Take up of UK warehouse space is expected to return close to pre-pandemic levels, according to global property consultancy Knight Frank. Leasing volumes for units larger than 50,000 sq ft are forecast to total 36 million sq ft in 2023, compared to 46 million sq ft in 2022, with 6.9 million sq ft transacted in the first quarter. This forecast is in line with the pre-pandemic 5-year average of 35 million sq ft.

The change is largely a result of the slowdown in expansion amongst online retailers and distribution firms, who scaled their operations at unprecedented levels between 2020 and 2022 on the back of surging ecommerce growth. Last year saw online retailers account for 20 percent of warehouse take up, compared to 36 percent the previous year; which was an all-time high.

The trend reflects national ecommerce penetration levels, with online sales accounting for 26% of total UK retail spend in 2022, compared to 30% in 2021. Going forward, online sales volumes are forecast to rise to £147 billion by 2027, which will still see the sector crate an additional 45 million sq ft of warehousing space requirements over this period.

Evolving occupier dynamics

Last year manufacturers accounted for a quarter of all take up and this has continued into 2023, with manufacturing firms representing 26% of all floorspace taken in the first quarter, compared to 19% in 2021 and just 10% in 2020. The past 12 months has seen take up from food manufacturers, including vertical farming operators, breweries and wholesalers, up 94% compared to the previous year. Jones Food Company opened a facility near Bristol last year, with the 148,000 sq ft industrial unit now the UK’s largest vertical farm. In London, Harvest London committed to 139,977 sq ft at Prologis Park Beddington, Croydon, for an advanced indoor farm growing vegetables for customers in the food service and retail sectors.

Similarly, demand from advanced manufacturers, including engineering, electronics and automotive and aerospace firms, accounted for just over 10% of annual take up between Q1 2022 and Q1 2023.  Meanwhile, take up from life sciences manufacturers rose 193% in the past 12 months, with Siemens Healthineers taking just over 600,000 sq ft in Bicester, Pelican Healthcare taking 82,000 sq ft in Cardiff and CMR Surgical taking 75,000 sq ft in Ely, near Cambridge all in the first quarter this year.

Development pipeline remains constrained

Approximately 33 million sq ft of space has already completed or is expected to complete in 2023. However, new development activity is falling due to a combination of inflated build and financing costs and softer exit yields. There have only been four new development starts this year, compared to 23 in the same period last year, pointing to limited availability towards the end of 2023 and into 2024. Vacancy rates are near an all-time low of just 3.3% and will remain below frictional levels between around 5%-8%, contributing to continued rental growth, with a rise of 4.3% anticipated in 2023.

Claire Williams, Industrial & Logistics Research Lead at Knight Frank, commented: “We believe the  temporary pull back amongst online retailers will be cushioned by an increasingly diverse range of occupiers, including food producers, manufacturing firms, data centres and film studios. The market has already witnessed this over the past year, with more companies reshoring to ensure compliance with post-Brexit legislation and avoid costly tariffs or disruption. Manufacturing and distribution companies are also localising supply chains, to meet sustainability targets and transition away from a dependence on low cost labour toward more capital-intensive, automated facilities.”