London Industrial: Where Scarcity Does the Heavy Lifting

Long-term land erosion and constrained deliverability now do more to support values than transaction volumes or near-term movements in the cost of capital. While recent commentary has focused on softer liquidity and repricing, this risks underestimating the durable forces that continue to underpin London industrial as a long-term investment strategy.

A Market Built on a Shrinking Land Base

London’s industrial land supply has been contracting for more than two decades. Since the early 2000s, total industrial floorspace has declined materially, even as residential delivery and population growth have accelerated. Around a quarter of the Capital’s industrial floorspace has been lost over this period.

Over the same timeframe, London’s population has grown by more than 20%, while employment density in industrial-adjacent sectors has continued to increase. Industrial land release has occurred alongside rising structural demand, suggesting it is not primarily driven by obsolescence or declining utility. Today, industrial land accounts for less than 8% of total land use in Greater London, despite supporting a significantly higher share of economic activity and employment.

For investors, this materially reshapes the risk profile of the sector. Industrial land has not simply been displaced by alternative industrial formats; in many locations it has been permanently released to higher-value uses. The supply side is therefore structurally impaired and unable to respond meaningfully to pricing signals within a typical investment horizon.

The impact has been most acute in Inner London, where several boroughs have experienced industrial land losses of 40–50% since 2002. Outer London has also seen a net decline typically in the order of 10–20% over the same period based on VOA floorspace trends, despite historically accommodating a larger share of London’s industrial capacity. The result is a finite and shrinking investable universe, embedding scarcity at a fundamental level, limiting the scope for future dilution through new supply.

The Structural Undersupply Shaping London Industrial Performance

In previous cycles, rising rents stimulated new supply, which in turn moderated rental growth. In London industrial, this mechanism has weakened materially.

Since 2022, high industrial land values and inflated vendor pricing aspirations have caused a significant reduction in speculative industrial and logistics development. This hangover in pricing from the peak of the I&L market in 2022, did not align with the reality of yields having softened by 150 basis points in the following few years.

Due to various headwinds including the cost-of-living crisis, global tariffs, geopolitical conflicts and continued high levels of inflation, the occupational market has been relatively stagnant since 2022. Increased occupier costs, coupled with high London rental values, have meant that occupiers have been unable or unwilling to upgrade to larger or more modern units within the Capital, and indeed some have chosen to move further out to save on overheads.

In addition to high land prices and lack of sites, new development has also been constrained by build costs, which have increased by more than 30% over the past five years. Environmental, Social, and Governance (ESG) and biodiversity net gain (BNG) requirements have become a non-negotiable and increased upfront capital expenditure. A lack of available power in the capital, particularly in West London has also been a constraint on speculative development, with grid connection lead times in several submarkets extending beyond 24–36 months, increasing delivery risk and capital exposure.

As a result, new supply represents only a small proportion of existing stock, and speculative delivery across the capital remains limited at present. This has important implications for underwriting.

Downside risk from new supply is constrained, while improving occupier demand will reduce overall vacancy rates and kick start rental growth (the timing of which will be impacted by the current Middle East conflicts).

During H2 2025, we did see a slight uptick in development land trading, which should trickle through to new supply in some localised markets, but this is not widespread. Localised market conditions are highly varied across different London sub-markets, and this will determine how much supply is delivered in each. For now, activity remains focussed on prime markets with access to the highest degree of the most affluent households.

Occupier Demand Lacks Optionality

As stated above, the various London submarkets are displaying varying characteristics. Occupier fundamentals are improving but vacancy rates on the face of it, are high in some areas.

But a meaningful proportion of available space is short-term, secondary or functionally constrained by yard depth, power capacity or access. Headline availability therefore overstates the level of genuine occupier choice.

Demand is increasingly driven by occupiers that are operationally tied to London. Urban logistics operators, trade and servicing businesses, creative and media occupiers, life science users and infrastructure-linked uses are typically less mobile and less price-sensitive. Proximity to customers, access to labour and operational reliability often outweigh headline rent considerations.

For investors, this underpins income durability even during periods of softer market sentiment. Demand is driven by operational necessity rather than discretionary expansion, reducing the risk of rapid occupier withdrawal.

Occupational Case Study: Limited Relocation Options

A recent Inner London multi-let estate provides a clear illustration. A long-standing trade and distribution occupier reached lease expiry on a mid-sized unit and explored relocation options outside the borough in an attempt to mitigate rental uplift. While cheaper headline rents were identified in Outer London, the occupier ultimately renewed in-situ at a materially higher rent.

The decision was driven by operational constraints rather than affordability. Relocation would have increased journey times for staff, reduced same-day servicing capability and disrupted established delivery routes within Inner London. The cost and operational risk outweighed the rent differential.

This pattern is increasingly common across well-located London industrial stock, reinforcing the link between operational dependency and income resilience. It also reflects the fact that rents in Outer London have grown more rapidly than Inner London rents since 2022, so the differential between the two has narrowed.

Repricing in Land Markets Begins to Unlock Development

Following two years of limited development activity, land is beginning to trade again and developers are returning to the market. This renewed activity has largely been enabled by falling land values.

Recent softening in land and development volumes has often been interpreted as a loss of market conviction. In reality, liquidity has shifted rather than disappeared. In our experience, land pricing was slower to fall than standing assets, which led to mis-pricing after yields had softened post 2022. This meant development was unviable, and so site sales dried up. However, landowners have now accepted that yields are not recovering to 2022 levels any time soon and transaction activity is recovering.

Residential development in London also remains largely unviable at present. As a result, competition for alternative uses is limited and the prospect of selling sites for a higher-value residential use is increasingly unrealistic.

For well-capitalised investors, this adjustment in land pricing is beginning to reopen development opportunities within London’s industrial sector. As land values move closer to underwriting assumptions and supply remains constrained, development returns are becoming easier to justify.

Replacement Cost as a Value Anchor

Rising build costs and sustained land erosion have pushed replacement cost to the centre of the investment thesis. In several London submarkets, replacement cost now exceeds the capital value of standing secondary stock, even before abnormal costs or planning risk are applied.

As the cost of delivering new space increases, the likelihood that rental growth is undermined by competing supply diminishes. Existing assets benefit from scarcity, while deliverable development schemes take on increased strategic importance within a constrained market.

London’s industrial land loss has been materially greater than in other major UK city regions, with floorspace declining by around 24% since 2000 compared with approximately 20% in Manchester, 18–20% in Birmingham and 15–18% in Leeds based on VOA trends. This helps explain why values have proven more resilient than sentiment alone would suggest and reinforces the role of replacement cost as a valuation anchor.

A More Nuanced Opportunity Set

London industrial is not a single-strategy market. Core assets benefit from income resilience and rental tension. Core-plus and value-add opportunities remain compelling where entry pricing and business plan costs versus risks are properly balanced.

Development now sits alongside these strategies as a credible and increasingly liquid route to accessing future-proof stock in a structurally constrained market.

In our view, London needs to be assessed at a more micro level. It has been unfairly dismissed by some on the basis of high-level statements around affordability and void, which often do not hold true.

Conclusion: Scarcity is the Investment Thesis

London industrial should be underwritten as a structural scarcity strategy rather than a cyclical logistics trade. The land base has materially eroded, supply responsiveness is constrained and occupier demand is embedded within the capital’s economic infrastructure. Capital values have already adjusted to reflect a higher-for-longer cost of capital environment, bringing pricing closer to realistic underwriting assumptions.

London represents around a quarter of the UK economy despite accounting for only around 13% of the population, combining the country’s largest consumer market with the highest household spending per capita. This concentration of economic activity underpins one of the deepest and most diverse occupier bases in Europe, supporting demand from logistics, urban distribution, manufacturing, trade counters, and service-led occupiers that require proximity to the capital’s consumption base.

At the same time, buyer competition remains relatively subdued. For well-capitalised investors, this creates a window where development sites and assets can be secured with limited competitive tension in a market defined by long-term supply scarcity.

Scarcity, replacement risk, and the durability of London’s consumption economy will continue to shape the next phase of returns.

Unless otherwise stated, all data is provided by Newmark.