The industrial sector and office sector have both seen significant flux in the past year. In a global macroeconomic environment filled with shifting trends and difficult lending policies, the commercial real estate (CRE) market is filled with market participants hunting for every opportunity they can find. In the UK specifically, this – along with shifting renter focus – has led to the rise of two new niche sectors in the United Kingdom. In the office sector, we’ve seen the rise of the UK Lab Space niche sector; and in the industrial sector, Industrial Outdoor Storage (IOS) is rising fast.

Overall, the past few months of UK CRE has shown that commercial assets are valued approximately 10-11% too low. This means that there is a spread of opportunity to generate unlevered returns across the market. And when real estate is cheap compared to base investments, market participants have the chance to enter the market with a low barrier to entry –that they can take advantage of to hop into investing at an opportune time.

This opens a potential window through which UK investors can look towards budding markets, such as these new niche sectors. So, let’s take a moment to examine them with a bit more of a discerning eye.

Starting with UK Lab Space, we’ll focus on the name itself. The name “lab space” is used for the niche sector as opposed to “life science” or “labs” because the spaces can be used for a wide array of purposes. Lab spaces include other scientific fields, such as innovation & tech, as well as other related activities like venture capital, legal purposes, or even government agencies. Essentially. these assets are former offices or life science spaces that are being repurposed as lab space rentals within the same location – allowing for a multitude of different uses and a wide spanning name that includes all these possibilities.

Given that the UK life science sector is significantly smaller than the US life science sector, this distinction is important. Even in the primary source of lab space assets, there is only 7M square footage in the UK golden triangle as opposed to 47M in the US.

The three cities (Cambridge, Oxford, and London) that make up the UK’s golden triangle constitute nearly 40% of the cumulative VC funding in the lab space sector. And given the projected growth in the sector through 2027, this number is only expected to increase. As the lab space sector seems to intersect with both life sciences and office, the projected growth in US life science (3.6%) and office (1.9%), both bode well for lab space investors. On top of that, the expected rent increases in London specifically should help cap supply so that demand can continue to rise ahead of the curve, further assisting asset owners.

Outside of the lab space, recent research has also brought forth new opportunities arising in the UK industrial sector. Industrial outdoor storage (IOS) is already a subset of assets already folded into many an industrial portfolio. But these days landlords are deliberately trying to segment out these workstreams given the recent spike in demand, creating the emergence of an entirely unique subsector. Under 20% of floor-to-area ratios, as opposed to the 60% in traditional industrial assets, distinguishes these assets as a new type of their own. Some are even under 2-acres in size.

In fact, ultra urban sites under the 2-acre mark are generating the most demand. The recent increases in demand even have active tenants currently pushing for longer leases given the lack of supply. And as local municipalities favor residential projections in development, these IOS assets are still struggling to meet demand with supply – creating even further opportunity for rents to rise. The IOS subsector is still dealing with sourcing issues, however the lower cap-ex features of assets and the much higher projected rental increases pose risk adjusted returns which should dramatically justify the investments for the right investor.

All in all, these two subsectors alone should paint the picture vividly of how certain niche investments are poised to grow – should you be able to find them. But accessing the right data and the right insights from that data will make all the difference in helping you not only identify the right opportunities – but get ahead before the market finds them as well. Be sure to watch the Green Street UK Niche Sectors Webinar to hear more about these two niche sectors and what’s to be expected from them in the larger context of UK CRE Growth.

Learn more about CRE debt funds by watching the replay of our webinar or talking to a CRE specialist on Private Credit today.