Reflecting on the UK Industrial and logistics market in 2024 & looking forward to 2025
2024 – The market in numbers
4 minutes to read
The industrial property market showed improved levels of activity in 2024, with higher volumes of transactions in both the occupier and investment markets. Annual investment volumes were 29% higher than in 2023, while occupier take up was 20% up year-on-year.
While activity in the occupier and investment markets has picked up, development activity remained weak in 2024, with completed floorspace 40% lower than in 2023. Despite lower levels of development, the vacancy rate rose throughout the year. From 5.5% at the end of 2023, it rose each quarter in 2024, reaching 7.3% by year end.
Average market rents rose an average of 5.5% in 2024. This compares with rental growth of 7.6% in 2023. While growth in average rents is slowing, prime rental growth has been sustained, with 7.2% growth recorded in 2024, compared with 7.4% in 2023 (units over 50,000 sq ft).
These are headline rents however, and do not reflect changes in incentive packages. Analysis of rent-free periods show that they averaged 8.8 months for each ten years of lease agreed in 2024, up from 8.0 months in 2023. While incentive packages are becoming more generous, they remain low compared with historic levels, in 2019 the average rent-free period was 11.0 months for each ten years of lease term.
In 2024, distribution firms remained the dominant source of demand in the occupational market. They accounted for 38% of the market, taking 8% more space than they did in 2023. However, it was manufacturing firms that contributed the largest rise in take up in 2024, taking 36% more space in 2024 than they did in 2023. They accounted for 29% of space taken up in 2024 (in units over 50,000 sq ft), up from 25% in 2022/23.
Despite interest rates remaining high, investors have pursued some large transactions in 2024, boosting both total volumes and the average lot-size of transactions. The average lot-size for transactions in 2024 was £42 million (including portfolios), compared with just £22 million in 2023. A number of large, single-asset transactions boosted the investment total for 2024 and resulted in a rise in the average lot-size of transactions.
Private capital as well as listed property companies and REITs, both increased their share of investment in 2024. However, overseas capital, and in particular, US private equity, remains the key driving force in the market.
Industrial yields showed some signs of compression throughout 2024, Knight Frank’s yield guide shows prime distribution yields (based on 15 years income and open market rent reviews) at 5.25% at the end of 2024, compared with c.5.5% at the end of H1 2024. Meanwhile, average yields for transactions were 6.2% in 2024, compared with 6.7% in 2023, which may reflect some compression, as well as some a shift in investment style/investor composition, with an increased appetite for core assets, as well as the increased activity from private capital.
Look ahead to 2025 and beyond
In 2025, the UK's logistics property market is expected to experience steady investment and occupier demand, with a focus on high-quality developments and a moderation in rental growth. Investors and developers are likely to prioritize strategic acquisitions and developments that meet evolving occupier needs and sustainability standards.
In the near-term, the logistics market (along with the wider economy) faces some challenges and uncertainty. A stalling domestic economy and concerns about future cost increases are weighing on business sentiment. Current global market conditions, continued geopolitical uncertainty and potential policy changes following the US elections also threaten to dampen growth prospects.
However, despite some risks for the short-term outlook, the long-term structural growth prospects for the sector are robust.
The post-pandemic correction in the online retail market is now behind us, with online penetration rates now showing an upward trend once again. As a result, online retailers and distribution firms are switching back into expansion mode as they plan for future growth.
There are also positive signals for the long-term growth potential in the manufacturing sector, as highlighted in our recent Future Gazing Research. This is particularly true of advanced manufacturing sectors, manufacturing linked to defence and aerospace, the green energy transition, and pharmaceuticals. The growth of these sectors will have implications for demand, in terms of preferences for location and unit specifications.