Industrial in Motion: Newmark on a Sector Built for Change

How has the industrial sector evolved into one of the UK’s most resilient and in‑demand real estate asset classes?

In this episode, Newmark’s Steve Sharman and Seb Moseley join NatWest hosts Ashley Toy and Tom Sharman to explore what’s driving industrial today. From automation and power requirements to supply, tenant demand and long‑term structural trends, they discuss why industrial has proven so resilient — and what that means for investors, developers and occupiers looking ahead.

Transcript

SPEAKER_03 0:00

They pick out, I think there's like eight or ten sectors, which they're like a growth sectors for the future, and you've got technology and digital operations, life sciences, sustainability, defence, those sorts of areas. One way or another, those sectors are gonna need a shed somehow to advance that.

SPEAKER_01 0:22

Welcome back to Property Perspectives. I'm Ashley Toy and I'll be your host again for this series. We're looking across all the main sectors in real estate, and today we are covering industrial. Throughout the series, I'm joined by Tom Sharman, our head of research and strategy. This episode we are joined by Steve and Seb from Newmark. So, Steve, you are a research partner over at Newmark and Seb, you are an agency partner. So across the two of you, I think we've got a wealth of experience across the industrial sector. So when did it suddenly become the sector that we all started talking about a lot more?

SPEAKER_03 0:56

Well, if you sort of look back, right, over since we worked together, say 10-15 years ago, every external shock that has like hit the UK economy, whether that was Covid, which had like a massive positive impact, whether it was Brexit. Positive impact on logistics.

SPEAKER_02 1:18

Sorry, yeah.

SPEAKER_03 1:20

Um Brexit sort of helped with stockpiling. Um that sort of drove demand to warehouses and pushed the near-shoring agenda and stuff. So it's been sort of incremental, like it's responded positively to all these external shocks. Um but yeah, COVID was the main driver, wasn't it, recently?

SPEAKER_04 1:40

I do I do remember I remember a long time ago going to a kind of future of real estate type event, and there was a guy talking about you know, 30 years in the future when we would have things like driverless cars and this kind of stuff, right? And um, you know, I remember thinking, you know, I came out of that that talk thinking, you know, so if we follow this through, in the future there'll be no offices because everyone will be working remotely. You know, there'll be no retail because everyone will be doing it online, but there'll still need to be sheds to move this stuff around. So is is is is that as true today as it was then, or you know, what happens with kind of automation and this kind of stuff? How what is there, what risks are there going forward that that dynamic changes?

SPEAKER_00 2:18

I mean, e-commerce is is only growing still. Um in terms of the automation piece, you know, we're seeing that advanced automation becoming ever increasingly important for occupiers to basically improve occupational and operational efficiencies. Um not only operational but also in terms of sustainability, those that have to adhere to sort of CSR. Um that's only increasing. So I I think in in terms of risks at the moment, I don't really see that kind of appetite slowing down.

SPEAKER_01 2:53

Um and for the uninitiated, you say advanced automation. Can you make that real for us?

SPEAKER_00 2:59

Um well I guess it's it's looking at the the technology that they're using. Um, and I guess robotics is is probably the easiest example. Um whether you know you're an Amazon or you're in a CADO, um, we're seeing it now that they are, you know, majority of of of new space they're looking to take is with the idea to make it automated.

SPEAKER_04 3:19

So that that cuts down, one would assume, on labour involvement, physical human labour involvement within within a warehouse. But how does it change the nature of the warehouse itself?

SPEAKER_00 3:30

Good question. Um, I mean, as you said, in terms of labour, we will begin to see less people in the warehouses. Um, I think a lot of that is pick and packaging. Um, robots will start to displace some human elements of it. Um and I guess uh the way they look when you when you come into a warehouse, um there will be sort of a lot more, I guess structure's not the right word, but the equipment that you would see today will be very different from the equipment that you saw sort of, you know, five, ten, fifteen years ago.

SPEAKER_04 4:01

Yeah. So from a from a kind of developer's perspective, then does that I mean one thing we hear about all the time is is power, the requirement for power. It used to be, you know, my kind of uh earliest memories as it was of logistics was how close are you to the motorway junction? And there was nothing else. You know, there didn't seem to be any other requirement. Now power seems to be number two, if not number one, a lot of the time.

SPEAKER_00 4:21

Yeah, and and the power point is interesting. Uh we are we're going through a period of time in this country where it's becoming increasingly difficult to get power. Um, so when developers are looking to buy or acquire new sites, that is a you know, that is something they will look at quite closely. Um where we're seeing you know the demand for power, one is the automation that we just discussed. Um I think there's a couple of other points, but I mean EV fleets that will become increasingly important and um more common. That's you know, that's a lot of power that's needed to charge those um vehicles. So having that that power available and also the infrastructure, often from day one of new developments, to make sure ductings in the yard or you know, ductings in the car parking spaces, um, is becoming increasingly important.

SPEAKER_01 5:13

And I guess within that, the the fast charging for lorries, if you believe the trajectory of lorries, is really important. And so I guess how much does that play into the future proofing?

SPEAKER_00 5:24

Yeah, and I I I think we yet we're yet to see, you know, how many HGV fleets are actually going to be electric. Um, so that will be interesting moving forward. But yeah, it it it plays into that into that power piece even in.

SPEAKER_04 5:40

The obvious one seems to me, again, from a layperson's perspective, is is the the kind of last mile logistics with the thousands of little bands that go relatively short distances. That seems like the obvious kind of direction.

SPEAKER_00 5:52

Yeah, exactly that. Um and I I I think the important part on the power, and we're seeing it more and more now, is landlords are now starting, or landlord funds developers are now starting to write into any sort of rent reviews, new heads of terms for occupiers that they actually the occupiers have to maintain a certain level of power. So if you if you go into a building that has one MVA of power, throughout that lease term, whether it's five, ten, fifteen years, they will often say it will be prescribed you cannot you cannot um you cannot lose that one and all one MVA of power because it's so difficult to get it back.

SPEAKER_04 6:29

Okay. Yeah, okay. So I mean taking a taking a step back, I guess, from the the technology side of things, just kind of moving more broadly to um to demand supply dynamics. Kind of we mentioned at the beginning how you know industrials obviously had a great, great run, you know, 10 years plus of great returns and growth. Clearly, we had a correction in kind of 2022-23, but outperformance over a long period of time. Um now, when I look again at kind of the headline data, I see um trending upwards of of uh supply, trending upwards of vacancy rates. And I and I know um I think in one of your recent reports, you know, that it showed a tick down after a long trend upwards of of big box supply. But but more broadly, you've got this upward trend. How do you look at this? The market seems to be very sanguine about it, um, but rental growth is slowing. So is there is there a tipping point at some point, or or why is the market so relaxed?

SPEAKER_03 7:23

Well, I think we're probably over that turning point now, um, which was probably Q2 last year in terms of supply. Um and Q4 came down again, and the rate of return of secondhand space has slowed down as well. So you're still seeing occupiers trade up accommodation when a lot of leases were signed, which are sort of coming up for renewal now, or break, or you know, like there's an event coming up. Um, so we don't think that um the supply is going to go back to the COVID lows when it was like three and a half percent. I think more it's gonna be more gradual given that um sort of five-year gap and um how occupiers are trading up into more efficient accommodation, better accommodation. Um and on balance it's expansionary demand, which is positive, um, but they're sort of still releasing secondhand space back to the market. So I think like the overall um supply demand dynamics are still fairly positive, really. Um maybe it's sort of more of a a return to normality than um than that like the exceptional COVID period. Um, but even the normality of like you know 2018-2019 was still pretty good. Yeah.

SPEAKER_04 8:48

So I mean I I remember, you know, again, this is making me feel and look old, but you know, in the old days it would be the the the older guys when I started out would say, you know, industrial needs to be high yields because you get no rental growth, and you know, it's kind of there's a lot of um there's a lot of churn, there's a lot of uh kind of weaker tenants. A lot of those dynamics have kind of changed now, right? So you you know, you guys kind of pioneered, I guess, in a way, kind of multilet research, which I'm very grateful for because there was hardly any of it out before. Um, so you know, what do you see in the market today for multilet that that makes it so different to what it was, you know, when I started out 25 years ago?

SPEAKER_03 9:24

Hmm. It's it's a very different uh development dynamic with big boxes and multilet. Um I mean, development margins for developers are sort of back to 2019 levels, um, and overall volumes are back to those sorts of levels as well for the big box. Um you've got very well capitalised developers who are doing that at that end. For smaller last mile multilayer industrial, you just haven't seen that development response at all. So you've got um an occupier base which is expanding um to deliver parcels, and you know, there's a broad range of sectors which um it's sort of like very representative of UK PLC, really, uh multilet industrial, because you've got all sorts of uh occupiers in there. So you've sort of got an expanding occupier base and a fairly static supply, um, and that's been really good for rents.

SPEAKER_04 10:25

Um I saw a great line in one of your reports, a great phrase which is the gentrification of multilet estates, which I love. I kind of pictured some fairly strange things with that with that image. But um, you know, what what what is that about? That is what you say, the the trying to change of the tenant mix.

SPEAKER_03 10:41

Yeah, it's sort of the the moving away from the oily rags and the MOT centres, if you will, which is still like an important part of these, you know, that asset class, to more retail, um last mile logistics, more advanced manufacturing type operations. Um if you look at London, for instance, there's a lot of food specialists, um uh not necessarily, you know, your your dairy farm or something. This is like you're you're putting the final touch on a very very petite little cake or something. Um so yeah, I think gentrification is the it's a way of describing it, isn't it? Sort of clean maybe cleaner operations uh undertaking those sorts of buildings.

SPEAKER_01 11:29

And do you think that trend continues in the sh in the short term? And and if it does, what do you what do you think changes it in the future?

SPEAKER_03 11:36

If you look at the the government's industrial growth strategy, um they pick out I think there's like eight or ten sectors which they're like a growth sectors for the future. And you've got you know technology and digital operations, life sciences, sustainability, defence, those sorts of areas. One way or another, those sectors are gonna need a shed somehow to advance that um those growth sectors. So it's sort of they're very different asset classes, big box and and multilayer, but they're sort of symbiotic in a way, and those sort of big overarching growth strategies are gonna ultimately affect both asset classes, I think.

SPEAKER_04 12:26

You mentioned defence, and it's like the the the property industry, as you guys know, love a love a big theme that kind of we can all get behind and chimes with what we read in the papers, and defence feels like one of those that you know you can't you can't kind of uh read the papers without hearing about increases and or planned or hoped for increases in defence spending. Um that then kind of feeds through to a hope for increase in demand for you know logistics industrial space. Are we actually seeing any real evidence of this or is this still a kind of a theory?

SPEAKER_00 12:57

Yeah, I mean we've seen BAE systems recently take space in the northwest, yeah. Um which was about 500,000 square feet, and that was linked to to that. Um we're aware that Rolls-Royce, you know, are thinking about or or have live requirements at the moment that are again are related to the MOD. Um, and similarly, we're aware that sort of around Reading and that area, there are again our military of defence occupiers or related occupiers looking for space. So I think it have we seen it? Yes, we've seen it with BAE, and it feels like speaking to you know various occupier agents, include including our own, um, our own tenant rep team at Newmark. Yeah, um, there's already conversations ongoing with with said occupiers where it looks like they will do something in within the next sort of 12 months.

SPEAKER_01 13:51

And does that when you've got defence as I guess the the sector in in the asset, does that change anything you need from the asset surrounding the asset?

SPEAKER_03 14:00

Well, it's it's a lot harder to track. Yeah, yeah. Um, because they're sort of necessarily confidential, these sorts of deals. Um But there's there's good data on it. There's good um Ministry of Defence data on um MOD spend. Um and you you know information and communications tends to be sort of more London south east, yeah. And the heavy shipbuilding and things is sort of the northwest, those sorts of areas. And that's where you've seen most demand, I think.

SPEAKER_00 14:30

Yeah, it feels like the north well if from what you read, it feels like the the northwest is maybe the first that will see that sort of take up rate increase because of because of defence.

SPEAKER_04 14:41

I guess an element of that, I suppose, and and for the industrial sector more largely is the availability of space and land on which you can build these kind of things. Um, you know, from a layman's perspective, you know, I think about big bots and the first thing that comes into my head is retailers, right? Uh is is that still the major engine of the market or is it is it more broad than that?

SPEAKER_00 15:03

I think that's so. I mean that's probably still the yeah, I mean that's still the one of the dri one of the main drivers. Um I think we've definitely seen a more diverse market over the last 18 months. Um whether that's food and beverage, um, we recently acted for Carlsberg, who've taken sort of 200,000 square feet at Westmids Interchange. Um, you know, the 3PLs are all still taking space. Um GXO take a lot of space last year at um at Dirt. Um, yeah, I mean the USINs, the XPOs, all the all the usual suspects from the 3PL world are still active and have live requirements. Um the manufacturers are still out there taking space. So I I think yes, retail is still driving it, but but the demand has definitely diversified across different sectors, which is which is really positive because it means we're not so reliant on just the retailers to make sure that our take-up continues.

SPEAKER_04 16:04

Onshoring Steve, you mentioned onshoring at some point. You know, it's it's a it's a kind of theme that that that chimes with me in the sense that it makes a lot of sense. You can you can follow the kind of logic through the supply chains and stuff. Is that is that something that we're again are we genuinely seeing an effect there? Um, you know, has the kind of tariffs and the the the greater difficulty of global trade, is that starting to increase that trend?

SPEAKER_03 16:29

Yeah, I mean companies are uh uh looking to optimise and protect their supply chains. Um and that means bringing manufacturing closer to home. Um that's been a a trend for a while now. Um and it's probably why we've seen like such strong manufacturing demand as well. Because if you look at like the the economic data on the manufacturing sector, it's not exactly going through the roof at the moment, and you know, like the automotive sector has its own challenges and stuff, but um it's uh it's been one of the more active sectors over over the last couple of years. Going back to e-commerce, which has been like a massive, uh had a massive influence on on the sector. Um I read something recently that the the RNS data that you can get on retail sales uh or internet retail sales as a proportion of all the things. Yeah, I'm familiar with it, yeah. That might sort of be undercooking like the actual um online habits of the UK because um formerly things which you would buy, say a newspaper or a book, or you'd go to blockbusters and get video or something, they were described as being goods before that you would purchase, but now you have a Kindle for a book and you get the FT on your substituted, yeah. Um, and so that's sort of become more of a service than a good. Okay. So that um, you know, 28-29% of internet retailers, a portion of all retail, might be undercooking it. Yes. And not like on an international stage, that might make the UK like one of the most um, or that the UK have one of the the deepest interests penetration.

SPEAKER_04 18:19

I I do often you know, I often look at that and I think you see the data for mainland Europe particularly, and it's a lot lower. And I and I always feel like it's inevitable that they will follow the same path, you know. Maybe that's wrong, maybe they're just culturally different. But so you you know, you're you're making a point about you know newspapers. I'm still old school and like my you know piece of paper in my hand, but I know that's a kind of rare thing these days. So that is an example where actually substitution has occurred where that newspaper no longer needs a warehouse, right? So I guess there are there are corners of the you know technological uh you know landscape that that do take away uh demand for uh for industrial, but actually it's it's still fairly niche.

SPEAKER_01 18:58

Um we talked a bit about Europe though, and I there's been some big names that have moved about recently, specifically to focus on I guess industrial logistics in Europe. Does that say anything about where we think money flows are going to go over the next two or three years? You know, is the UK gonna continue to be as attractive as it has been recently?

SPEAKER_03 19:18

Well, Newmark are sort of a global organisation. So uh Seven I tend to focus on the UK sort of operationally, but we do I you know I personally speak to our global research colleagues, um, and they sort of see the UK as being like a bit of a trailblazer for last mile logistics, and um we're sort of a year or so ahead, not not necessarily of the US, the US is its own market, but other countries across Europe. Um and they sort of look to the UK to see if they can get any idea of what's happening in their own domestic markets. So, yeah, it's one of the most mature uh and advanced and um online and uh uh transparent markets out there, so it's always going to be attractive, and the fundamentals still look quite good from an investment perspective. Um there's still uh still real uh rental growth, you know, prime rental growth, we're still uh recording that. Um and we don't see that slowing down over the next couple of years. It's not going to be the exceptional COVID, you know, growth that we've seen, but um sort of low single-digit rental growth.

SPEAKER_04 20:35

Um so if that is so as you say, you know, if and it's it's a it's a theory I can kind of buy into that you know the mainland Europe is perhaps a a few years behind in in certain trends. Does that mean then if you are kind of international capital, do you then think, well, the UK is a played out market in terms of that growth kind of uh story? Um, or the perhaps not growth story, that's not fair, that excessive growth, like exceptional growth story, and that you know moving into mainland Europe therefore would offer you um that growth going forward?

SPEAKER_00 21:07

I I think speaking to and working with various developers in the market at the moment, um I think finding funding partners for new schemes and developments over the last 18 months maybe has been slightly more challenging than it was, you know, during COVID, for example. Um but sentiment certainly Q4 onwards to now, um speaking to them, feels like capital is is is now ready to deploy. Um whether that's capital from Asia or America um or or Europe. Um, but it feels like that that sentiment has returned and yeah, there's multiple capital partners now now ready to to back developers, which is a really positive sign for for us moving forward.

SPEAKER_04 21:54

Yeah, absolutely, yeah. And and viability, development viability has been a bit of a challenge across a lot of the sectors that we That we lend into. You know what I guess is required in order to improve that? What will resolve that that challenge at the moment?

SPEAKER_03 22:12

Well, I guess developers are influenced by positive headlines on the occupier front. If you know there's uh good news out there of you know take-ups gone through the roof, and so that's sort of sentiment side of things. Um and then so that's sort of the heart, if you will, and then the head on, you know, does this make financial sense to do this? Um if you look at build costs, they've been um relatively high and going up. Um and the capital value of buildings, yes, you've got rents uh that that are still growing, but yields have been sort of fairly flat for a while now. So I think there has been a development response on on the bigger box side, um, but a lot more measured, um, a lot more considered, well thought through looking at the local market dynamics than we saw throughout you know 2022 when the conditions were a bit looser. Um I think we we recorded last year uh about 11 million square feet of development completions, which is roughly the same as 2017, so quite low in the grand you know scheme of things. Um and you know, a slowdown of of speculative development might push occupiers down the build-to-suit path, you know, so that they can do it themselves rather than developers have that risk currently of a speculative building.

SPEAKER_00 23:46

I think I think the yield shift as well is is you know, in terms of viability, that those yield shifts are seem to unlock viability in a big way. So it'll be interesting to see what happens on that front over the course of the next 12 months.

SPEAKER_04 24:02

Yeah. And and how about you know, in in terms of in a in a lot of other sectors where, you know, particularly kind of offices, for example, you're seeing a real split between um modern, kind of well-located space, which is seeing strong rental growth and good demand, and then perhaps at the other end of the spectrum, there's a lot of space that maybe is deemed to be potentially obsolete. Is is there a similar picture within within industrial?

SPEAKER_00 24:26

We've got almost a kind of three-tier market where you have your your speculative developments, you have your kind of your second-hand reefer buildings, then your more secondary, kind of almost tertiary buildings. And I think where perhaps we've been quite lucky over the last 12 months is actually a lot of the three PLs are who are looking for flexible lease terms of say five to three years, seem to be taking up a lot of this kind of secondhand space because actually for them, where their margins are becoming increasingly tight, um, their profit margins increasingly tight for their customers that they're bidding on contracts with, if they can take a second hand building for the term of that contract that they win, you know, at nine quid opposed to £10.50, that makes sense for them. Um so I think from that part, take up has been quite strong, and especially if it has any fit out in it, i.e., does it have sprinklers, does it have racking, um, does it have fire and arm systems, you know, those those three elements alone on a building of say 400,000 square feet, you could be in for two million pounds worth of potential fit out savings. So that's taken up a lot of that space. I think the the problem probably is for that more tertiary space where the building is probably coming to the end of its life cycle, but there's probably a bit too much value in it to knock it down and and start again with a new development straight away. So that's probably the area of the market that that causes a few more headaches for for landlords.

SPEAKER_01 26:04

So we've talked about quite a few subjects today. Is there anything we haven't talked about that you think we should be and should have out of our list of concerns?

SPEAKER_03 26:13

Well, if if you're future gazing, um artificial intelligence, the impact of AI on all sectors um is gonna have a massive impact. Probably on balance, it'll be like a net positive, I hope, um, for for various reasons. Um but that's like a big thing that's coming down the line, isn't it? It's gonna affect you.

SPEAKER_01 26:35

How do you get a net positive?

SPEAKER_03 26:36

What's your I've got nothing to disagree with you, by the way. Well, just take the retail sector, for instance. If um rather than using Google, you have some like agentic AI system that will predictive buy your goods for you and it makes the whole process easier, yeah. Perhaps that will drive throughput, you know, increase retail, perhaps. That's good for sheds in a way, on balance. Um I would guess you'd probably also see maybe more efficient buildings with you know, we talked about automation and robotics and stuff like that on steroids, I would imagine, um, which may mean sort of smaller, more cubic type buildings, yeah. Um, maybe on longer leases as well, given the the capex that's needed on those sorts of buildings. Yeah.

SPEAKER_04 27:37

Um I always think the the kind of you know, they they can make the inside of these warehouses so efficient in the way that they work, obviously led by kind of the likes of Amazon dealing with millions of parcels, but the the bit of actually getting it from there to your home still seems to remain pretty inefficient in terms of like, you know, I can I can have something ordered delivered any day this week, living in my remote countryside location, and that van has to go all over the place. So I guess you think that AI would arguably put best to use by making that process more more efficient.

SPEAKER_03 28:09

Yeah, inc increase productivity, definitely. Um but it's gonna span so many sectors and industries that whilst individually like you might need a a smaller building for a longer period of time, like collectively it might push demand up. Um and the data center market crikey, that's probably a topic for another podcast for you. All of again, yeah.

SPEAKER_04 28:36

Um that's that's if you can get the power, isn't it? If you can get the power connection to build them. I think I remember reading that if all the um all the kind of uh data center uh planning applications or whatever went through, there wouldn't be any land left to build on, I don't think, in the rest of the country. But but as you say, another another.

SPEAKER_01 28:55

But there wouldn't be any power for the rest of the country. Yes, that's pretty much it. So I just just to kind of close off that AI piece, I guess it's the broad suggestion that the Internet of Things keeps taking over and the current the kind of current softening we've seen reverses again. Because you're I guess if you're pushing more through that channel, you're naturally doing less walking through the front door of a shop. So is that is that a part of the thought process there, or is it just that status quo everywhere else and you just get more through um the last mile?

SPEAKER_03 29:28

I guess there'll always be dinosaurs like Tom who wants to buy a physical newspaper. Yes. Um we can only hope. And there will be physical, you know, goods and but yeah, I mean, on balance you can see if the process of buying something is easier, more will be bought. Yeah. Um that I don't know, maybe that isn't a net positive.

SPEAKER_04 29:52

I mean it's just just as I say, so I I have uh been told I know how to wear glasses. So the other day you go onto the uh website of a well-known uh glasses retailer, and it will the AI will kind of pick a set of glasses that look good on you and stick them on your face, on your face of the phone. So naturally, then I would not need to go into you know any kind of establishment. It would come straight from a warehouse, presumably.

SPEAKER_01 30:13

So on the next episode, we can see you as L Jones.

SPEAKER_04 30:15

You may see.

SPEAKER_01 30:17

Thank you very much for Seb. Um, that's it for another episode of Property Perspectives. Uh I've been Ashley Toy, he's been Tom Sharman. Uh please click like and subscribe.