Urban multi-let industrial real estate has quietly become one of the UK’s most resilient asset classes. With land scarcity intensifying in cities, particularly amid competition with other uses such as residential and retail warehousing, and new-build supply virtually non-existent, rents in the sector have continued to climb.

Mark Kelly

However, as macroeconomic uncertainty lingers, the question for landlords is no longer whether the sector is strong, but rather whether their assets are fit to compete, both in the near and longer term.

According to Colliers, the UK’s average prime headline rent for mid-box and multi-let industrial units reached £15.55/sq ft in June, up 4% year on year. While the pace of growth has moderated from previous highs, the sector continues to outperform other commercial property types.

But in as nuanced a market as this, it would be a mistake to use rental growth as the metric by which you base investment decisions. Occupier behaviour is evolving, driven by the push of business needs and the pull of stakeholder (including regulatory) pressure, bringing both opportunities and challenges for multi-let industrial landlords.

There is a substantial need for innovation in how we manage our assets and portfolios as a whole

Businesses are seeking space better aligned with their operational needs, ESG commitments and cost efficiency, in a market increasingly defined by regearings, relocations and strategic upsizing or downsizing. Lease structures are also shifting: property management software provider Re-Leased reports that average industrial lease lengths have grown 5.7% to 56 months this year, bucking the trend in the office and retail sectors.

City slicker: multi-let urban industrial is in high demand but asset management remains the key to success

This isn’t a reflection of occupiers being content with what they have; rather it’s an indication that in many cases they are stuck with what they have in a high-quality supply-constrained market. This is not to say landlords can sit back and relax, believing their portfolios are safe because occupiers have no other choice. Instead, it is evidence of exactly the opposite: the need to act.

Those that do not act will experience four things. First, they will experience rental stagnation, as although everything is leasable at a price, maximum rental growth will only be possible for spaces that tenants – whose occupational costs have gone up by 60% since 2019, according to Newmark – see as worth the investment.

Second, landlords will face increased churn as occupiers either vote with their feet against rental growth or find suitable alternative accommodation. And third, owners will see a levelling off in capital growth as occupier interest cools and investment risk heightens.

Risk of asset obsolescence

Finally, landlords face asset obsolescence as sustainability regulations (or at the very least corporate governance standards) inevitably rise. Urban industrial property tends to be much more carbon and energy efficient than the wider real estate investment market realises, with an average EPC rating of ‘C’. Owners like ARGO that are investing in
data capture and green upgrades see that, in practice, buildings’ energy efficiency performance tends to meet an EPC ‘A’ standard.

Given that so many others in the market are also capturing actual energy use, the government will inevitably move to measuring that, rather than theoretical usage, which will have significant impact on those whose assets, on paper, should perform well but do not in practice.

All this adds up to a substantial need for innovation in how we manage our assets and portfolios as a whole.

In the urban, multi-let industrial market, supply/demand dynamics have been heavily in landlords’ favour for some time – but it is categorically not the case that this alone is enough to make investment in this area work.

That is why active asset management is a central part of our strategy, including our £500m brown-to-green platform with cornerstone investor Blue Coast Capital. Only active asset management can ensure that property owners continue to reap the rewards from the still incredibly attractive urban, multi-let industrial market. If done well, it can mean occupiers secure a better deal and investors get the returns they need – two outcomes that collectively signal there is room for growth for the long term.

Mark Kelly is head of asset management at ARGO Real Estate