Knight Frank’s latest research into the industrial market has found a “critically low” supply of grade-A stock, shifting power towards landlords at the same time as investment activity hit a seven-year peak in H2 2013.

The agent’s LOGIC report found new-build shed supply down 82% from its Q1 2008 peak, standing at just 5.2m sq ft.

At the same time, total take-up for units above 50,000 sq ft was 19.1m sq ft in H2 2013, up 5% on H1 and 11% above the five-year average.

Build to suit accounted for 24% of take-up, with particularly strong activity in the Midlands, where 2.7m sq ft was pre-committed

Investment volumes for industrial reached levels not seen since 2006/7, driven by UK funds and overseas interest from the Middle East and Asia for single-let product.

Transaction volumes hit £2.9bn in H2 2013, up 64% on the first-half total. This has led to significant price rises throughout 2013, with prime yields hardening by 100 basis points to 5% on 20-year incomes, compared to 5.75% for South Eastern multilets.

Head of logistics Charles Binks said: “The acute shortage of supply has put distribution landlords firmly in the driving seat. Several years ago, occupiers were able to do deals offering extremely generous terms, but now the pendulum has swung the other way. Incentive levels came in sharply during 2013, and we are now seeing landlords holding out for 10-year deals.

“While we anticipate more cases of spec-build to come forward during 2014, the majority of larger requirements will continue to be satisfied through the traditional design and build route. As terms on existing buildings have toughened, the differential between existing and design and build deals has narrowed, and this is likely to help push an increasing number of occupiers to opt for design and builds”.

Investment partner Johnny Hawkins said: “Investment activity in the distribution sector surged in the second half of 2013 and looks set to remain buoyant in 2014. Although strong demand is apparent for each of the main property sectors, the current fundamentals around UK distribution provide an added draw. The sector is under-supplied from the occupier perspective, plus the sector stands to benefit in the long term from the rapid growth of e-commerce.

“The sheer weight of money in the market will continue to lead to further growth in prices this year, and we expect yields to harden by a further 25bps or so at the prime end. Strong pressure to spend is likely to prompt more UK Fund investors to consider opportunities higher up the risk curve, including regional multilet estates, shorter income and weaker covenants.”