UK - Demand for UK logistics could reach a record low this year and will remain subdued until at least 2010, according to Jones Lang LaSalle (JLL).

Industrial statistics compiled by the company's in-house logistics research team showed occupier leasing activity declined sharply by 70% in the second half of 2008 compared to the first half of last year as a result of the looming recession.

The decline has led to fewer pre-let schemes and logistics developers postponing the majority of new speculative schemes in 2009, with the development market unlikely to improve until 2010 or 2011, said Richard Evans, joint head of National Industrial and Logistics at JLL.

"The worsening outlook for manufacturing and production levels will continue to have an adverse impact on the logistics sector this year, and we forecast demand for larger logistics units to be comparable to the volumes witnessed in the final quarter of last year," said Evans.

Less than two million square feet of logistics real estate was leased in the final quarter of 2008, however, vacancy rates varied across the UK.

"Deteriorating market conditions, combined with the high completion volumes across a number of regions, and has resulted in an unequal spread of vacancy rates," said Alexandra Tornow, head of European Industrial Research at JLL.

"Notably, Greater London and the south-east, as well as parts of the Midlands, are still recording good demand for larger units; however increasing vacancy rates in other areas are now beginning to put a downward pressure on headline rents, although landlords are naturally keen to resist any falls," she added.

Prime rents in greater London fell 4% in the final quarter of 2008 while rents in Birmingham, Edinburgh, Glasgow and Leeds remained stable.

Manchester and Glasgow actually recorded an increase in prime rents over the year of 9.4% and 4% respectively, driven by new quality supply.

JLL said it anticipates occupier activity will pick up as tenants take advantage of the lower prices to relocate to higher quality and more energy-efficient buildings, or decide to move to prime locations with better infrastructure.

The Midlands and the South East will be areas that occupiers are likely to focus on first, according to Evans, while more peripheral areas in the South West and parts of Northern England and East England will take longer to recover.

Experts predict, however, the uncertain economic situation could lead to lease contracts being shortened. UK leases range between 5-15 years compared to European standards, which are between 3-5 years.

Cameron Mitchell, joint head of National Industrial & Logistics, said: "Overall, whilst we expect occupiers to remain conscious of the current climate, and requirements to move more slowly, leasing activity is expected to be driven by occupiers with new management structures or rationalisation strategies, equity in their property and those able to take advantage of the current market conditions to demand more flexible leases and lower rents."

Evans said the return of retail-led demand and "a more favourable funding environment" is needed to help the UK logistics sector.

Commenting on the main issues facing the industry, Evans said: "I think over the five-year time line, supply of grade A stock will be an issue, particularly in the South East simply because there hasn't been any speculative build in the last 18 months and there probably won't be any speculative build over the next 18 months to two years," he said.

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