of September.

MSCI’s latest Monthly Index showed rental growth for distribution warehouses was just 0.23% in May (annual rate of 5.7% to end May), which is the lowest monthly level since peak-lockdown in January 2021 and unsurprising given the hike in the vacancy rate over recent months. But with vacancy now on the turn, development slowing and occupier demand, particularly for ‘New/Grade A’ product on the rise, we expect to see rental growth pick up once more from here on for the remainder of 2024. Despite the statistics, DTRE have continued to experience strong rental growth in core markets at beyond these levels. 

At the end of the quarter some cautious optimism has returned to the capital markets. Sentiment is starting to improve and in a few limited examples competitive tension has returned. One Swallow does not make a Summer – perhaps it may make an Autumn? With the likelihood of a new government and with the Bank of England expected to cut rates in either August or September, we expect the ‘Bid/Ask’ spread which has held back the market for much of the year to narrow and a busier second half of the year will unveil with increasing levels of stock expected.

Q2 saw £1.8 bn of deals complete, with the largest transaction in the sector being Tritax’s purchase of Abrdn’s UKCM which included c.£270m of logistics assets. The largest single-unit deals saw Ceva Logistics purchase its own warehouse at Rockingham Gateway from Mulberry for £78m, whilst M&G sold a Co-Op distribution unit in St Helens, just outside of Liverpool, to Brookfield for £59m/5.79% NIY. 

At £1.8bn, trading volumes in Q2 have increased 63% on what we saw in the first three months of 2024, and this cautious optimism is largely mirrored in the bond and swap markets. 5-year swaps are now priced at 3.95%, down from the 4.1% - 4.2% range where they have spent most of Q2 with a similar story playing out in the bond market for UK 10-year gilts, as investors price in interest rate cuts as inflation has tumbled down to its 2% target.

Pricing has remained firm through the quarter, particularly for assets with reversion and with little to no sign of distress in the sector, a phenomenon hopefully confined to the US and office sector, we expect both direct pricing and valuation yields to remain stable for the remainder of the year, with some inward movement for assets with open market rental mechanisms.

In fact, the ’Bid/Ask’ spread, which has narrowed marginally during Q2 should continue to see the gap close over the forthcoming quarter as swaps (5-year) and gilts (UK 10-year) dip under 3.9%. This could unlock a number of deals, including some larger deals and portfolios which have continued to be conspicuous by their absence.

Finally, and surprisingly, (and unlike in France) the UK’s general election has not seemingly spooked the investor community this time around, as it has done in the past, with investors much more focused on the latest CPI print and the bank rate, rather than whether it’s a Labour or Conservative government.

To that end, we don’t expect to see any disruption caused by a change of government. Indeed, if Labour, who are on average 20 pts clear in the polls, do form the UK’s next government then their proposed reform of the planning laws, intended to promote housing development, should also be seen as an unintended boon to logistics.

DTRE Big Box Logistics Report - Q2 2024

5 Things You Need to Know About Big Box Logistics In Q1 2024

The occupational market has got off to a sluggish start in 2024, with a combination of factors ensuring that the quarterly volume for new lettings reached just 5.6 million sq ft, that’s down 16% quarter-on-quarter and the slowest start to a year since 2019. However, there remains reasons to be positive as we move into the second quarter. 

Whilst the slowdown in occupier demand can be attributed to a number of macro-economic factors, ‘transaction friction’ has also increased significantly. Legal and ESG due diligence processes appear to be the main contributors, although C-Suite decision making is slower than it has been.

However, DTRE are currently tracking 7.6 million sq ft of logistics units that are under offer and should all those units complete by the end of June 2024 then take-up for the half-year will be 10% ahead of the “Pre-Covid” average.

Looking at Q1, the Midlands led the way accounting for almost 60% of all demand, split 40% East Midlands and 19% West Midlands, with Yusen Logistics’ 1.2 million sq ft pre-let at SEGRO’s Northampton Gateway accounting for 47% of the Midlands total.

In total, twenty-two deals signed across the first three months of the year, with 100,000 - 300,000 sq ft being the most popular building size, accounting for 77% of take up. Positively, particularly given the availability of assets in the 300,000 sq ft size bracket, take-up for bigger units was 14% ahead of the “pre-Covid” quarterly average (2007-19).

The level of supply and in-turn the vacancy rate has continued to creep up at the start of 2024, albeit it at a much slower rate than we saw throughout 2023. By end Q1 2024, the DTRE Big Box Vacancy Rate had only reached 7.2% up from 6.9% at the turn of the year.

However, we believe this will be the ‘peak’ vacancy and that the headline rate will trend downwards through the remainder of the year. There is only 7.6 million sq ft of new speculative development due to complete in 2024 – this will be the lowest level of new speculative completions of Big Boxes in seven years.

At the end of 2023, there were 24 assets available in the 300,000-400,000 sq ft size range; encouragingly 5 units are now under offer and with no significant new supply expected, this sector should see further decreases as the year progresses.

Finally, rental growth continues strongly and is being driven by the demand/supply dynamics that have underpinned industrial and logistics for the past ten years, rather than inflationary pressures. The latest MSCI Monthly Index for end March showed annualised rental growth of 6.9% for the industrial sector (see below).

Whilst rental growth had tracked closely with the UK’s CPI for much of 2023, by autumn it had de-coupled,  and we are now seeing real rental growth of 370 basis points over the latest annual CPI number of 3.2% for March.

The themes that have dominated the capital markets for the last twenty-four months continue to persist and whilst bouts of optimism have appeared over the first three months of the year, they have also receded just as quickly, as capital sits on the side lines awaiting a definitive signal from the world’s central bankers.

The result of this hesitancy in the capital markets has meant that just £1.1bn of industrial and logistics has traded over the quarter, down 21% on the 10-year ‘pre-Covid’ average (2010-19). Larger transactions and portfolios remain largely off the radar, and this is reflected in the fact that only four deals occurred over £50m in the quarter.

The biggest deal of the quarter saw the US fund manager Ares (advised by DTRE), purchase Project Armitage, a highly reversionary 1.84 million sq ft portfolio from Royal London for £175m/5.5% NIY in an off-market transaction. Elsewhere, the industrial & logistics apportioned pricing for the LondonMetric/LXI merger helped boost the end quarter volume by a further £163m.

Whilst the UK economy has turned a corner and the threat of a prolonged recession is in the rear-view mirror, the bond and swaps markets tell of the bumpy path endured year-to-date as well as providing a pre-cursor to what lies ahead. 

At the start of the year and on the back of the US Federal Reserve signalling they were likely to undertake four rate cuts during the course of 2024, UK 10-year bond yields were trading at 3.4%, however, as the prospect of both a) when the first rate cut will be and b) how many there’ll be this year, the UK 10-year has moved upwards and now stands at 4.3% (17th April).

The swaps market tells a similar story, with 5-year swaps at 3.5% at the start of 2024 and now standing at just a nudge over 4.1% (17th April).

Whilst corporate activity in the listed sector is on the rise - as undervalued businesses receive attention from bigger players seeing an opportunity to create scale - in a pure property transaction sense, the shift in bond yields and swap rates since the start of the year has meant capital has been hesitant, particularly for the bigger ticket lot sizes. Unfortunately, we expect more of the same ‘wait and see’ approach for the next 3 months at least, with transaction volumes remaining depressed whilst the ‘bid/ask’ spread remains too wide.  

Significant dry powder continues to admire the sector, and with the Big Box vacancy rate about to turn a corner, real rental growth continuing and a 25 bps cut to interest rates to come in Q3, we remain hopeful of a busy end to the year.   

DTRE Big Box Logistics Report - Q1 2024

5 Things You Need to Know About Big Box Logistics In Q4 2023

After three record breaking years, the UK’s Big Box occupational market has reverted to pre-pandemic levels, however, given the macro-economic picture that unfolded during 2023 that is not necessarily such a surprise.

Take up by the end of 2023 was just short of 25 million sq ft and whilst that is down 35% year-on-year, when compared to the long-run ‘pre-Covid’ average from 2007-19, take-up for 2023 is actually up 2%. 

Perhaps more importantly, DTRE are tracking 8.2 million sq ft that is currently under offer as we start 2024, which will provide a significant boost to take-up volumes.


The most dominant sector in Q4’23 (and in 2023 as a whole) remained the retailers, who accounted for just over 51% of total occupier demand in the final three months of the year, with Amazon’s return to the market, securing a site at SEGRO’s Northampton Gateway to develop a new 2 million sq ft facility – an early Christmas present for the market.


Looking ahead, we expect the retailers to continue that trend as the dominant sector. The grocers, including Tesco, Sainsbury’s and Marks & Spencer all have requirements as part of a drive to increase supply chain efficiency, and we expect Amazon are on the cusp of a significant return in 2024.


Whilst manufacturing enjoyed a strong Q3 last year, that uptick was not sustained in Q4, with just five transactions totaling 600,000 sq ft. Given the latest PMI and GDP numbers from the manufacturing sector, we would be a surprised to see above trend demand from that area of the market in 2024 (see Fig 2).


Turning to supply and vacancy, the supply of Big Boxes has continued to rise throughout the year, with 15 million sq ft (64 buildings) of new speculative developments completing across the UK together with a further 8 million sq ft of ‘grey space’ added to the supply schedules. The effect is that the DTRE Big Box Vacancy Rate has risen all the way to 6.85% by end 2023, up from just 3.5% twelve months ago.

The statistic is that 36% of the UK’s entire Grade A supply (in 24 buildings) is of between 300,000 and 400,000 sq ft.


However, on a positive note, last year’s pricing correction and construction price rises have ensured no supply increase, and so we anticipate that 

the current vacancy rate of 6.85% will be the peak of supply, with only 5.7 million sq ft of new speculative development is due to complete in 2024.

This will be the lowest level of new speculative completions of Big Boxes since 2017.

 Available planning permissions and prohibitive site enablement costs will ensure that on-site starts will remain suppressed.

"There is currently 23 million sq ft of Grade A space on the market, however, with 24 assets totalling 36% of the UK’s entire Grade A supply is between 300,000 and 400,000 sq ft, it is evident that certain size brackets have more vacancy than others."

Finally, rental growth continues to confound. The latest MSCI Monthly Index for end December showed annualized rental growth of 7.2% for distribution warehouses. Whilst rental growth had tracked closely with the UK’s CPI for much of 2023, by autumn a de-coupling process had started and we are now seeing real rental growth of 330 basis points over the latest inflation number of 3.9% (see Fig 3).

Macro-economic themes dominated the investment market in 2023 and those same themes won’t disappear entirely over the next 12 months. However, whilst downside risks remain, long term trends (de-globalisation, demographics, and de-carbonisation) also provide tailwinds for the logistics sector and with the overall macro outlook starting to improve, with inflation easing, a UK recession looking unlikely and with the interest rates narrative switching to cuts rather than rises, sentiment turned to a more positive outlook as ‘23 closed and ’24 opened for business.

Investment volumes across all industrial and logistics reached £7.4bn in 2023,

 and though that was down on the £13.3bn transacted in 2022, it is still a remarkable 

40% ahead of the average annual volume from 2007-2019

. When stripping out multi-let deals, overall logistics volumes reached £4.7bn, down 39.7% on 2022.


Despite overall volumes being ahead of the long-run average, Q4’23 finished as a damp squib, with just shy of £530m transacted, with the largest single-let deal being the sale by Tritax of an 847,000 sq ft Eddie Stobart unit on midlands Logistics Park to P3 Logistics Park for c.£92m.


Looking ahead to what’s in store in 2024, the industrial and logistics sector remains the asset class of choice and whilst fully acknowledging that some investors will come under pressure from numerous external forces, such as fund redemptions, refinancing and potential breaches in Loan-to-Value covenants, we do not expect to see distress in the market.


The lack of distress can be largely attributed to the fact that many banks are now reluctant to step back into the market having worked out of their positions following the GFC. As a result, investors faced with having to refinance could be given the option to simply ‘kick the can’ down the road in the hope that improving macro-fundamentals will see an easing in financing conditions and/or some yield compression.


In terms of pricing, the economic fundamentals have improved in recent weeks, with the yield on 

UK-10 year gilts coming in from c.4.7% at the end of October 2023, to 3.4% by the turn of the year.

 Albeit that yield has moved out once more in the first two weeks of January 2024 to stand at 3.9% (January 18th 2024).


The reason for the fall in yields in recent weeks has been that the US Federal Reserve policy makers signaled in mid-December that they expect to undertake 75 basis points of cuts this year, marking an abrupt shift from previous warnings that rates could still go higher through much of 2024.


Whilst the rhetoric from the Bank of England has remained that it’s ‘too early to signal rate cuts’ and that 

the fight against inflation is not yet over, the BoE is largely expected to follow the US FED in cutting rates in 2024.

 Therefore, from late summer, DTRE expect to see more conviction from investors as inflation and in-turn the Bank of England base rate starts to fall. As a result, UK-10 year gilt yields should also fall to c.3.5% and stabilise at that level, allowing prime yields to fall in-line with the ‘risk-free’ rate.


In terms of who will be active market participants in 2024, institutions are returning to the market after being priced out for a number of years, seeking to capitalise on the limited number of unexpectedly available core assets.


However, the US Private Equity houses, Prologis and the UK REITs will be the dominant market forces as the year progresses. Blackstone, KKR and Ares, amongst others, have all signaled their intention to deploy into the sector in 2024.

"... from late summer, DTRE expect to see more conviction from investors as inflation and in-turn the Bank of England base rate starts to fall. As a result, UK-10 year gilt yields should also fall to c.3.5% and stabilise at that level, allowing prime yields to fall in-line with the ‘risk-free’ rate."

Big Box Logistics Market Review – Q4 2023

5 Things You Need to Know About Big Box Logistics In Q3 2023

The annual summer slowdown that occurs during Q3 has unfortunately not helped in boosting this quarter’s take-up figures which reached just shy of 5 million sq ft. As a result of this year’s slowdown, occupational demand has now reverted back to it’s pre-pandemic trend line, after the Covid-induced boom.

Nine months into 2023 and take-up for Big Box logistics units over 100,000 sq ft stands at 16.7 million sq ft, down 41% year-on-year. However, as mentioned this is close to the preCovid (2009 19) average of 19 million sq ft. Measuring take-up on a quarterly basis shows that since Q1’22 take-up has averaged out at 7.5 million sq ft, similar to the pre-Covid (2009-19) quarterly average of 7.4 million sq ft.


What has caused this reversion back to pre-Covid trends? This can largely be attributed to three things.
Firstly, due to the macro environment, decision-making processes within businesses are taking much longer. That is apparent in the take-up numbers as well as current requirements. We currently have 9.2 million sq ft of space currently under offer, however, of that figure, 40% of it was also under offer three months ago when I last wrote this report.


Secondly, the growth in online retail sales has fallen back to its pre-pandemic trend after the Covid-induced spike. Online sales accounted for 24.9% of total retail sales in the UK in August 2023, down from a high of 37.2% in November 2020, however, still higher than the 19.1% seen in February 2020 and tracking the pre-Covid trendline. 

"We currently have 9.2 million square feet of space currently under offer, however, of that figure, 40% of it was also under offer three months ago when I last wrote this report."

Pure-play e-commerce retailers accounted for 57% of total retail take-up in 2021 as they rushed to deal with this new level of demand, however, since the end of the pandemic pure-play retailers have retreated and therefore demand from e-commerce occupiers for warehouses has also fallen back. This year e-commerce occupiers account for just 16% of take-up from retailers.


Nevertheless, as retail sales and consumer confidence recovers over the next 12 months and the worst of the interest rate and inflationary environment passes, we expect to see the online retail segment of the market recover also, back to prepandemic levels of around 30%.


Thirdly, despite some sporadic examples, the return of the manufacturers in a post-pandemic and post-Brexit world is yet to materialise in any meaningful way. Manufacturers are on course for their worst year of take-up since 2013 and take-up is currently 55% below its long-run annual average since 2009. The latest UK PMI data for manufacturing doesn’t point to a pick-up anytime soon given there has been a slowing in both global and domestic demand.

The DTRE Big Box vacancy rates now totals 6.2% up meaningfully from the 3.5% it was
at the turn of the year with a further 6.1 million square feet to be added in the remaining 3 months of 2023..."


Another area of the leasing market attracting some unwanted attention is the level of supply in the market.
Looking at the supply schedules, there can be no doubt also that supply has ticked up and t

he DTRE Big Box vacancy rates now totals 6.2% up meaningfully from the 3.5% it was at the turn of the year, with a further 6.1 million sq ft to be added in the remaining 3 months of 2023.


We have modelled the vacancy rate to reach a high-water mark of 6.6% if current occupier levels of take-up are sustained through the remainder of this year. However, from Q1 2024 we expect the vacancy rate to start to fall considerably given the highly constrained pipeline thereafter.


The constrained pipeline also provides investors and developers with confidence that the rental growth story can be continued. With above-target inflation expected to continue through 2024 and a relatively resurgent consumer matched against the constrained development pipeline, DTRE is forecasting average distribution warehousing rental growth of 4.3% in 2024, which is well in excess of anything else on offer in the offices or retail sectors.

After a turbulent twelve months it feels as though the investment market for industrial and logistics has at the very least steadied. Given the significant weight of global capital that is continuing to target the sector we feel confident that yields for prime assets will at the very least maintain current pricing levels and we may begin to see some inward movement from this point. At the other end of the spectrum, however, we could yet see further outward movements for secondary and tertiary assets as void and default rates will rise until mid-2024 and cap-ex bills start to mount.

In terms of the numbers, Q3 investment volumes reached just over £1.15bn, split between £630m in single-let assets and portfolios and £566m in multi-let estates and portfolios. This takes the annual total so far to just over £5.3bn – down 53% yearon-year but up 13% on the 5-year average (2016 - 20) prior to the Covid induced boom.


The biggest ‘Big Box’ deal of Q3’23 saw Bericote and JP Morgan, advised by DTRE, sell Coventry Logistics Park to DTZ Investors for £140m/4.5% in an off-market deal. Whilst the biggest openly-marketed deal saw Valor purchase Tera40, a four-unit mid-box scheme in Greenford, London for £143m/2.96% from Lothbury. Tera40 saw multiple rounds of bids and attracted significant attention from across the investor community with bids from ten separate parties, demonstrating the depth of demand for prime, logistics assets.

"Q3 investment volumes reached just over £1.15bn, split between £630m in single-let assets and
portfolios and £566m in multi-let estates and portfolios."

Other £100m plus deals saw Blackstone, advised by DTRE, purchase a three-unit portfolio from Equation and BentallGreenOak in another off-market transaction for £102m. Whilst SEGRO, advised by DTRE, sold their three-unit Javelin Portfolio to P3 Logistic Parks for £100.9m.


Yields have stabilised so far this year and the latest MSCI Monthly Index for August showed yields for ‘All Industrial’ were flat once more at 4.7% for the eighth consecutive month, whilst the industrial sector was the only sector to post positive capital growth in August, on the back of the continued rental growth story.
‘All Industrial’ rental growth is currently running at 6.8% in the year to end August, with Distribution Warehouses slightly behind at 6.4%. Whilst rental growth will continue to cool from the extraordinary high of 14.2% seen in August 2022 we continue to expect the sector to deliver ‘real’ rental growth. DTRE are forecasting average distribution warehouse rental growth of 4.3%, with rents being supported by the declining vacancy rate and recovering macro-economic outlook through 2024.
In terms of future pricing, the current economic fundamentals don’t quite stack up particularly amid the continuing sell off in bonds which is driving up yields. The ‘riskfree’ rate on offer from the UK 5-year (4.66%) and 10-year gilt yields (4.62%) is currently in-line with the MSCI ‘All Industrial’ net yield (4.74%), this is versus an historic spread of c.350bps over since the start of 2018 until the correction in September 2022.


At these metrics we will have to see a further shift outwards in yields. Whilst we don’t believe there will be any further significant outward shift for prime logistics there could be cause for concern in the more secondary end of the market. As these types of units come up for re-financing, the shift in yields and new financing rates will mean LTV covenants could be in breach and a hole in the debt package will need to be filled, or risk handing the keys back. Should distress appear then pricing will soften.


However, on the whole we don’t expect to see widespread distress. There continues to be a significant weight of global capital targeting industrial and logistics, particularly as the sector continues to offer some of the most future-proofed assets and all without the more problematic EPC and ESG-related hurdles facing offices and retail. These factors coupled with limited stock coming up for sale will maintain values at the prime end.

"...There continues to be a significant weight of global capital targeting industrial and logistics."

Big Box Logistics Market Review – Q3 2023

5 Things You Need to Know About Big Box Logistics in Q2 2023

Six months into 2023 and whilst take-up volumes have remained robust, it is clear that we are now entering the new ‘Post-Covid’ phase. At the end of H1 2023 take-up stands at 11.6 million sq ft, down 44% year-on-year and closer to the pre-Covid (2007-19) average of 14 million sq ft (see Fig 1).


Decision-making by corporates has slowed substantially now the Covid ‘race-forspace’ has ended and as a result deals are taking longer to complete. Therefore, and in a similar vein to our Q1 report, there remains a substantial amount of space under offer. DTRE are currently aware of 9.44 million sq ft under offer across 37 separate transactions.


Transactions over 300,000 sq ft have been a contributing factor to the suppressed level of take-up for over a year now. In the eight quarters from Q2’2020 until end Q1’2022 we witnessed 100 separate transactions over 300,000 sq ft at an average of 12.5 per quarter. In the last five quarters that has slowed to just 36, a fall of 42% in the number of deals over 300,000 sq ft signing each quarter.

"Decision-making by corporates has slowed substantially now the Covid ‘race-for-space’ has ended and as a result deals are taking a lot longer to complete."

This may cause some concern given the amount of units that are either under construction or have returned to the market in that size bracket over 300,000 sq ft. There are currently 42 separate units of 300,000 sq ft or greater, totalling 17.8 million sq ft that are either available or will reach practical completion within the next 6 months, 31% ahead of the number of available units we were tracking at the start of 2020.


Given in the last two years we have witnessed 18.4 million sq ft of take-up, this would imply there’s currently almost two years of supply on the market in the 300,000 sq ft + size range.


Nonetheless, the market has largely avoided an oversupply. Brexit, Covid and then last year’s pricing correction in land values (see Fig.2) has held back over development. For that reason, from late summer this year the speculative development pipeline drops off significantly, with just 4.8 million sq ft of new units due to complete from Q4’23 onwards and this will continue to support rental growth in the sector.


Whilst rental growth has slowed in recent months, it remains firmly in positive territory and according to MSCI, distribution warehouse rents have grown at annualised rate of 8.31%, closely tracking the rate of CPI inflation in the UK, which stands at 8.7% for May 2023.


Rental growth and inflation have a strong correlation and given the stubborn nature of inflation in the UK currently, this will continue to translate through to given the continued tight vacancy rate (4.9%) and the nature of the occupiers in the logistics sector. However, as with inflation generally, we expect rental growth to fall to close to 4.5% by the end of 2023 and to 2.5% by end 2024. Moving forward the logistics sector continues to offer strong growth prospects, particularly when compared to the traditional real estate sectors of offices and retail.


The amount of occupier space currently under offer, coupled with the number of active requirements DTRE are tracking, totals close to 15 million sq ft and it is still expected that year-end take-up volumes will reach close to 32 million sq ft. That would be 19% ahead of the pre-Covid average (2007-19) as we move into the new ‘Post-Covid’ era for Big Box logistics.

"...the market has largely avoided an oversupply. Brexit, Covid and then last year’s pricing correction in land values (see Fig.2) has held back over development. "

Interest rate rises have now firmly impacted the capital markets with interest rate rises ensuring that transaction volumes are down significantly when compared to 2021 and 2022. The sense of optimism that had begun to creep into the market by end Q1’ 23 has been eroded by further rate rises up to 5% by the Bank of England. Inflation remains stubbornly high and now further interest rate rises, possibly up to as high as 6%, are now expected.


Yet volumes have reached £3.2bn across the entire sector, suggesting that the sector fundamentals remain attractive, with £1.4bn in single-let and £1.8bn in multi-let. Whilst this is down significantly on the £7.5bn witnessed in H1’21 and the £7.2bn seen in the first half of 2022, it is very much ahead of the volumes seen prior to Covid.


Indeed prior to the Covid-boom, the average volume of deals transacted in the first half of the year from 2011 to 2019 was £2.67bn, so with H1 2023 seeing £3.2bn, the sector stands at 20% ahead of the pre-Covid average.

However, that is not to say the current market is without difficulties and a degree of inertia has set in over recent weeks. There had been a limited but increasing number of motivated vendors in the market through the year. However, in the face of everincreasing debt costs, yields have had to move out and as a result there’s now a mismatch between vendor and purchaser aspirations and as a result we expect trading volumes for Q3 to be suppressed.


Prior to the recent shift in interest rate expectations the market had seen signs of life and in total £1.9bn has been transacted in Q2’23 across both multi-let industrial and single-let logistics, with DTRE advising upon a significant element in the quarter. The single largest deal of the quarter was the purchase of Trafford Park and Heywood Distribution Park from Harbert (advised by DTRE) by Blackstone for £480m, whilst Blackstone also bought the Spears Portfolio from BlackRock for £152m/5.42% NIY, for which there was a significant list of seven underbidders, demonstrating the weight of capital still sat on the sidelines trying to improve their weighting in the sector.


When focusing on the single-let market, this year has so far seen just over £500m of deals transact, with the key deal of Q2 occurring just last week with Clarion’s purchase of Phase 1 & 2 Gorsey Point in Widnes from Mirastar, advised by DTRE, for £89m.


The headlines were grabbed by Abrdn, who sold the Amazon occupied Wembley 180 to clients of Deutsche Bank for £74m/3.49% net initial yield. DTRE acted for Abrdn. Moving through the remainder of 2023, the occupational market is demonstrating a robustness that when coupled with rental growth should prove enticing to purchasers trying to access the sector.


Nonetheless, inflation and interest rates on both sides of the Atlantic, remain a significant threat to volumes. The US with CPI at 4% is significantly ahead of the UK (8.7%) in its fight against inflation. If inflation can be further tamed by the recent rate rises, then particularly in the US we could see interest rate cuts by the end of 2023 (see Fig 4). Perhaps the UK will be seen to be more competitively priced at that point.

"...in the US we could see interest rate cuts by the end of 2023 (see Fig 4). Perhaps the UK will be seen to be more competitively priced at that point."

Big Box Logistics Market Review – Q2 2023

5 Things You Need to Know About Big Box Logistics in Q1 2023

After three record breaking years, the occupational market has seen a slowdown from the pandemic induced retail highs thus far in 2023. Given the wider macro-economic picture, this is not an unjustified concern. Nonetheless, the fundamentals within the sector still remain considerably in the landlord’s favour, with supply remaining tight and record rents continuing to be set across the board, particularly for new and/or well located units. 

Take up so far this year has slowed by 19% on its pre-Covid quarterly average, with tenants signing for just over 5.6 million sq ft across twenty-two deals. However, with a further 8 million sq ft currently under offer or in solicitor’s hands then we don’t expect this slowdown to continue through Q2 (see Fig 1).


In terms of the stats, the slowdown has been most marked in the XL Boxes, with only six deals over 300,000 sq ft in Q1’23, down 50% year-on-year, holding back overall volumes, with a complete  absence of any deals over 700,000 sq ft, which had become commonplace in recent quarters. In contrast, the 100-300,000 sq ft size band has performed well and remains in-line with historic averages.


A slowdown from the pandemic fuelled growth in e-commerce was not unexpected but given the wider macro headwinds the occupational market has continued to perform well. In addition, we believe three trends will bolster demand for Big Boxes through the remainder of 2023.

"Take up so far this year has slowed... with tenants signing for just 5.6 million sq ft across twenty-two deals."

Firstly, the shift to ESG compliant buildings is no longer avoidable for many occupiers but especially those blue-chip organisations, although this trend is not limited to them, with their own ESG goals to hit. Secondly, the continued re-organisation of supply chains, including on-shoring, to protect against any future external shocks and bolster occupiers’ plans for growth, whilst thirdly, occupiers will move to address the structural labour shortages by taking newer units fit for robotics and automation.


The main story of the occupational market continues to be rental growth, with the latest MSCI Monthly Index for February showing annualised rental growth of 9.9% for distribution warehouses. This is evidenced in several deals that have occurred during the quarter.


Firstly, DPD acquired the 203,000 sq ft Big Box Bow unit in Bromley-by-Bow, London at a rent in the mid-twenties and over 40% ahead of the guiding rent when launched. TritaxSymmetry achieved a rent in the high £9s on their Symmetry Park, Bicester scheme when letting Unit C to Syncreon and there are several deals under offer in prime Golden Triangle and prime North West locations that should they complete will set a new rental tone in those locations.


One of the key reasons we continue to forecast strong rental growth, is that despite a slowdown in take-up, the vacancy rate remains tight. The latest DTRE Big Box Vacancy Rate is 4.2%, with the recent additions of some ‘grey space’ from tenants pushing up the vacancy rate in Q1, whilst, there is also c.15.5 million sq ft of new, speculative product currently under construction.


In many respects the market has avoided an oversupply by luck rather than judgement, with firstly, Brexit, then Covid and then last year’s pricing correction in land values (see Fig.2) holding back further development. For that reason, from late summer this year the spec development pipeline drops off a cliff, with just 3.5 million sq ft of new units due to complete from Q4’23 onwards. As a result, we expect vacancy to remain tight providing buoyant support to rental growth and should forecasts be proven correct and a recession is avoided then we’ll see take-up numbers reach ≈34 million sq ft by year-end, 20% ahead of its long-term average.

"The main story of the occupational market continues to be rental growth"

Driven in large part by higher inflation than most forecast and the resultant rises in interest rates, all the way from 0.5% in March 2022 to 4.25% in March 2023, the logistics investment market has witnessed a significant slowdown. As a result, volumes for the first three months of 2023 have reached just over £600m for single-let Big Boxes, with a lack of large deals, particularly portfolio and platform level deals, holding back overall volumes (see Fig 3). However, where we are seeing activity is from conviction buyers, using all cash to buy trophy assets at pricing that is back at pre pandemic levels. Those buyers may yet be seen to have been the clever investors.

Back in late January and early February there was a sense of purposeful optimism, with the FTSE reaching record highs, inflation was trending downwards, and the interest rate hiking season looked set to close out at 4% here in the UK. As vendors came to terms with their new valuations off the back of a turbulent debt market, purchasers saw opportunity in revised pricing and the shoots of a market was forming.


Fast-forward six weeks, the collapse of SVB and Credit Suisse and a hotter than expected inflation print (10.4%) for February has placed another roadblock in the way to doing deals as some investors pulled back to ensure they avoid any contagion from the banking sector. Nevertheless, this pause is proving to be temporary, and we don’t expect to see any further significant correction in pricing as a result. In fact, if anything we’ve seen prime yields harden, particularly for smaller lot sizes.

"... where we are seeing activity is from conviction buyers, using all cash to buy trophy assets at pricing that is back at prepandemic levels."

This year’s choppiness has meant that deal volumes have been down significantly so far. The year’s biggest deal year-to-date saw DTRE advise Tritax Big Box REIT on the disposal of a portfolio of three assets to Copley Point, whilst Leftfield with their two purchases of a ProDrive unit in a sale and-leaseback deal (£15m/5.6%NIY) and a Smyths Toys unit in Corby (£30m/4.55% NIY) have also been active.


Outside of the Big Box sector, Blackstone via its Mileway platform has deployed £142m into the multi and urban sector. Mileway’s purchase of the Garrison Portfolio (£46m/5.8% NIY) was its biggest purchase as Blackstone remaining unwavering in their conviction in the industrial and logistics sector.


If one phrase could summarise the first three months of 2023 it would be “access to reversion”. With the all-in cost of debt soaring to ≈5.75% for a single-let standard unit, from ≈2.5% just 12 months ago, then sales getting the most traction are those whereby purchasers can get their running yield up in the 6%’s quite quickly. Moving forward we don’t see this trend changing anytime soon, as the rental growth story in the occupier markets continues to underpin this investment thesis (see Fig 4).


One other investment theme that’s tentatively emerging so far this year has been the return of investors keen to partner with developers to undertake spec funding or forward fundings. Investors, with an eye on both future ESG risk and tenant flight to quality, are taking advantage of the attractive yield spread between taking on development risk versus purchasing standing stock, given the leasing fundamentals.


Moving forward, the next three months will see additional bumps with deal volumes remaining suppressed, as we wait for the banking sector turmoil to play out and particularly if any problems in the US office sector come to the fore. However, thereafter, inflation is forecasted to drop like a stone, interest rates won’t go any higher than they currently are and by late summer we are expecting a more normal, albeit two-tiered, market will be underway.


We expect pricing for prime located, ESG compliant assets with limited capital expenditure to trade at a premium to where they are currently valued, whilst the market for secondary assets which require significant capex to remain future proofed will have less depth.

"... inflation is forecasted to drop like a stone, interest rates won’t go any higher than they currently are and by late summer we are expecting a more normal, albeit two-tiered, market..."

Big Box Logistics Market Review - Q1 2023

My previous ‘Credible Thinking’ piece, written from my living room in the depths of lockdown #1, highlighted the incredible performance in the ‘Big Box’ (300,000 sq ft+) market since start of the pandemic. It’s safe to say, this trend has not abated in the 21 months since.

In 2021, take up in the ‘Big Box’ market equated to 29.4m sq ft, which is the equivalent of 59% of total figures for the year (100,000 sq ft +). Occupiers’ flight to ‘bigger is better’ has become very apparent as they are looking to improve their supply chains. As a result of this, there are currently only three available new build units that are immediately available to occupy over 300,000 sq ft (excluding those under offer and/or under construction).
The headline grabber of the last 18 months has been the level of rental growth that has been witnessed around the country. One of the best performing markets has been the Midlands which has witnessed an unprecedented increase in the headline rents being achieved.

Whilst proposals are being circulated ahead of these levels, achieved prime rents on new build product now stands at £8.75 psf in the ‘Golden Triangle’ which is an increase of 23% in as little as 18 months. For context, that is as much rental growth as had been witnessed in the 10 years from 2009 to 2019 and, if the growth continued on that trajectory, prime rents would be £10.75 psf by Q4 2023.
Northampton is set to break the £9.00 psf mark shortly and Birmingham should see its first double digit rent on a unit just shy of 100,000 sq ft. Once the mental barrier around achieving double digit rents starts to be eroded, we anticipate that a number of schemes will push their quoting rents upwards, in an attempt to capitalise on this sustained period of demand.
The market accepted discount in rent for quantum may and should become a thing of the past. If anything, there is a strong case to be put forward for a rental premium for those sites that can deliver larger scale facilities, few as they are. In any global marketplace, if demand is increasing for an asset (in this case a 300,000 sq ft + ‘Big Box’), and the availability of said asset is the most depleted, the fundamentals of demand v supply dynamics would dictate a premium should be paid for that asset. Watch this space.
Clearly there are currently other factors at play than just the strong depth of occupier demand and dwindling supply. Inflationary pressures and long lead times on building materials are having an impact
on build costs. These cost increases have to be absorbed in the deal terms, whether that be increasing the rent, a shortening of incentives or an increase in the lease term. Realistically we are seeing all three
metrics sway in favour of landlords. Especially those who are willing to be more robust on leasing terms.
With a UK vacancy rate of 2.6%, the lowest ever recorded, this upward rental trajectory is set to continue in the short to medium term. Whether it continues as the pace of the last 18 months is yet to be seen, but what is clear is that rents aren’t going to plateau at their current levels any time soon. The extent of occupiers demanding space is as diverse as it’s been for a long time and we are seeing less and less mention of and reliance upon, the ‘Big A’.
As long as the healthy level of demand we are seeing across all of our enquiry schedules continues in a similar vein, this market still has a healthy amount of growth yet to be unlocked.