Reasons to be cheerful but 2025 expected to follow similar path to 2024
In our recently released report, Big Shed Prospects, we examined a bullish and bearish case for the market and concluded that, overall, the market remains in a transitionary phase that is taking longer than anticipated to balance out. However, as our data shows, occupiers remain active but driven by more strategic reasons than business growth alone. In turn, this is leading to deals taking longer to complete and often resulting in older space returning to the market, therefore having a negligible impact on net absorption and overall vacancy.
The latest reading from the Savills Requirements Index shows an 11.3% rise in nationwide requirements in the fourth quarter of 2024, with a notable uptick in London and the South East and the nationwide 100,000–200,000 sq ft bracket. The index is a reliable way to forecast future take-up and is suggesting that H1 2025 should see take-up in the order of 16–18m sq ft, which would exceed the first-half figures for both 2023 and 2024.
Contingent to that happening is a rise in the level of BTS activity in the market as such deals are often larger and have an outsize impact on the overall take-up levels. Whilst there are many BTS requirements in the market, we remain concerned regarding occupiers' ability to fund the CapEx associated with the fit-out of such units. That being said, one possible outcome of the recent government budget, which increased the costs associated with recruitment, could be an increased appetite for warehouse automation as the return on investment period decreases.
One area of the market that may see outsize growth in 2025 is schemes located in Freeport areas, given the favourable position on national insurance and business rates. Occupier demand has thus far been limited in these locations, but we expect that position to change as occupiers get to grips with the financial implications of locating in one.
Given the short-term outlook for supply, take-up and absorption, our latest rental growth projects have moderated. However, at a national level, our baseline model is still projecting solid growth of 3.5% per annum which comfortably excels the pre-Covid ten-year average of 2.6%. All things being equal we expect 2025 will play out in a similar fashion to what we have seen in 2024, with a strong underlying level of strategic requirements in the market, but due to their nature, taking longer to conclude and possibly not having the downward impact on vacancy that many in the industry would hope for.
BUILD COST AND PROGRAMME
Whilst 2024 take-up has remained broadly stable, we have witnessed a substantial fall in the level of BTS and the number of speculative announcements in the market. Whilst the Savills Project Management team continues to work on both BTS and spec projects, the overall level of warehouse construction continues to drop from the high watermarks of the pandemic period.
This is reflected in the latest data from the Savills ProgrammE and Cost Sentiment Survey (S.P.E.C.S), which has shown that build costs in the logistics sector have started to fall from recent high levels. However, any case-by-case falls are only marginal as the overall construction market remains in a situation where overall costs and programme timescales are rising. Indeed, after six quarters of our S.P.E.C.S index either falling or remaining stable, the most recent data points into the index have pushed the overall score to 19, the highest level of the index since Q2 2023. For the most part, however, we are not witnessing dramatic rises in build costs but more stable and predictable rises in line with the wider inflationary environment in the wider economy.
Moving forward within the industrial and logistics sector, there remains the potential for competitive tendering as contractors look to fill their order books which, in turn, could put downward pressure on build costs.