Industrial and Logistics vacancy forecast to drop below 1% - Construction Network Ireland - Construction Network Ireland

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Published in Construction on 18/05/2022

Industrial and Logistics vacancy forecast to drop below 1%

CNI Editor reports

834,000 sq ft of industrial and logistics property transacted in Q1 – 33% higher than the five-year Q1 average and an increase of 59% compared to Q1 2021. This is according to a new report from property advisor, Savills Ireland that forecasts a vacancy rate of just 0.7% before the end of the year – a record low.

Commenting on the report, Jarlath Lynn, Director of Industrial and Logistics at Savills Ireland, said: “The top four deals, which accounted for 60% of take-up in Q1, were all for pre-lets or recently completed stock. Of the stock due for completion this year 43% is already let, with a further 26% reserved. This leaves just 440,000 sq ft of stock available to lease which we are confident will lease before reaching practical completion or shortly after.”

“After conducting an analysis of pipeline stock in Dublin we have run several scenarios to forecast how vacancy will evolve over the rest of the year. We calculated a lower bound by assuming all pipeline stock signs in the year it completes, which looks increasingly likely in the context of strong occupier demand and lack of available stock. We also assume that the two remaining modern units on the market will sign in the next three quarters. Removing both schemes from vacancy immediately reduces vacancy by 0.4 percentage points to 0.7%. While this is certainly a bullish case, we believe it is most likely, given the strength of the market and a strong chance the two standing units lease this year.”

Q1 Deals

The growth of large international firms in the Dublin market was evident in the top deals this quarter, with the largest deal being the pre-letting of 200,000 sq ft in Northwest Logistics Park to a confidential international occupier. The occupier continues to build out what is an already significant operation here. In the second largest deal of the quarter, DB Schenker – a leading German supply chain management and logistics solutions firm – pre-let 134,000 sq ft in Unit D, Mountpark II. It represents their fifth unit in the Mountpark Campus and follows on from their acquisition last year of a 219,000 sq ft unit in Kildare, which is currently under construction, illustrating the growth by third-party logistics firms. The third-largest deal was for 88,000 sq ft at 605 Greenogue Business Park to MH Star an Asian e-commerce company.

Build-cost inflation

John Ring, Director of Research at Savills Ireland added: “Another area we are tracking closely is build-cost inflation. Rents for prime stock have seen robust growth over the last year and now stand at €11.25 psf, an increase of 7.6% on Q1 last year. A persistent imbalance of supply and demand, particularly for modern stock, has fuelled this growth. The occupier market is undeniably strong, but cost factors are also influencing rental growth and are likely to strengthen in the current high inflation environment. Indeed, data from Linesight, a construction company, suggests that the upper-bound cost of construction of warehouses has increased by 8.8% over the same period, outpacing rental growth. This disparity is not isolated to 2021 either: construction costs have increased by 14.3% since 2020, while prime rents only increased by 12.5%.”

“The rise in construction costs confirms anecdotal evidence from developers we have spoken with, who have noted a marked shift in the market since the start of 2021. Some developers have reported increases in their input costs of between 25% and 30% over the period as the number of tenders received from subcontractors declined sharply.

This is not to say that development will become unviable, build costs form only part of the calculus when a developer or landlord sets rents. However, increased cost uncertainty will inevitably adversely affect more risky speculative development. While this may give rise to caution among developers, given the strength of the market, we would expect construction to continue at pace supported by sustained rental growth.”

Read the full report here –