UK Logistics Sector Review (2024): Industry Confidence & Unlocking Economic Potential

Jun 10, 2024

As of 2024, there are some 230,000 logistics businesses and a staggering 2.7m professionals (circa 8.2% of the UK workforce) employed in logistics roles around the UK. Across the three traditional modes of transport (land, water, and air), logistics activity contributes £163bn in GDP every year to the UK economy (EDIT 13-06-24: this in latest reports increasing to £185bn in 2022) – accounting for 12% of the UK’s non-financial economy. [1] Latest national figures report logistics businesses as having generated £1.3 trillion in revenues in 2022, an increase of 25.8% compared to 2021. [17] Undoubtedly, the logistics sector plays a critical role in economic activity around the country, yet as we close 2024’s second quarter, research indicates a profound combination of both optimism and concern as to the overarching performance of the industry.

In terms of confidence metrics, Barclays surveyed more than 100 senior decision makers within Logistics who provided their views and insights on the factors most affecting the sector which put the 2023 index score at 47.3 [2]  – the second lowest index score published since 2012 and one of only three years in which the index score dropped below 50. In fact, 2023 confidence levels barely surpassed those reported in 2020 (at 47.1), during the first year of COVID-19 lockdowns. Despite this, respondents expressed confidence in commercial growth over the next 12 months (both in terms of turnover and profit levels), yet at a reduced rate compared to the year before. Furthermore, seven out of ten logistics leaders admitted that significant capital expenditure would be likely over the same period.

That being said, the study highlights more confidence from business leaders who describe themselves as utilising an asset-light business model, with a confidence score of 52.7 against 44.2 for those who describe themselves as asset-heavy. With businesses who utilise an asset-light model benefitting from not being burdened by the costs of operating their own fleet and being provided a greater level of flexibility” [2]

According to CBRE’s UK Logistics Q1 2024 report [3], investment volumes (transactions in excess of £5m) for the period dropped 23% below the rolling 12-month average (from £1.6bn down to £1.2bn), with a balanced split between distribution (35%), multi-let (33%), and portfolio (33%) deals across the period. The total space under construction for Q1 also dropped by 10.4% quarter-on-quarter, down to 19.2m square foot and bringing the volume of space under construction roughly back down to pre-pandemic levels. Notably, the deal size for logistics spaces also reduced to an average of 223k square foot in Q1, with a larger proportion of deals involving smaller industrial boxes (100k-300k square foot).

Of note is also regional disparity and the balance between speculative and committed space within the development pipeline. While the South East, East Midlands, North West, and West Midlands displayed a healthy balance between speculative and committed space at the end of Q1 2024, this was less the case across the South West, Yorkshire and the North East, and Scotland, where the development pipeline displayed far reduced speculative activity in comparison to committed space. Notable was also the imbalanced relationship between speculative and committed space in the South East (heavily weighted towards speculative development) and while the East Midlands continued its dominance of the pipeline, the Q1 share actually dropped from the 12-month average of 41.9%, down to 29.5%.

While the report broadly paints a very reserved picture for the industry, the results of the report are also not terribly shocking to anyone that has been monitoring the changing dynamic of logistics (especially concerning retail and e-commerce). Perhaps sparked by the COVID-19 pandemic, e-commerce and last-mile logistics continues to be on the rise both in the UK and across Europe [4], following predictions made by Ellis Shelton, Policy Advisor at Logistics UK on the potential for the UK’s last-mile delivery market to expand by almost 10% between 2022 and 2029. [5]

Yet, expansion of the last-mile delivery segment of the market does come with a few caveats. In particular, last-mile deliveries face increased cost-pressures and coupled with congestion and general availability of space in heavily urbanised locations, a re-evaluation of logistical infrastructure has perhaps always been on the cards. Unsurprisingly, several industry experts (including DHL) have stressed the importance of using smaller, regional warehouses and the practicality of partnering with external logistics firms who can offer excess storage capacity. [6] Such trends would naturally favour a reduction in the square footage of logistics spaces and weighting towards developmental activity in heavily urbanised areas (such as in the South East), both of which are noticeably reflected in CBRE’s Q1 report on these metrics.

Then looking at Knight Frank UK’s update on market activity [7], we see a slightly more optimistic picture of events combined with some confirmation of prior thoughts. Firstly, while Knight Frank clarifies that it does not expect levels of activity to return to the peaks of the COVID-19 period any time soon, the company does state that there have been a number of sizeable take-up transactions this year, including a 1.2m square foot pre-let agreement with Yusen Logistics.

Notably, Knight Frank specifically alludes to a rise in demand from outsourced logistics providers like Yusen Logistics as firms shift to outsourcing their logistics and distribution activities, with insight from Harris Williams connecting the rising success of those outsourced logistics providers to the innovative value-adds that such providers are now creating – particularly in the form of tech-enabled, consultative approaches that can differentiate on themes such as onshoring, ESG, and cybersecurity. [8]

Aside from demand on the operator end, Knight Frank’s research also indicates a spike in developer confidence as indications from Q1 suggest a much-reduced rise in the BICS All-In-Tender Price Index (a 2.6% rise, compared to the prior 8.6% year on year rise). Already, this improved confidence has led to a rise from 8 to 15 construction starts in the first two months of 2024, compared to the same period in 2023. Should these projections come to fruition (and continue), we can certainly expect to see a sizeable ramp-up in development activity as tender price growth stabilises at a more palatable level.

In its Future Gazing – 2024 report [9], Knight Frank also nods to the rise of online retail and how e-commerce growth is driving the demand for warehousing space, highlighting how online penetration rates have increased from 9.3% to 26.6% between 2012 and 2022 (which Mintel forecasts to reach 29.1% by 2028). Knight Frank’s research also highlights a specific demand for distribution and fulfilment facilities, particularly along key transport routes and close to urban centres. Tying success in e-commerce to the demand for warehousing space, Knight Frank predicts a sizeable rise in the need for warehousing space to support online activity between 2024 and 2028, increasing e-commerce driven demand by over threefold; similar research by Savills echoes this prediction, projecting additional logistics requirements of up to 48m square feet between 2022 and 2027. [10]

Ian Cramb, Managing Director at X2 shared: “Retail and e-commerce are significant drivers for logistics activity in 2024 and beyond, but it’s also reshaping how the logistics industry works to some degree. More than ever, there’s an appetite for outsourcing the logistics function and de-risking that entire element of the business. From our own research, we know that organisations are expecting either similar or greater retail volumes this summer (as indicated by 80% of respondents to our survey), but profitability in that market demands a streamlined, efficient, and effective logistics function.”

The Wider Economic Picture: Logistics as the Key to Economic Growth

Now, while it would be easy to isolate the logistics industry and judge its performance directly, it’s critical to look at the bigger picture first. Serving as the backbone of trade and commerce, the logistics industry is perhaps more at the whims of wider economic activity than any other sector. As of 2024, the UK economy is in a rather peculiar position. The last few years have presented not only challenges from the COVID-19 pandemic, but as a result of complications in the geopolitical scene, supply chain pressures have also limited the UK’s ability to recover effectively post-Brexit.

The position that the UK is currently in can be best portrayed through examples within the manufacturing industry. Over the years, there has been a growing emphasis on expanding manufacturing activity on UK shores and somewhat returning to the “good old days” of Britain being a leader in international manufacturing activity (initially through 2014’s Reshore UK) [11]. And while research highlights the optimism of the industry in 2024 on the one hand (with figures from Make UK indicating 52.7% of British manufacturers view the UK as a competitive place to locate their activities) [12], the other hand presents a bleak forecast for industrial growth (at only 0.1% for 2024, before increasing to 0.8% in 2025) [13]. So what exactly is going on?

While we won’t delve too deeply into the broader political scene, critics of the Government have highlighted a fundamental issue with productivity levels that reportedly date all the way back to the early 2000s, where an increased productivity gap (measured by GDP per hour of work) has emerged between the UK and its peers in France, Germany, and the USA (going from 9% in 2008 all the way up to 18% in 2022). [14] As to the underlying cause, there are potentially more than one could count, but the outcome is clear – the UK is facing a productivity crisis and is struggling to attract foreign investment in the same manner as before.

So, outside of the rudimentary notion of logistics being the facilitator of trade and commerce, how exactly does this tie in with the logistics industry? Well, according to research by Oxford Economics as of late 2023, the logistics industry may in fact be the solution to the UK’s “productivity puzzle” that we seek. [15] As such, the logistics industry is situated in quite the strange position, as both an industry limited by the performance of its industry peers and simultaneously the key to unlocking the potential of the UK beyond 2024.

To provide context, the UK’s position in the World Bank’s Logistics Performance Index (LPI) has deteriorated significantly in recent years, dropping from fourth place in 2014 to joint 19th as of 2023 (again coming behind its peers in France, Germany, and the USA). [16] Yet, according to Oxford Economics, restoring the UK’s position as a global leader in logistics could boost UK GDP by £3.9bn by 2030. In fact, Oxford Economics argues that if the UK were to rise back into the top of global rankings by 2025 could add some £7.9bn to GDP in today’s prices by 2030.

Of course, restoring Britain’s position as a logistics leader is far easier said than done, especially as evidenced by the marginally lessened confidence within the logistics sector and reduced overall CapEx spend we’re currently seeing. Yet, at the same time, it’s during these times that organisations able to circumvent the challenges of the day can really make a difference by driving down logistics costs, reducing risk in the logistics function, and designing a logistics service that allows businesses to focus on the core business activities that drive commercial growth. Perhaps 2024 is truly the year of the asset-light logistics function.

Ian Cramb, Managing Director at X2 (UK) stated: “The UK has always and will always be a fantastic market to be a part of. That said, there are certainly challenges that businesses have been facing for a number of years that still exist in 2024. We take our responsibility as an enabler of commerce and trade incredibly seriously and believe that, through intelligent, efficient, and tailored logistics solutions we can unlock the potential of organisations across retail, manufacturing, and beyond. As an organisation which is able to operate in a very strategic, asset-light manner, we can offer a level of logistical agility that can navigate the cost-pressures existing within logistics today and provide a service that allows long-overdue commercial growth for our clients.”