Over the past few years, the industrial sub-sector of the UK commercial property market has played the part of the canary in the coalmine. In 2021, the dizzying combination of low interest rates and a pandemic-induced redirection of demand from services to goods led to a frenzy of deal making and yield compression. In 2022, just as demand for goods was settling down, war in Europe clipped the wings of economic growth by pushing inflation and interest rates to new levels – in record time, industrial property capital values collapsed by over 20%.

The market is now feeling its way to a new normal, but the position is delicate. JLL’s most recent ‘Industrial Spotlight’, published on April 27, provides a helpful overview of the state of play. Although the data suggests that we have passed the peak of the violent correction that shook the market in the second half of 2022, transaction volumes in Q1 2023 have been well below their historic average.

The JLL report identifies supply, not demand, as the limiting factor. Although there are signs of good health in the market (capital values and yields have largely stabilised, rents are steadily increasing, and there is less pessimism about the macroeconomic climate), vacancy rates and the broader availability of industrial assets are under severe strain. Factors such as decades-long failures of planning policy, elevated build costs, and high exit yields are preventing new industrial units from making their way to the market quickly enough. Meanwhile, an increasingly diverse pool of market participants are taking an interest in industrial property – chief among them, third party logistics companies, life sciences companies, manufacturers, and retailers.

If, as many expect, the second half of 2023 will put inflation to flight, bringing interest rates down and returning the economy to growth, there is good reason to believe that the industrial sector will reawaken – perhaps not at the scale of 2021, but certainly a far cry from the dark days of 2022. A new normal beckons.