The availability of grade A industrial space continued to fall in the last quarter of 2010 driven largely by demand from occupiers consolidating their operations, according to DTZ Research's latest UK Property Times Industrial market report.
Consolidation was the key driving force behind activity in Q4 as retailers sought to rationalise their distribution hubs, often into a single, centrally located unit.
This trend was particularly evident in the North West, which saw the largest volume of transactions, with further demand anticipated in 2011. Despite output growth in the manufacturing sector during the quarter, this did not translate into demand for industrial space, with its share of transaction volume falling to 9%.
The report observes that decreasing supply and continuing demand for prime space are indications that the market is recovering, although demand is still well below historical norms.
There was significant demand in the North West from non-food retailers searching for national distribution hubs which helped to boost transaction levels to over 2.5m sq ft for the quarter. In one of the biggest deals, Matalan purchased the 470,000 sq ft Galaxy on Knowsley Industrial Park for storage and distribution. High levels of take-up in Q4 have continued to erode existing supply and grade A availability however the supply of grade B and C space remains high.
Tony O'Keefe, director of DTZ's industrial team in Manchester, said: "This supply imbalance is particularly notable in the North West market where the continued take-up of Grade A space is encouraging. It is worthy of note that deals recorded have been on occupier-friendly terms. Nevertheless, we are at a pivotal point within the big box market where the negotiating power is slowly moving away from the occupiers."
He added: "Should current market recovery continue, an argument could be made to support a return to speculative development within the region going into 2012, although it is unlikely that we will see the volumes of development witnessed during the mid- to late-2000s, and there is an increase in polarisation of the industrial market between prime and non-prime locations."
Overall UK take-up in Q4 was slightly down from the previous quarter, at 5.8m sq ft, with availability of prime space falling to 37m sq ft. Transactions were dominated by retailers and third party logistics operators who together accounted for 91% of all take-up.
Martin Davis, head of UK Research at DTZ, said: "With downward pressure now on incentives, the prospect is for the industrial market coming more into balance in 2011, particularly at the prime end."