Retail dominated Q1 take-up, driven by Online Retail (26%) and the Grocery sector (21.5%). The rise of e-commerce continues to act as a key driver of demand, and social distancing measures related to COVID-19 are likely to only accelerate the consumer shift to online channels.
For the grocery market, which previously had low online penetration, the surge in demand and supply chain disruption caused by the virus has reinforced space requirements, both for short-term needs and long-term strategic aims.
The average unit size in Q1 increased to 368,045 sq ft, compared to 240,716 sq ft in Q1 2019. Major deals include Aldi's plans for a 1.3m sq ft facility at Interlink South in Leicestershire, and Amazon acquiring the Follingsby Max site in Gateshead which has planning permission for a bespoke distribution centre of up to 2.0m sq ft.
Some occupiers will be reluctant to commit to new leases during this period of uncertainty, and a slowdown in Q2 take-up is a possibility. The underlying demand-side story remains strong however, given ongoing supply constraints and the need for businesses to adapt to meet changing consumer preferences.
In addition, COVID-19 has led to a marked rise in short-term space requirements from supermarkets, data centre operators and pure play online retailers, although many of these have been absorbed into existing capacity.
We expect further supply increases over the near-term, as some occupiers rationalise their existing space amid cashflow pressures related to COVID-19, leading to an uptick in second-hand or under-utilised space coming to the market.
However, today's industrial & logistics sector is in a stronger position to deal with an economic downturn. The occupier base has hugely diversified since the GFC, thanks to the rise of online retail. This should help demand recover quickly, preventing any major rise in supply and vacancy rates over the medium-term.
In terms of new supply, 2.1m sq ft of speculative space reached practical completion in Q1, with a further 5.2m sq ft either under construction or due for delivery over the remainder of 2020.
Some of these developments may see completion dates slip to 2021, as construction activity has been delayed partly due to COVID-19. While much has now remobilised, new build delivery in 2020 is likely to fall short of the 9.2m sq ft recorded in 2019.
Rental growth was moderating prior to COVID-19, and this trend will continue. However, the constraints on new development, coupled with tight supply in most regions, will offer upside support. Incentives are more likely to be the first thing altered by landlords to keep occupiers on track through this period of uncertainty.