The outlook for Industrial & Logistics: reasons to be cheerful?

It certainly bodes well for the mood at Property Week’s I&L Conference, which takes place on 26 February at The Kia Oval in London.

And yet, the state of the wider economy prompts pause for thought. After all, business confidence remains low and the I&L sector does not operate in isolation. So, realistically, how confident should the sector’s owners, investors and developers be at this stage in the new year?

Savills’ head of EMEA logistics research Kevin Mofid, who is on the conference advisory board, admits there are many concerns still looming. “On the downside, you only have to look at the unemployment rate, which is creeping up,” he says. “Inflation isn’t going down as quickly as anybody hoped. Interest rates haven’t moved in as quickly as people hoped and GDP growth is largely flat.”

James Orr, fund manager and head of I&L property at Royal London Asset Management (RLAM), is due to speak at the conference. He says the interest rate point is critical and explains why investment volumes in 2025 were lower than many expected.

The market isn’t going to outperform until, frankly, GDP growth kicks in
Kevin Mofid, Savills

“People thought the market last year would probably be busy and they thought interest rates would come in and that would mean there’d be more demand,” he says. “But I think with that not happening, it’s meant there have been slightly fewer transactions.”

However, Mofid is still optimistic when it comes to the I&L sector and its prospects in the year ahead. “Barring another geopolitical calamity, the market feels like it’s in a good place,” he says. “Requirement levels are up. All of the indicators that I see are pointing towards the market getting back into some level of equilibrium.”

Encouraging signs

Orr agrees, adding that it has been encouraging how well most occupiers have weathered additional costs, such as tax increases. He adds that take-up numbers are “pretty good” but it is taking slightly longer for leases to be agreed.

“And on the smaller units, you are seeing a slight increase in void rates. Tenants have got some quite heavy costs with business rates, the minimum wage going up and so on, but on the whole we’re quite encouraged that we haven’t seen that many tenants have difficulties.”

Mofid also notes that the type of deals that were done in 2025 provides a reason to be cheerful. “Interestingly, there actually weren’t more deals done in 2025,” he says. “It’s been that the deals are getting bigger, which is a good thing because those bigger deals have largely been absent for the last two years. We’re starting to see supply fall for the first time since 2022 as well, which is good if you’re a developer or an investor; less good if you’re an occupier.”

It also seems that the I&L sector is growing despite rather than because of the state of the economy. “At the moment – and there’s nothing really to persuade me otherwise from the data – businesses are still taking space, but not really because they’re growing,” says Mofid. “They’re taking it for more strategic reasons.”

He adds: “Maybe it’s for ESG [environmental, social and governance] reasons. Maybe it’s a lease event. Maybe it’s some sort of strategic supply chain optimisation or consolidation or whatever. But they’re not taking space because they’re growing, so the market isn’t really going to outperform until, frankly, GDP growth kicks in, and none of the forecasts are saying that’s likely in 2026.”

For these reasons and more, I&L developers are pretty cautious. According to Savills’ latest I&L Market Outlook report, the development pipeline is currently around 65% lower than it was in 2022. Three years ago, of course, the sector was still artificially inflated from the pandemic-induced ecommerce boom, which was obviously unsustainable, but it is still a startling statistic.

You can’t build the level of housing required without having the I&L to support it
Aisling O’Kane, Avison Young

That being the case, there is an argument that developers that decide to dust off their plans this year could enjoy a first-mover advantage. Mofid, however, is doubtful. “It really depends what goes on in the capital markets,” he says. “The investors aren’t really there to fund speculative development at the moment. If you’re going to external funders, that’s very hard at the moment – there isn’t really an appetite.”

Of course, not all developers are dependent on external investors, but again Mofid is sceptical. “The people who would be developing are the balance sheet investors, such as Prologis and SEGRO, but I think they want to see a bit more transactional activity first.

There’s a case to be made that we will be in an undersupply situation come 2027-28, but I can’t see the development pipeline ramping up dramatically in 2026.”

Staggered development

Broadly speaking, Orr agrees. But he says that RLAM is still trying to take advantage of the situation in a measured way. “I think we are going to stagger development,” he says. “The way we view it is that development starts at the moment have fallen away a bit, so what we’re thinking is that we’re hopefully building into a reasonably good market. First-mover advantage and all that.”

When it comes to transactions, Orr says the fact that interest rate cuts failed to materialise as expected in 2025 had a dampening effect and that further cuts this year would help.

But he adds that there are more important considerations. “I think because people were assuming values would increase last year, they were hoping that if they pushed the sales at the end of the year they would get a higher number,” he says. “That hasn’t really happened, especially the portfolios that have been out in the market. I think that might be why they haven’t sold as they were originally put into the market.”

From both a transactional and development perspective, Orr adds that he believes smaller urban developments are well placed this year, not least because they are difficult to build in the first place and therefore relatively rare.

“There’s not that many of those new schemes being built because it’s really difficult – you’re competing with housing as a land use,” he says. “So the urban logistics piece, I think, is really positive. People might have to realise they’re not going to get the massive rental growth that they’ve seen historically. I still think they’ll see rental growth, but it may not be quite as high as it has been in the past couple of years.”

Another conference speaker, Aisling O’Kane, director of town planning at Avison Young, says competition for development land remains a burning issue. She adds that while the government has made some positive changes to the planning system, there is still a long way to go. “Since the Labour government have taken power, there have been moves towards recognising I&L,” she says.

“However, I&L isn’t something that’s being recognised as a standalone sector [in the Industrial Strategy]. But we’re an incredibly important sector. We drive employment in the country. We have a huge value in terms of the GVA that we provide. You can’t build the level of housing that is required in the country without having the I&L to support it.”