Logistics sector – 2024 outlook

At the beginning of 2024 the outlook for the logistics and the supply chain sector was a positive one. There is no doubt the last 5 years for this sector has been exceptional. The consumer landscape has completely changed with a rise in the demand for online services and the increase in requirements for same day and next day delivery.

Logistics market outlook

Market predictions for 2024 suggest that we will see an increase in rental values for the logistics and the supply chain sector and there will be less availability of sheds towards the end of 2024 as demand increases. There is further commentary to suggest the leasing market in the sector will have a high focus on grade A space. In Savills Big Shed Briefing report, it was suggested that 2023 saw 72% of leasing deals related to grade A space. The demand for grade A space appears to be one of the key reasons for rental prices increasing as companies fight to meet their net zero and energy efficiency targets going into 2025.

Global logistics

There are, however, global economic influences which need to be considered as part of this outlook. The world has already seen distribution concerns as a result of the increase in piracy in and around Yemen, along with the restrictions in the Suez Canal. These influences have already impacted the sector, with shipping companies rerouting trade ships via South Africa which has resulted in the cost of shipping increasing dramatically.

It is no surprise that the uncertainty and increased vulnerability of shipping for companies has created an increase in companies’ reshoring, nearshoring and/or onshoring in the hope of reducing transportation costs and import and export costs. There are suggestions that build-to-suit warehouses are now in less in demand as warehousing space has continued to grow and, given the variety of sizes and scales available, there is now a suitable range for various companies. It could be argued, however, that the UK has seen a rise in demand for build-to-suit warehouses since this has allowed companies to create, build and invest in technology and robotics to facilitate the demand in response times to consumers.

Logistics sector investment

The cost of development and investment in the logistics and the supply chain sector is another key issue to note. The uncertainty of inflation and the holding and dropping of interest rates by both the Federal Reserve System and the Bank of England has hindered the growth of the sector for some time. As inflation falls in line with expectations, there is hope that interest rates will soon decrease which in turn will allow borrowing and investment to increase. We saw the Bank of England hold the interest rates again last week which could well drive further uncertainty for the sector.

Legals

From a legal perspective, flexibility is key for landlords when agreeing terms for the logistics rental market. The flexibility will come around assignment and underletting provisions, as logistic and supply chain tenants might be looking for the ability to change and refocus their businesses should they become affected by any of the above-mentioned concerns. We have seen a rise in underletting provisions allowing flexibility to a tenant for the underletting of part, and/or sharing with a group company in recent years. In the same vein, we are also considering use clauses within leases and whether landlords can be flexible as to the use of a property at the time the lease is completed and in the future. 

The fit-out provisions of a lease are another consideration for any landlord as the effect of upgrading a property to become more energy efficient will suit both landlord and tenant. However, a landlord may need to consider having robust reinstatement provisions as many tenants will require bespoke fittings that are unique to their business which may not be readily transferable.  

We are also looking more generally at default interest rates within leases, the effect of those rates in the longer term and what is reasonable to expect in such an unknown market..

Conclusion  

Overall, it will be interesting to see how the logistics and the supply chain sector develops in 2024 and whether there will be a rebalance in the demand for space in terms of rental value and the availability of good quality sheds. There is clearly an overall business requirement for energy efficient properties across every sector and the logistics sector is no different. The perception that build-to-suit warehouses are now less in demand will also be a key observation to watch, as many companies appear to be thriving from counterbalancing the costs of technology and robotics with rising employee wages. Further, it will be intriguing to see if the Federal Reserve System and the Bank of England set out their response to inflation rates in the next few months to calm markets generally, or whether this will continue to add further dimensions to an already dynamic logistics and the supply chain sector.

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