Industrial And Logistics Investors Turn To Niche Sectors For Growth

The golden era of logistics, driven by the pandemic, is over.

Investors are seeking niche subsectors within the once-booming industrial and logistics sector as they look for growth in a market dampened by high vacancy rates and global market volatility. 

But planning and power constraints continue to hold back development as investors seek to create new formats to reinvigorate the market.

“We have gone to seven subsectors within industrial and logistics, including big box logistics, multi-let industrial and small industrial, but also trade counter and self-storage, which is an operational business so with really stable costs which as they mature see the top line go to the bottom line, plus urban logistics,” LGIM Fund Manager Matt Lilley told an audience at Bisnow’s UK Industrial And Logistics Transformation 2025 event at Regent’s University, London.

“We focus on mid-box on peripheries of centres [for urban logistics]. Not much exists, so you have to build it, and so we’re doing that at the moment,” he said.

He added that self-storage takes a long time to build, but LGIM has been looking at smaller units designed for trade users that can be small-scale and drive-up.

“The fundamentals are the same despite the current volatility, and we’re in it for the long haul with an open-ended specialist fund. The structural drivers will remain for the next five, 10 years, and if we look beyond current negative sentiment, we are positive,” Lilley said.

Indurent CEO Julian Carey outlined the development picture for the Blackstone-owned business nearly a year into its creation from the merger of St. Mowden Logistics and Industrials REIT.

“We see rent growth at 3-4% this year and beyond, but there are sub-markets with relatively high vacancy rates at above 8%, meaning there is limited scope for further rental growth in those locations at present,” Carey said.

He stressed that Indurent has three focus areas. The first is place, which he said is “not just location, but also drive time, access to ports, power and labour.” Then is product, in terms of the building and having the right assets and right specification that is also attractive for employees. And the final focus area is service proposition.

Indurent has pushed ahead with spec development, and Carey said said that development remains challenging due to headwinds on planning, policy and power..

“In terms of planning, we have seen some positive changes, but there is still more work to do. We are working with Savills on a methodology for employment land allocation and working with the BPF and Logistics UK to promote logistics as foundational sector in the Government’s new Industrial Strategy,” he said.

Carey also lambasted the “endless frustration” in terms of the time it takes to secure power connections and said that the National Grid is often unable to take on-site solar back into the main supply.

“The National Grid moves at a glacial pace and is also hamstrung by the planning process,” he said.

JLL Head of UK Multi-Let Industrial & Logistics Tim Clement said that the investment picture was uneven across the country but that it was also a resilient sector.

“London has been more challenging than other markets, though we’ve had a good run in west London and Heathrow, the south east has been good, and the Midlands, south west and north east have seen large transactions,” Clement said.

“We have to move with the times and roll with the punches, work out the tariff implications — some business it really hurts, others are faring well — and look at areas like the defence market, which has become a strong sector.”

In terms of yields, he said that it depended on location and whether the asset was prime, pointing to much secondary and tertiary stock continuing to struggle, though he remained hopeful that interest rate cuts would have an impact.

Predicting where that will go “is a bit of a mug’s game”, Trammell Crow Head of European Capital Markets Richard Fell reflected. “We entered 2025 with assets rebased, the new supply line low, the financing market probably the deepest and most liquid it has been ever, lots of alternative lenders in the room, but tariffs are the elephant in the room.”

As a result, like LGIM, Trammell Crow has been looking for opportunities beyond the traditional core market and “trying to find the alpha not the beta” in terms of real estate assets and is therefore evaluating demographic and societal changes and how they influence where there is a lack of asset supply, he added.

However, Fell insisted that with around 40% of investors in UK industrial and logistics international, the UK has proven the biggest, most liquid and efficient market in Europe. He also said that data analysis in Europe is far behind the UK.

Cain International Managing Director Jon Strang added that the recent volatility has caused a challenging market for investors, but the company remained a believer in the sector’s long-term prospects and was a long-term holder.

“Pre and during Covid, everything you touched turned to gold, now you have to be very careful about asset selection, product design and market specifics," he said. "The UK is the largest market in Europe and an easier place to do business because it’s liquid and established, and ultimately, the fundamentals suppressing it are the same across Europe. The one difference is that in Europe, interest rates are low, and that gives you a bit more breathing room.

“Yields are the million-dollar question. They really represent a consensus of what investors feel, and that reflects not just today’s rates but where we are going. I think yields will remain stable, what could drive them inwards is if we see an economic acceleration.”