Don't Worry, Inflation Won't Blow Up The Sheds Market

It is easy to see how the world of logistics could suddenly feel fragile.

A severe slump in consumer spending could, in theory, take the heat out of the UK’s super-hot warehouse property sector. 

Last week's Spring Statement revealed that UK inflation is now predicted to peak at 8.9%, roughly double the official forecast last autumn. UK GDP growth is expected to reach just over 3%, approaching half the earlier forecast. Both mean a cost-of-living squeeze that could choke the life out of retailers and third-party distributors who already face steeply escalating input costs.

But don’t panic. Wise heads in the logistics property business said inflation will not blow a hole in the shed scene.

Trammell Crow UK Head of Logistics Mike Forster said that input costs gave him pause for thought, but he was still projecting rental growth.

“The fundamentals of the warehouse property sector are still quite strong,” he said. “Costs are rising, but consumers will still need to buy, and someone will still need to supply, and there’s such a divergence between supply and demand, and so much capital coming into the sector, that I can’t see that changing.” 

Rental growth will slow, but in line with existing expectations, no faster, agents told Bisnow. Nothing dramatic is going to happen, Knight Frank Head of Logistics Charles Binks said.

Comparisons with the last time the shed scene took a serious jolt — during the Great Financial Crisis — are not helpful.

“Who knows what’s coming in the future, but we are seeing great depth of demand for new floorspace, unlike 2007-8 when the depth of demand just wasn’t there," he said. "We didn’t have four or five occupiers looking closely at every available building, and we do now.

“There’s a lot of moving parts in the warehouse property business and I don’t think you can pick one thing out and say it will change everyone. For instance, consumers facing increased cost of living might shop online more, not less, because they can find better prices. And even if online retail penetration is out by a factor, it is still going to grow significantly at a time when vacancy rates are at historic lows.”

Vacancy rate estimates are notoriously variable, but most agents put the figure between 2% and 3%.

“Yes, inflation is a risk for occupiers but won’t derail the market," Binks said. "And on rents, this is simply a factor that’s already been taken into account in forecasts. I doubt it will make rental growth this year shallower than it was already going to be, because demand still outstrips supply.”

Knight Frank Industrial Property Analyst Claire Williams conceded there could be turbulence, but shared Binks’ overall diagnosis.

“We may see inflationary and supply chain pressures slow down development, some development schedules will get pushed back, but that ought to support rental values, rather than hitting them, because it will limit the supply of new warehousing even further,” Williams said.

And whilst occupiers face a raft of inflationary pressures on labour costs, energy, business rates and supply chains, property costs are a microscopically small part of their input costs: perhaps 1% in some cases, Binks said.

Knight Frank’s 2022 UK Logistics Market Outlook suggested that industrial rents are expected to rise an average of 4.2% per annum over the next five years, compared with 1.7% per annum for offices and 0.6% per annum for retail. The sector’s strong occupier market fundamentals and persistent growth in online sales are expected to continue to drive rents.

Investors are betting on continued growth by increasing fund allocations to the sector. Thirty-nine point seven percent of the UK All Balanced Property Fund Index was invested in the industrial sector in Q4 2021, up from 33.2% in Q4 2020 and just 16.4% nine years ago.