Following the previous quarter when a quarterly record 14.8m sq ft was leased, occupier appetite for best in class units continues to translate into strong momentum in the market. The 10.6m sq ft total for Q1 2022 is 28.0% below that remarkable milestone set in Q4 2022, yet the figure stands alone in terms of activity in the first quarter since the onset of the pandemic.
As national restrictions eased last year it has become clear that adoption rates for online spend have stabilised and become entrenched. Expectations are that this spend will stabilise at 26.0% throughout the remainder of 2022, informing us that more warehouse space will yet be required to satisfy demand. Consumer behaviour has changed irrevocably with initial forecasts suggesting that online spend could reach 38.0% by 2026 (Edge by Ascential).
Third-party logistics operators accounted for 32.0% of take-up in the first quarter of the year, high street retail occupiers commanding 28.0% and online retailers signing for 9.0% of all activity in square footage terms.
Some 36.0% of space signed for in the opening quarter came from build to suit opportunities, up from 13.0% in the previous calendar year, something we expect to see as the amount of available standing stock dwindles. Challenges do exist; economic uncertainty and the cost of living crisis will dampen disposable consumer spend and rising energy prices and supply chain issues present their own structural challenges for the sector.
As we move into a third year of expected strong take-up, the year a shortage of supply of standing stock is evidently manifesting. A consequence of such a sustained period of occupier demand is that there has been a massive 50.0% drop in available space on the market since just before the pandemic (33.6m sq ft in Q4 2020).
There remains an acute shortage of new units coming to market. BNPPRE analysis shows that the amount of newly built stock as a percentage of all supply stood at 32.0% at Q1 2022, the five year annual annual average is 42.0%.
The tightening supply of best in class units combined with enormous requirements means that occupiers are investigating second-hand opportunities. Since Q1 2021 there has been a 23.0% reduction in the amount on new build space available, but during that same period the second has market had shrunk by 55.0%.
Rental growth continues to register positive increases thanks to positive absorption rates. Twelve-month rental growth to the end of March averaged 11.4% according to MSCI.
There is 11.9m sq ft of space in the pipeline for delivery this year, with 1.4m sq ft currently under construction. Increasing costs and a labour and materials shortage have meant some projects have been delayed. Given that shortage of supply we will see more occupiers committing to pre-lets on built to suit sites.