London and the South East are set to run out of logistics space in five months if take-up rates persist, according to a new report by London First and CBRE.
The findings show that the vacancy rate in the South East has compressed to just under 1.8% of total stock, having previously stood at 6.2% at the end of 2019. Take-up in the region exceeded 8m sq ft last year, with the majority comprising speculative developments.
The report, entitled Demand for commercial property in London: what does the future hold?, found that 75% of all deals closed between Q2 2020 and the end of 2021 were for smaller big box warehouses measuring between 100,000 and 300,000 sq ft, as the amount of available industrial land in and around London continued to shrink.
Prime logistics rents in London are forecast to continue increasing over the next five years at a 4.3% annualised rate.
To tackle these challenges, the report said local areas should be encouraged to embrace last-mile delivery uses on or near the high street, and that the government should join up its approach to housing growth with the need for more industrial space.
Paul Weston, senior vice president and regional head of UK at Prologis, said: “There needs to be a better understanding of the vital role the sector plays and ensure there is a joined-up approach between housing growth and the need for more industrial and logistics space – given the nature of our economy, you can’t have the former without the latter. This may require some bold thinking, such as supporting logistics development on poor-quality greenbelt land.”
Office demand to grow
The research also shows that central London office take-up is set to remain at 13.5m sq ft per year, above the 10-year average of 12.3m sq ft. Despite a potential 9% reduction in office space as a result of hybrid working, researchers said businesses are seeking bigger spaces in the capital.
Transactions for spaces measuring more than 50,000 sq ft accounted for 38% of total take-up in 2021. Nearly three-quarters of those were within newly completed buildings or were deals for prelet space.
Take-up is expected to total 67.4m sq ft in the four years to 2026. Activity from tech occupiers is expected to continue rising, along with sectors such as life sciences, fintech and gaming.
Prime rents across central London’s submarkets are predicted to surpass pre-Covid levels in the run-up to 2026.
Richard Smart, managing director of London at CBRE, said: “London continues to hold its allure for occupiers, which has been reflected in the strong uptick in the leasing market at the end of Q4 2021.
“The trend towards occupiers seeking the best-quality and amenity-rich space is holding strong as businesses seek to magnetise the office. Pressure remains on the property sector to take action and actively decarbonise the built environment, which many businesses are building into their ESG strategies.”
The report suggests that a “flexible application” of planning policy and property taxes could prevent secondary office stock from remaining vacant, as well as tax incentives to encourage retrofitting to meet sustainability requirements.
Paul Williams, chief executive of Derwent London, said: “The days of [a] ‘let and forget’ relationship between landlord and tenant are long dead, and closer relationships with our customers are imperative.
“We are looking to provide more long-life, loose-fit, low-energy buildings that are adaptable, all driven by the broader challenge of addressing the climate emergency.”
Recalibrating retail
Separately, researchers said the total volume of retail floorspace in the UK will need to decrease by 16% to reach the average sales densities seen in 2015-2020.
The report calls for further action to make the high street a more positive place to work and enjoy, including the creation of meanwhile use registers for start-ups and SMEs.
Jonathan Seager, director of place at London First, said: “The pandemic has changed much about how we use space in the capital, but the demand for high-quality commercial property still remains. While market forces will direct much of what happens in terms of future investment, there is a role for public policy to navigate, ease and indeed direct change to support London’s economic recovery.
“A potential glut of old office space is both a challenge and a great opportunity, but only if both national and London government can help smooth the way for investors to breathe new life into these assets.”
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