Cushman & Wakefield RETHINKING: The Shape Of Real Estate 2040

QUANTIFYING THE SPATIAL REQUIREMENTS FOR THE UK’S FASTEST GROWING SECTORS 2 0 4 0

FASTEST GROWING SECTORS

(RE)VOLUTION

QUANTIFYING CHANGE

CARE HOMES

DATA CENTRES

HOTELS

LIFE SCIENCES

LOGISTICS & INDUSTRIAL

PBSA

PRIVATE RENTED SECTOR

RETAIL WAREHOUSING

SELF STORAGE

SENIORS HOUSING

(RE)VOLUTION

CHANGE

REAL ESTATE IS IN CONSTANT SLOW EVOLUTION.

We are currently in a period of significant change. The turbulence of the last few years has exceeded that of the past 20, if not 40 or 60. This has been driven primarily through Brexit, the impacts of the pandemic, wars with deep global geopolitical entanglements and a belated global reaction to climate change; in turn impacting supply chains, inflation, monetary policy and new standards and routes towards decarbonisation. Subsequently, these changes and events will drive our places and cities to evolve, firstly through consumer and occupier decisions and then in turn influencing investor and developer activity. Even without ‘once-in-a-lifetime’ events, behaviours change. The most noteworthy impact of behavioural change for real estate in recent years, has been seen in logistics and industrial demand and subsequently supply. The reversal of its trajectory c. 2017/18 was in direct contrast to the demand for retail space, as consumers changed the way they bought goods. Similarly, affordability constraints particularly in London and the South East as a result of a growing population, shrinking household size and low levels of new supply have all underpinned consumer and subsequently investor demand across the residential private rented sector (PRS). Most recently and most pertinently, the pandemic-related impacts of the changes in working behavior have influenced office occupational demand – as a quantum, but also with regards to quality, type and location. As a result, not only has investor appetite for previously desired asset classes diminished (and vice versa), but investor optionality has multiplied. Even in cases whereby that evolution is marginal – as an example, historically life sciences businesses were until relatively recently confined to science parks, and now have a much wider real estate base from which to choose – these decisions are often born out of occupier choice and can have a significant impact, not only for users, but also on our cities, places and of course subsequently investor choices. This is something we analyse in detail, across FUTURE OF CITIES.

Consumer demand for the built environment can change quickly, yet real estate’s ability to react to this change can be slow. As a result, supply and demand are often mismatched. Even so, over time, the make-up of our real estate gradually evolves. Not only in terms of supply and demand, but at the margins, where real estate decisions happen. This impacts scale of development (or demolition); changes of use; occupier and investor demand and of course; the proliferation of new forms of real estate, new operating models, and new investment options.

DARYL PERRY Head of Research & Insight

RETHINKING: THE SHAPE OF REAL ESTATE IN THE UK

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UTION

REVOL

REVOL

DEMAND DYNAMICS

This report takes into account the behavioural, technological and

demographic demand-led drivers that will determine UK real estate requirements over the long term, highlighting the top 10 fastest growing sectors in the period to 2040. Understanding future real estate requirements through demand-led variables can identify imbalances in the UK real estate portfolio. Projecting forward, these imbalances can help those shaping the future of our cities – investors, developers, public bodies – to allocate land and resources to help satisfy future pools of demand, while reallocating away from areas that are expected to shrink. The considerable capital and carbon invested in existing property means that this is of considerable value in avoiding downside risk, as well finding repurposing and repositioning opportunities. To achieve this, we have produced a sector-by-sector outlook using a range of demand-led drivers to assess the trajectory of required supply over the long term, ultimately seeking to ascertain what sectors will experience the strongest growth through to 2040.

The shape of the real estate in 2040 laid out in this report, is also dependent on supply-side factors including the planning system, building regulations, sustainability performance requirements and land availability. These will react to the evolving demand landscape, as well as wider economic and political developments, and will define what proportion of the required space gets delivered. The outlook presented in this report should be taken in the context of these considerations.

RETHINKING: THE SHAPE OF REAL ESTATE IN THE UK

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QUANTIFYING CHANGE

FORCE

DIRECTION

IMPACT

CERTAIN

M

H

ECONOMY

MULTIPLE CYCLES / LOW RATES / SKEW TO THE OLD / STRUCTURAL SHIFT

L

H

L M

M

M

POPULATION

GROWTH SLOWING OR NEGATIVE / AGEING / INORGANIC

L

H

L

H

THE PROCESS

H

L

URBANISATION

SLOWING OR NEGATIVE FOR LARGE CITIES, INCREASINGLY YOUNG

L M

M H

M

M

MOBILITY

PT GAIN SHARE / LONG LEAD FOR INFRA / FINE-GRAIN INNOV / MAAS

L

H

L

H

In constructing a view for the future real estate landscape, we applied the 12 key forces identified within the our Future of Cities vision that will underpin structural changes through to 2040. The table on the right lists these forces and assesses relevant factors, and then makes an assessment of the potential impact to status quo and the certainty with which we can judge the outcome. We bake in ‘high impact certainties’ of environment, automation and social change into our hypothesis. This forms our framework for modelling forward future real estate requirements across the UK.

H

H

AUTOMATION

TECHNOLOGICAL UNEMPLOYMENT / NEW ROLES / PRODUCTIVITY

L M

L M

H

L

VIRTUALISATION

E-COMM / WFH / LEISURE EXPERIENCES / AUGMENTED

L M

M H

M

L

NEW TECH

5G / IoT / CLOUD COMPUTING / BIOMETRIC

L

H

M H

M

M

HEALTH

COVID / NEXT COVID? / ANTIBIOTICS / LATER LIFE CARE / OBESITY

L

H

L

H

H

H

ENVIRONMENT

WARMING / FLOODING / SOCIAL RESPONSE / NEW ENERGY

L M

L M

H

H

SOCIAL

YOUNGER FOR LONGER / RENTING VS BUYING / DIVERSITY

L M

L M

M

M H

SOCIAL JUSTICE

ACTIVISM / CORPORATE ETHICS / MINORITY REPRESENTATION / EQUITY

L

H

L

M

M

POLITICS

EASTERN SHIFT / BREXIT / POPULAR POLARISATION / PROTECTIONISM

L

H

L

H

RETHINKING: THE SHAPE OF REAL ESTATE IN THE UK

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QUANTI

FYING

CHANGE

THE RECENT PAST

TO 2040

10 FASTEST GROWING SECTORS

Between 2005 and 2023, the quantum of real estate across England and Wales increased by 12% against a backdrop of numerous property cycles, alongside population and economic growth of 13% and 24% respectively. This time period was also punctuated by a series of negative shocks - the Global Financial Crisis (GFC), Brexit, COVID-19, which impacted the demand and supply of real estate. Offices and retail were the primary growth sectors, at the start of this period, both increasing by 6% from 2005 to 2015. However, since then, behavioural changes in the way we shop has spurred a growth in logistics and industrial stock amounting to 4% from 2015 to 2023, despite having previously seen floorspace (particularly in urban areas) eroded. The expansion in the housing market, while not matching demand, has been significantly stronger and more persistent, amounting to 15% growth from 2005 to 2023.

Going forward, despite projections of a more subdued rate of economic and population growth, the requirements for real estate continue to be significant. This will be fundamentally driven by behavioural and demographic change as a result of technological advancement, demographic shifts and an evolution of the standards and requirements of our real estate. Based on our analysis of demand-side drivers, by 2040, we expect to see a requirement for additional real estate across our commercial and residential stock to the tune of 11% by 2040. However, where those requirements lay will be determined by sectoral differences as covered below and in detail later in our report. Our projections find that annual increases in the requirements for life sciences, hotels and logistics and industrial sectors range between 2.6% and 0.9%; while the largest requirements for additional stock as a proportion of existing stock are likely to be in those focused towards housing an ageing population. Our projections for care homes are for annual growth of 2.2%, while one scenario for seniors housing could be as high as 6.0% - although we note the ambitious nature in the seniors housing section and separately in Housing an Ageing Population , written in conjunction with the BPF.

SENIORS HOUSING

DATA CENTRES

LIFE SCIENCES

CARE HOMES

PRS

SELF STORAGE

HOTELS

LOGISTICS & INDUSTRIAL

RETAIL WAREHOUSING

2005-23

2023-40

PBSA

-30% -10% 10% 30% 50%

70% 90% 110% 130% 150% 170% 190% 210% 230% 250%

PERIODIC GROWTH RATE

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HEADWINDS OR TAILWINDS?

Housing demand is not expected to ease materially through to 2040, remaining significantly above the historic rate of supply. Easing demand pressures from slowing population growth will be offset by people living longer, rising numbers of single person households and migration. Owner occupied homes are expected to see the lowest level of growth as affordability remains challenging amid the supply-demand imbalance, while PRS is projected to grow its share of tenure significantly. Additionally, tailored housing products are also projected to see strong growth, particularly in the seniors housing and care home sectors as the ageing demographic stokes demand. Along a similar vein, the growing global retiree population and increasing international middle classes will bolster visitor numbers, driving up tourism demand that will support ongoing growth in the hotel sector.

Segments of the retail sector are projected to see a continued contraction in stock but at a reduced rate in comparison to recent years. As ever, there is considerable nuance to this. The retail sector has already gone through a number of headwinds that have driven rightsizing and revaluation. There is, and will continue to be, resilience in those locations and products which are fit for purpose in a new retail environment. These sectors will continue to see strong consumer demand, and this could in some cases lead to growth in the market. It is unlikely to be in the form of widespread development of retail parks or shopping centres, instead being driven by small extensions to existing schemes, refurbishments, or flexible usage spaces.

The vast majority of this loss of space will occur outside of core markets and will be of assets that fail to meet the environmental or workplace requirements of an occupier base and workforce that is no longer willing to accept sub-standard accommodation. Subsequently, office stock will become further stratified with demand concentrating into quality assets in major markets – resulting in an undersupply of fit for purpose stock in those centres. This impacts on values beyond what has already been seen and will encourage further development and refurbishment. The strength of the UK’s academic institutions and innovation industry is expected to provide a fillip to demand in the life sciences sector. Technological developments will help the sector to expand in capability and scale, along with increased requirements from an ageing population. The fundamentals that have driven continued demand for logistics and industrial space will persist in the short-medium term through increased requirements for warehousing and storage space, while in the medium term, growth will likely be powered through advanced manufacturing requirements.

A greater reduction will likely be seen across the office sector.

Changes to the way we work are well documented and will lead to falls in demand for office space across the UK, likely resulting in large-scale repurposing of space that is no longer fit for purpose.

RETHINKING: THE SHAPE OF REAL ESTATE IN THE UK

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LIQUIDITY = GOLD

MSCI UNIVERSE BY SECTOR

At a fundamental level, increased requirements should drive development. However, it is much more than this. The make-up of real estate determines the success of our cities as well as the flow of capital; and with that, the liquidity and value of UK real estate. While there will be an ebb and flow to this, the changes we are projecting will lead to a significant re-weighting of the investor universe. Investors may quickly expand their interest in previously underfunded, undersupplied, or stagnant sectors in the coming years. In 2005, 97% of institutional capital was invested in the industrial, office, and retail sectors. By 2022, this had reduced to 80% as other sectors including hotels, leisure, student housing, healthcare and PRS have expanded. In the aftermath of the GFC, almost 90% of the MSCI universe remained allocated to the office and retail sectors. This has reduced in time to now below 50%. While projecting values to the 2040 time horizon is not within of our scope, both these historic trends and our analysis suggests that this rebalancing will hasten rather than slow.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

2005

2010

2016

2023

RESIDENTIAL

RETAIL

OFFICE

INDUSTRIAL

HOTEL

OTHER

SOURCE: MSCI

RETHINKING: THE SHAPE OF REAL ESTATE IN THE UK

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OBSOLESCENCE EQUALS OPPORTUNITY

FORECASTED SHARE OF UK STOCK BY BROAD SECTOR

0

4

5 %

0

2

As some sectors wane and others prosper, the acute supply of land in key locations – particularly in city centres – and the increasing focus on sustainability will mean that repositioning and repurposing will be the first point of call for value-add opportunities. If the building is well-located for the sector (meaning strong transport links plus a surrounding business and amenity ecosystem for an office property, for example) and there is sufficient potential for rental uplift, then repositioning is the quickest and easiest solution. This retains the property’s existing use but modernises and improves the offer, making it comply – or ideally exceed – the requirements of current occupiers. In oversupplied areas, repurposing to a different use, or uses may be the best option. Approaches will vary from building to building, from altering goods access to stripping back assets to frame, however, the goal is the same: to achieve the spatial

11 %

3

2

0

7 %

2

5

0

14 %

0

11 %

2

19 %

56 %

48 %

27 %

44 %

31 %

28 %

RESIDENTIAL (EXC OWNER OCCUPIER)

standards needed for use by locally undersupplied alternative sectors.

LOGISTICS & INDUSTRIAL

RETAIL & LEISURE

OFFICES & LIFE SCIENCES

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SCALING UP

ENABLING CHANGE

Active asset management within the office and retail sectors in particular will be required to ensure that buildings avoid the increased risk of obsolescence. Assets in prime major markets where activity will increasingly concentrate may be better insulated from demand difficulties, but landlords will need to ensure that their offer is consistently fit for purpose in order to attract and retain occupiers amid strong competition. Read more on asset optimisation here.

Given the strong prospects for growth and the existing size of the markets, the logistics and industrial and living sectors are likely to attract the most investment through to 2040. The expected growth in these sectors will mean that competition for space increases following significant demand. Technological advancements will drive a significant increase in demand for previously niche sectors. For example, the move to electrify the energy grid and shift to renewable power will require substantially more energy storage capacity, resulting in real estate demand. The rise of Artificial Intelligence (AI) is also likely to have a visible impact on real estate demand through increasing efficiency across the economy, as well as increasingly the requirements for data centres. For, high growth sectors, barriers to investment include lack of expertise, and limited points of entry into the market. These issues will dissipate over time, and further development in smaller sectors will create more liquidity and opportunities for deployment.

Across all sectors, there are significant external factors that will weigh on the potential for real estate to respond, with the impact of inflation on borrowing costs and development viability being most pertinent at the time of writing. Government policies can also have a significant impact and are difficult to predict over the long-term. In addition, the environmental standards that are likely to be put in place to tackle the climate crisis not only via policy, but through an evolution of business standards, will be the greatest catalyst to obsolescence ever experienced by the built environment in the UK. Changes to Minimum Energy Efficiency Standard (MEES) alone, are expected to render approximately 90% of commercial real estate in requirement of improvement by 2030. As always, there are unknown unknowns, which have the potential to drive significant real estate demand and investment as well as presenting a degree of downside risk. Although the real estate market can move slowly, its scale means that there is always somewhere evolving, responding to the changes in the way we use space. As the number of properties grow, and the capital invested into them also grows, this rate of change only seems to increase. As such, looking out ahead to see where real estate is moving towards in the years and decades to come has never been more important.

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C A R E

CARE HOMES

H O M E S

CARE HOMES

CARE HOMES FLOORSPACE FORECAST

INDEX (2023 = 100)

As the UK’s population ages, and the birth rate gradually decreases, there will be increasing demand for care homes across the country . BY 2040, THE CARE HOME SECTOR WILL INCREASE BY 44.8%.

160

140

120

100

80

FORECAST

60

40

CARE HOMES

20

2012

2015

2020

2025

2030

2035

2040

CAGR

TOTAL

VOLUME CHANGE

2014-23

2023-40

2014-23

2023-40

2014-23

2023-40

CARE HOMES

0.1%

2.2%

0.9%

44.8%

2.4M SQ FT

123.3M SQ FT

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CAR

Improvements in public health through wellbeing focused lifestyles may help to delay some of the impact, however our increasing ageing population will ultimately outweigh this factor and is the primary driver of demand for care homes going forward. Applying the demand scale for care homes by age bracket to population forecasts, the overall requirement for care homes is expected to increase by 44.8% by 2040 from 2023 levels. This is a substantial increase and reflects the urgency of delivery of additional care homes capacity in the coming years.

Those numbers might be greater as the number of people with dementia is increasing as people are living longer. Alzheimer’s Society estimate that by 2040, there will be 1.6 million people in the UK living with dementia, up from around 900,000 people today. Affordability drivers will also impact the growth in care homes. Currently the pipeline is biased towards the South and East of the UK driven by more affluent households and their ability to pay for private care. Government support will be key to driving growth in care homes in other parts of the UK. Additionally, obsolescence will also be a major factor in the medium-term, with many facilities over 20 years old and not meeting the increasing standards required in corridor width, bathroom facilities and inadequate CQC ratings.

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D A T A

DATA CENTRES

CENTRES

DATA CENTRES

DATA CENTRES FLOORSPACE FORECAST

INDEX (2023 = 100)

As technology develops and becomes more universal across the consumer and business population within the UK and globally, the interest in data centres has also grown considerably. The scale of change in the sector is exceptional – and the rate of expansion is increasing. Rising smartphone usage – estimated to be over 90% amongst UK adults – has enabled on-demand access to and sharing of data at ever-increasing speeds. At the same time, subscriptions to cloud stored content services such as Netflix and Spotify have soared, while e-commerce continues to grow its share of retail sales. BY 2040, DATA CENTRES WILL INCREASE BY 98.8%.

250

200

150

FORECAST

100

50

INDEX

2005

2010

2015

2020

2025

2030

2035

2040

CAGR

TOTAL

VOLUME CHANGE

2005-23

2023-40

2005-23

2023-40

2005-23

2023-40

DATA CENTRES

1.5%

4.1%

30.2%

98.9%

3.8M SQ FT

16.3M SQ FT

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DAT

In the corporate world, cloud computing has also taken centre stage with virtual storage replacing filing cabinets in many instances. Supercharged by the pandemic, the rapid scaling up of remote and hybrid working has also had a material impact on data volumes. Looking ahead, the impact of artificial intelligence (AI) also promises to multiply data demands alongside the rolling out of the ‘internet of things’ in an ever more connected world. While the impacts on data centre floorspace have been relatively modest between 2005 to 2023, equating to an increase of 1.5% per year, the densification that high performance computing is bringing suggests that demand for data centres will see considerable growth in terms of power consumption principally but also in floor areas required in the years to come. Between 2023 and 2040, we forecast that demand for data centre floorspace will increase by 98.9%, amounting to a requirement for an additional 16.3 million sq ft of space. This takes into consideration expected improvements in energy intensity, assuming that the average power per rack will increase significantly with technological improvements.

As well as in scale, the data centre landscape is also likely to evolve in terms of distribution. Edge data centres – those located nearer to the point of consumption, improving performance and lowering latency and operating expenditure – are likely to increase around high density residential and business locations. Additionally, improvements in fibre optic efficiency may mean that location requirements for data centres become less stringent, meaning they can be placed in cheaper locations where land availability is higher. International demand for UK data centre capacity is also likely to continue, leveraging the UK’s strong fibre connectivity.

The challenge for data centre real estate demand is not projecting if there will be growth, but rather where the ceiling to demand will be. One critical factor to consider is the ability for the intense power consumption needs of hyperscale data centres to be met amid rising demand from across much of the economy. Delivering enough sustainable power in the right locations will be crucial to ensuring the demand within the sector can be met over the long term.

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H O T E L S

HOTELS

HOTELS

HOTELS FLOORSPACE FORECAST

INDEX (2023 = 100)

Prior to the pandemic, the tourism sector was one of the fastest growing industries, fuelled by increasing populations, disposable incomes and leisure time as well as improving transport infrastructure and the consumer shift away from spending on goods towards experiences. Healthy demand for hotel accommodation followed as a result, with 3.0% annualised growth in overnight stays between 2014 and 2019. While the pandemic put this trend on hold for two years, the recovery has been strong with hotel occupancy levels in Q1 2024 exceeding that of 2019. This supports the positive long-term outlook for the sector, with an increase of 30.8% in required floorspace by 2040. BY 2040, THE HOTEL SECTOR WILL INCREASE BY 30.8%.

160

120

100

80

FORECAST

60

40

HOTELS

20

2005

2010

2015

2020

2025

2030

2035

2040

CAGR

TOTAL

VOLUME CHANGE

2005-23

2023-40

2005-23

2023-40

2005-23

2023-40

HOTELS

2.0%

1.6%

43.3%

30.8%

105.6M SQ FT

107.7M SQ FT

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OTE

Business travel is also evolving. While corporate sustainability policies and the rollout of video calls may have reduced travel as virtual global conference calls and meetings amongst executives have become significantly more common, there has also been a rise in remote and distanced working. The rapid rise in home working has meant that many people are now living in a different city to which they work, deciding to travel in as required and stay in a hotel for one or two nights a week or month. The overall result is that business travel has rebounded faster than expected (albeit in a different form) with an increasing share from remote and distanced workers rather than just executives. Additionally, the rise of Airbnb and other sources of competition to the hotel sector look to have plateaued somewhat. Going forward, additional taxes and planning restrictions are likely to temper further growth in this market. Nonetheless, budget options in hotels are rising, partly due to competition with the Airbnb offer as well as in response to changing consumer preferences. As these smaller rooms grow their share of the market, the average floorspace per key is declining. At the same time, hoteliers are being more efficient with their use of space, resulting in a gradual reduction in the supporting floorspace (lobbies and foyers, for example) per room.

As tourism numbers recover, new opportunities and challenges have emerged. Strong consumer demand underpinned by surplus savings after the pandemic, allowed a robust increase of room rates surpassing the inflation growth in many markets. Increasing labour and energy costs are accelerating investment in technology, automation, sustainability measures and overall rise of new more efficient and less labour intensive hotel concepts. While a weaker pound has wider economic implications, it can also incentivise greater domestic and international tourism as the UK becomes comparatively better value for the consumer than abroad. The global growth outlook is also promising, with a growing international middle class and increasing discretionary incomes expanding the customer pool for UK destinations with a global appeal. While London is overtly dominant in this respect, other cities are raising their offer and tourist numbers including Edinburgh and Manchester, as well as Birmingham and Liverpool. Ageing populations globally mean that there are more retirees, more of whom have savings to support

This means that, while the demand for hotel rooms is going up, the demand for hotels measured through floorspace is more tempered. Taking into consideration these factors, the outlook for the hotels sector is healthy, with the hotel sector projected to see an increase of 30.8% by 2040, as domestic and international tourism as well as business travel all see growth over the next 16 years. This is expected to amount to an increase of approximately 107.7 million sq ft over the period.

an active retirement, including domestic and international travel in many cases.

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L I F E

LIFE SCIENCES

SCIENCES

LIFE SCIENCES

LIFE SCIENCES FLOORSPACE FORECAST

INDEX (2023 = 100)

The Growth of the life sciences sector continues.

160

As a result of the continuing advancement of scientific progress, along with the growing public interest in the health, green and pharmaceutical industries, and the associated capital that has been geared towards its growth. An ageing population means that health concerns and the treatment and prevention of these are of increasing importance. Additionally, popular culture trends focusing on health and wellbeing are growing in momentum, with younger generations seeking healthier lifestyles, ranging from drinking and smoking less, to making changes to diets to billionaires pursuing eternal life. BY 2040, THE LIFE SCIENCES SECTOR WILL INCREASE BY 53.4%.

140

120

100

80

FORECAST

60

40

LIFE SCIENCES

20

2005

2010

2015

2020

2025

2030

2035

2040

CAGR

TOTAL

VOLUME CHANGE

2005-23

2023-40

2005-23

2023-40

2005-23

2023-40

LIFE SCIENCES

1.1%

2.6%

22.4%

53.4%

3.0M SQ FT

8.8M SQ FT

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IENCES

LIFESC

LIFESC

There was already a significant amount of investment geared towards the sector prior to the pandemic.

However, the pandemic was a catalyst for attracting more capital into the sector along with greater activity from venture capital and retail investors, with funding leading to scientific developments and in turn, real estate demand. Active requirements in the market are considerable with a historic under supply of available space, particularly in the Golden Triangle of Cambridge, Oxford and London. In the short to medium term, the development pipeline is considerable, although schemes that have not yet commenced construction are unlikely to do so for a number of years due to the viability challenges facing development. Looking ahead, the emerging ageing population and health focus, along with the prestige of UK academic institutions and the proliferation of wider life sciences-related challenges such as climate change, all suggest that demand will persist in the UK life sciences real estate market. Additionally, the growth of R&D spending in the UK is expected to continue, which in turn will help to drive life sciences demand. This, as well as the expectation that employment in related industries and the number of enterprises in the sector are all expect to grow – combines to produce our forecast of 53.4% growth in the sector to 2040. This amounts to 8.8 million sq ft in additional stock – over twice the increase seen between 2005 and 2023.

Venture capital activity also underpins a significant portion of demand within the life sciences sector. While this is difficult to forecast, the GDP outlook for the UK and US (where the majority of capital is sourced from) and expectations for lower long-term interest rates suggest that it will be a supporting rather than limiting factor to future demand.

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LOGISTICS & INDUSTRIAL LOGISTICS & INDUSTRIAL

LOGISTICS AND INDUSTRIAL The evolution of the logistics and industrial sector throughout the past decade has been marked; transitioning the sector from a poorly perceived asset class proliferated by poor quality buildings during the late 1990s and 2000s to a critical contributor to the economy with rapidly modernising stock. This shift has largely been driven by consumer demand and the evolution of supply chains, which has increased the need for modern high specification warehousing solutions, located in strategically connected markets. BY 2040, THE INDUSTRIAL AND LOGISTICS SECTOR WILL INCREASE BY 16%.

LOGISTICS AND INDUSTRIAL FLOORSPACE FORECAST

INDEX (2023 = 100)

140

120

100

80

60

FORECAST

LOGISTICS & INDUSTRIAL

40

20

2005

2010

2015

2020

2025

2030

2035

2040

CAGR

TOTAL

VOLUME CHANGE

2023-40

2005-23

2023-40

2005-23

2023-40

2005-23

LOGISTICS AND INDUSTRIAL

-0.1%

0.9%

-1.9%

16.0%

-71.9M SQ FT

581.3M SQ FT

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OGI

Supply has followed these trends with the delivery of Grade A space sitting at a record high, having been bolstered by a strong developer response. This development activity reversed the previous erosion of industrial stock that had been occurring as a result of competing requirements – primarily residential schemes in urban areas – with pre-interest rate hike examples of industrial land values surpassing residential land values within Inner London. More recently the sector has seen further interest primarily due to the aggressive recalibration of supply chains in order to facilitate growth in e-commerce activity accelerated by the pandemic and a wider shift toward re-shoring within the manufacturing sector in recent years.

With 27% of total retail expenditure taking place online in 2023, the UK boasts one of the highest online penetration rates among other developed economies as a result of high digital literacy and near-universal internet usage. Going forward, the increase in e-commerce related demand will likely be slower than that seen amidst the structural shifts seen in recent years. This reflects an e-commerce market that is closer to theoretical maturity, and that has already made significant structural adjustment, relative to European counterparts and comparable consumer markets. Increased e-commerce retail activity will feed through into logistics and industrial demand primarily through warehouses for online only stores and delivery hubs – which have both seen a surge in real estate demand – but also through requirements for larger regional and national distribution centres better positioned to serve omni-channel supply chains.

The resulting impact on demand is expected to continue at pace through to 2030. While retail sales are expected to continue to grow, new demand for logistics and industrial property from e-commerce related activity will gradually recede from 2030, as supply chain capacity matures, seeing demand renege back towards leasing events and incremental expansions as a result of marginal gains in market shares.

Stoked by increasing costs of production abroad and border-crossing fees, the rise of re-shoring is driving growth in domestic production, primarily around key hubs such as the North West, North East and the Midlands. Continued geopolitical tension and weaker arbitrage will encourage domestic industry and the strengthening of key trade relationships. The resurgence in UK manufacturing is likely to focus on high value outputs, such as automotive, advanced engineering, and large machinery, leveraging the UK’s competitive STEM advantage. Resulting additional demand for logistics and industrial space is likely to be driven by associated handling, and working of semi-finished goods, as well as the re-shoring of supply chains. These are the key primary drivers incorporated into our logistics and industrial demand forecast, with manufacturing employment, warehousing employment, goods production, goods exports, e-commerce penetration and retail sales volumes all feeding into the overall picture.

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The combined outlook amounts to a 16.0% increase in requirements for space by 2040, equating to 581.3 million sq ft of additional logistics and industrial space across the UK. The supply response is likely to be slower, and will be determined by planning constraints, suitable development land and competitive pressure from other sectors. New supply in the South East will be challenging, necessitating the co-placement of logistics and industrial space alongside other use types and in “awkward” spaces, primarily owed to fierce competition from other sectors and high land values. As such, the bulk of growth will lean towards regions with a higher abundance of brownfield or permitted development land, where land values lower the viability hurdle for developers. Additionally, areas with a legacy in high value manufacturing outputs will likely be the focus of renewed UK manufacturing, for example in Ellesmere Port, Luton, Sunderland and Solihull. to meeting and surpassing ESG targets – a key component of which relies on having energy efficient buildings. Repurposing can offer a strong route to minimising carbon in development, while new supply can be built to a net-zero standard with relative ease compared to other sectors. Owed to its input intensive nature, the logistics and industrial sector is particularly sensitive

Large businesses looking to implement and meet ESG criteria are expected to continue to drive demand for this new and retrofitted sustainable industrial stock.

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P B S A

PBSA

PBSA

PBSA FLOORSPACE FORECAST

INDEX (2023 = 100)

The growth in domestic and international (broadly from Asia-domiciled individuals) students is expected to peak in 2032 with a plateau until the last third of the decade at which point global population slowdown will cause an increased drag. Student numbers are the key driver behind student bed demand, and so the outlook largely follows this trajectory, BY 2040, THE PBSA SECTOR WILL INCREASE BY 5.1%.

120

100

80

FORECAST

60

40

PBSA

20

2014

2018

2024

2028

2034

2038

2040

CAGR

TOTAL

VOLUME CHANGE

2014-23

2023-40

2014-23

2023-40

2014-23

2023-40

PBSA

4.1%

0.3%

43.6%

5.1%

158.5M SQ FT

26.4M SQ FT

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PBS

Higher education student numbers continues to grow, driven by increases in the proportion of applicants accepted, the strong international appeal of UK universities, and the ongoing attraction of postgraduate study. Top tier institutions that are able to leverage their prestige globally have seen particularly strong growth, incentivised through the growing gap between uncapped tuition fees for international students and the capped fees for UK-domiciled students. Across the UK, the demand pool for student accommodation beds now stands at just under 1.5 million. The pace of student accommodation delivery has not kept up with student demand, and the national average student to bed ratio stands at 2.1:1 in 2023. With many students unable to access a purpose built student bed, this as well as wider economic factors has led to record levels of rental growth in many markets. The lack of purpose built student beds has a knock on impact to the wider housing market, with many students having to rent in the private rented sector, worsening the supply-demand imbalance for traditional renters.

Domestic student numbers are forecasted through population projections of 18-24 year olds across the UK, which is expected to peak in the mid-2030s as the UK’s ageing demographic becomes more prominent. The share of this group going to university is expected to remain constant at the current level of approximately 30% over the next 20 years as labour market pressures for degree qualifications are held in equilibrium with a push for apprenticeships and vocational qualifications. Projections for international-domiciled students are split into the Big Three (China, India and Nigeria) plus the remainder of Asia, and the rest of the world. Incoming student numbers from China seem to have plateaued, against a backdrop of a now declining wider population – although there may yet be further room for growth. Student numbers from India and Nigeria are continuing to boom. The latter two are expected to continue growing in the number of individuals coming to the UK to study until they reach the level where China is currently as a share of the total population, at which point we project student numbers will track population growth. The rest of Asia is also projected to follow this trajectory.

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North and South American numbers are also expected to remain static as lower levels of population growth and strong competition from US institutions limits numbers coming to the UK. It is important to note that this projection assumes that the current shortfall in supply of student accommodation persists going forward. That is to say, the trajectory forecasted here is what is required to maintain a student to bed ratio of 2.1:1 - a chronic under supply. Therefore, there remains a significant upside in requirements particularly in the short to medium-term. Therefore there remains a significant upside in requirements particularly in the short-medium term. Additional factors which will influence the demand for student accommodation going forward but are beyond the scope of this forecast include changes to visa and migration requirements, government support for apprenticeships, tuition fees, maintenance loans needing to increase with PBSA rent levels and inflation, potential rent caps and planning regulations limiting supply.

EU-domiciled student numbers are expected to remain flat at their current level, with lasting impacts from Brexit and lower local tuition fees restricting growth, along with gradually ageing populations.

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PRIVATERENTED

PRIVATE RENTED SECTOR

S E C T O R

PRIVATE RENTED SECTOR Housing delivery across the UK has fallen substantially short of demand over the last two decades at least. Relatively stringent planning regulations, limited land availability – particularly in key locations – and infrastructure connection issues have all contributed to the shortfall in supply. The resulting imbalance has led to rapid growth in house prices. BY 2040, THE PRS SECTOR WILL ACCOUNT FOR 20.6% OF ALL HOUSING STOCK.

PRS AND OWNER OCCUPIER FLOORSPACE FORECAST

INDEX (2023 = 100)

160

140

120

100

80

60

40

20

2015

2010

2025

2035

2020

2030

2005

2040

00 FORECAST

PRS FORECAST

OWNER OCCUPIER

PRS

CAGR

CAGR

TOTAL

TOTAL

VOLUME CHANGE VOLUME CHANGE

2023-40

2005-23

2023-40

2005-23

2023-40

2005-23

OWNER OCCUPIER

0.3%

0.1%

5.5%

1.5%

1,218.9M SQ FT

360.3M SQ FT

PRIVATE RENTED SECTOR

4%

2.1%

102.6%

43.1%

2,378.7M SQ FT

2,012.8M SQ FT

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PRIV

Owner occupier homes continue to make up the majority share of tenures, however PRS has grown significantly as pricing pressures have squeezed affordability to record lows, accelerated further by the erosion of social housing stock across the country. Looking ahead, the same pressures are expected to persist. Population growth will continue but slow, meanwhile the average age across the country will gradually increase. Additionally, the average household size is trending downward and expected to continue to do so over the medium term, further adding weight to demand. Overall, the outlook expects approximately 4.0 million extra dwelling units will be required in the UK by 2040. While sizeable, this would represent a slight slowdown from the 4.1 million net additional dwellings that were added between 2005 and 2023 as population growth rates in the UK slow. It is important to note that these forecasts are based on the historic trend seen in the housing market and do not expect the chronic shortage of homes across the UK to ease significantly over the next 20 years. Demand for housing will still strongly outweigh supply in years to come even as more tailored housing solutions such as Build to Rent, co-living, student accommodation and seniors housing grow, leading to continued growth in rental values and house prices.

Additionally, the forecasts assume that the social rented sector maintains its 2023 level, accounting for 16.5% of the overall housing market.

Funding pressures will continue to compete with a growing public appetite for social housing delivery, alongside the persisting erosion of existing stock through the right to buy. Additionally, social housing delivery is particularly exposed to policy levers being pulled in the future which presents both upside and downside risks to social housing delivery. While the volatility of these factors puts it beyond the scope of this report, it is hoped that the trajectory toward greater delivery of social and affordable home increases. The majority of growth in dwellings is projected to be delivered through PRS. This is due to the decreasing affordability of homes, with future house price growth expected to outpace growth in disposable incomes as demand continues to outweigh supply, leading to a greater share of tenures being in rented units. Growth is expected to be seen in urban areas most prominently, with high density housing units centred around transport hubs. Green belt restrictions will continue to hem in activity on the periphery of cities, however planning regulations are expected to ease some limitations as housing pressures become even more acute.

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RETAIL WAREHOUSING R E T A I L WAREHOUSING

RETAIL WAREHOUSING Retail warehouse parks have benefitted from increased demand through recent years due to the structural shifts driven by post pandemic consumer behaviour and having undergone a significant period of restructuring from 2005-2015. In 2040, we forecast a 8.3% increase in Retail Warehouse Parks. BY 2040, THE RETAIL WAREHOUSING SECTOR WILL INCREASE BY 8.3%.

RETAIL WAREHOUSING FLOORSPACE FORECAST

INDEX (2023 = 100)

140

120

100

80

60

RETAIL WAREHOUSING Retail warehouse parks have benefitted from increased demand through recent years due to the structural shifts driven by post pandemic consumer behaviour and having undergone a significant period of re-structuring from 2005-2015. RET CUSHMAN & WAKEFIELD 20 40 2005 2010 2015 2020 2025 2030 CAGR TOTAL 2005-23 2023-40 2005-23 2023-40 RETAIL WAREHOUSING -1.2% 0.5% -20.1% 8.3%

FORECAST

2035

2040

VOLUME CHANGE

2005-23

2023-40

-37.2M SQ FT

12.3M SQ FT

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The pandemic saw a marked shift in consumer behaviour, with consumers opting to favour open air schemes with large spacious stores and the ability to travel independently and park their cars a determining factor. Whilst some reversion in consumer behaviour has been observed, the effects of these shifts are likely to be long-standing. As such demand has largely persisted through 2023 and is expected to continue, with retail parks outperforming other areas of the retail market in terms of occupier demand and footfall activity. The case for occupier demand is also compelling, owed to the size of available units within the asset class, their flexible configurations, and relative affordability. Although perhaps one of the more homogeneous retail real estate solutions, retail warehousing space offers strong clear heights, and often rear loading access, meaning they are well suited to facilitate omni-channel retail, or for the integration of a mezzanine sales floors creating a larger sales area. There are a number of examples of retailers using the additional space offered in the larger units to accommodate online fulfilment, both through click and collect and through stock picking for deliveries, as well as creating additional compartmentalised spaces that offer personalisation and experience in store. Thus flexibility of this space and its interaction with omni-channel retail is expected to safeguard the sector from the effects of digital retail.

Additionally, the sector and its occupiers have already proven resilient in the face of digital marketplaces. Typical occupier blends for the asset class, often involving a high exposure to household consumables and discounters, also serves the sector well. The majority of these retailers continue to show strong trading performances, with limited impact from the wider growth in e-commerce activity. This is largely due to physical bricks and mortar stores offering a relatively lower cost of business than pure-play digital retailers, which allows the pricing of products between the two channels to remain comparable.

These factors are attributable for the sustained momentum anticipated for retail warehouse parks.

However, the gradual uplift in demand-driven supply of 8.3% by 2040 is expected to be delivered incrementally and primarily through expansions of existing sites rather than in the form of significant new schemes being built. On net, we expect this could increase to total approximately 12.3 million sq ft of additional space in the sector in 2040 versus 2024.

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