Industrial & Logistics Market Outlook: Five Predictions for 2025
4 minutes to read
1. Investment Volumes Will Improve
Positive investor sentiment and a broadening buyer pool, along with lower debt costs, will lead to a rise in industrial investment volumes in 2025. Investors continue to favour the sector due to sectoral tailwinds, and with pricing now showing signs of improvement, robust prospects for rental growth, and reduced borrowing costs, 2025 should see stronger levels of investment activity, particularly from investors focused on core assets.
2. Modest Yield Compression
As borrowing costs fall and gilt yields compress, we expect some modest yield compression. Prime London industrial estates’ equivalent yields are now back below 5.00%, with two recent transactions evidencing pricing at around 4.75%.
Ten-year gilts are forecast to fall next year (and beyond), which should put downward pressure on real estate yields. Oxford Economics forecasts ten-year government bonds to yield 4.16% by the end of 2025, reducing further in 2026/27. This compares with 4.29% at present. If inflation falls more quickly than expected, gilt yields could compress further, enabling more significant yield compression for industrial property. Conversely, there are downside risks to the forecast—an increase in trade tariffs would prove inflationary and could mean gilt yields and property yields remain elevated.
3. Rental Growth Will Continue to Slow
The pace of rental growth has been slowing since peaking in 2022. In August 2022, the MSCI monthly index registered average annual rental growth of 13.2%. The latest reading is 6.1% (year to the end of October). RealFor forecasts average annual rental growth for the UK at 5.5% for the 2024 calendar year, slowing to 3.7% in 2025.
Although rental growth is slowing in the industrial sector, expectations far exceed those for other sectors, with 2.4% average rental growth forecast for UK offices next year (RealFor).
4. Occupier Market to Remain Stable
Occupier demand in 2025 will remain broadly consistent with the levels seen this year.
The UK’s occupier market is highly diverse and, as such, demand for space has a relatively broad base. However, different segments of the occupier market have different drivers and move at different speeds. We will see some shifts in the types of demand and the location preferences of occupiers as a result.
The occupier market remains supported by strong fundamentals, including continued expansion of the e-commerce market and ongoing risks to international supply chains, which are prompting increased use of local suppliers or a need to hold additional stock. These trends continue to drive expansion prospects for the medium to long term. However, in the near term, most operators will face rising operating costs in 2025, with energy and labour costs both set to rise. This may prompt some firms to put their business expansion plans on hold.
As operators grapple with rising costs, we may continue to see cases of business restructurings and bankruptcies. However, for some operators, these increasing costs will boost appetite for automation and efficiency improvements. In some cases, implementing these improvements may require upgrading their facilities.
An improving economic picture, with rising real wages, should provide a boost to retail sales volumes. Oxford Economics forecasts 1.8% growth next year. However, unemployment is also anticipated to rise, and this, coupled with weaker consumer confidence, could undermine expectations for growth.
We will see 3PLs more active in the market. After muted activity post-pandemic, there are currently several sizable 3PL requirements. Demand from this segment of the market will, in part, be driven by expansion in retail demand, as well as the drive for efficiencies, ongoing supply chain threats, and the desire to outsource supply chain operations where risks are high, and margins are low.
5. Vacancy Rate Will Top Out
The vacancy rate has been rising since 2022. It was 3.3% at the end of 2022, rising to 5.5% at the end of 2023, with the latest Q3 2024 figure at 7.2%. The rate at which it is increasing has started to slow. While we expect it to increase further, we anticipate it will top out in 2025 before starting to moderate.
Development activity has been slowing. In 2022, 37 million sq ft of space was completed; this fell to 33 million sq ft in 2023, and we expect just over 20 million sq ft to complete this year. As a result of slowing development activity, the amount of speculative space delivered to the market vacant will moderate.
While development completions are contributing to vacancy in some markets, most of the space currently available is second-hand. During the pandemic, some e-commerce retailers overexpanded. The rapid upscaling in operations led to heightened demand (either through direct leases or 3PL contracts), particularly for new, best-in-class XL warehouse buildings, following a period of “right-sizing”, some of these facilities are now fitted out and available. The availability of modern, second-hand space will appeal to many occupiers, particularly those motivated to move and save on fit-out costs.