Despite being told that there is more space on the market, occupiers are being warned to prepare themselves for the credit crunch fallout. Liza Helps investigates.
This represents the sixth consecutive six-month period when an increase in floor space availability has been recorded and represents a new high.
However, the level of increase was minimal, with a nominal percentage rise of 0.5 per cent (1,172,840 sq ft) in this survey compared to 0.8 per cent in December 2007 and the 4.5 per cent increase this time last year.
Two of the northern regions and Wales produced the largest percentage increases. The North West was highest at 4.3 per cent with Yorkshire and Humberside at 3.4 per cent. Wales had the second highest increase at 3.9 per cent while The North and East Anglia recorded nominal rises of 0.2 per cent and 0.4 per cent respectively.
So why with all these increases are there warnings that space is running out? For starters there has been a reduction in the amount of large buildings over 100,000 sq ft, admittedly only a marginal decrease of 527,240 sq ft (0.8 per cent) to 66,518,320 sq ft, but added to that there has been for the first time in a long while, regions where the total amount of available floor space has decreased.
In the South East availability was down by 2.4 per cent, which would have been more but for a nominal increase in the Greater London sub-region, while Scotland fell by 1.9 per cent and the West Midlands by 1.5 per cent.
Paul Harknett of Savills says that big shed availability in the South East has dropped considerably. “There has been a major shift witnessed in the South East where years of supply has gone from four years in 2007 to its current level of just two years.”
Charlie Howard of M3 agrees and adds: “The pipeline is limited especially north of the river.”
Jon Sleeman of King Sturge explains: “It’s always the same, occupiers ask if there is an over-supply in the market, how come I can’t find any? There is nearly always a mismatch and there is never as much as you think.”
So despite an increase in the availability of new floor space – up six per cent to a new high of 31,903,400 sq ft – it’s not necessarily in the right place.
Indeed, along certain stretches of the M1 corridor there is virtually no immediately available space. Mark Coxon of Cushman & Wakefield says: “There is a lack of large buildings along the M1. There are requirements from larger occupiers, which is creating a competitive situation for every occupier looking.
“It seems as if the M1 corridor is one of the busiest locations in the UK for distribution. That means developers and landlords will be in a strong position as there are a limited number of existing buildings, those occupiers who cannot wait will pay the price.”
So what does this mean for those occupiers looking in areas where there is a shortage of large sheds? Richard Evans of Jones Lang LaSalle explains: “It means two things: first, [with the reduction in space available] if we look at the medium term, rents will start to increase. You could say it is the start of the rot for occupiers. Incentives will decrease, whereas 12 months ago there was a lot of fat in the margins and developers and investors could afford stonking rent-frees, it is now harder for developers to do that deal. Secondly, there will be longer leases – certainly 15-year leases could become more common again.”
Chip Mitton of Altus Edwin Hill agrees. He says: “Because yields have gone out landlords will need to stand firm on rent as they cannot afford to fall back – this means occupiers will be faced with paying higher rents or lower incentives in the future. At present rents have stabilised but [developers and landlords’] ability to put in a lot of incentives is diminishing.”
But surely the shortages won’t last long. Well, they just might, so even in areas where there is at present a plentiful supply of space, it may not last, particularly if take-up continues at the level it is at currently.
According to Gerald Eve in its latest Prime Logistics Report over 10m sq ft of space was taken up in the first quarter of this year.
Retailers continue to drive demand – particularly for large warehouses – and their distribution operations now occupy 19 per cent of all logistics space. This sector accounted for almost a third of all demand last year and 61 per cent of floor space taken up in units of 250,000 sq ft-plus over the past two years.
Indeed a major retailer is looking for 750,000 sq ft of space along the M1 corridor and recently Marks & Spencer confirmed that it would be taking one million sq ft of space at ProLogis Bradford in West Yorkshire.
According to King Sturge, there has been a 43 per cent decrease in available floor space under construction falling to 7,657,364 sq ft across 73 schemes compared with figures from six months ago. This is the second consecutive six-month period in which a fall has been recorded and the lowest recorded figure since 2004.
Approximately half of the floor space under construction speculatively in Great Britain was confined to the East and West Midlands. The highest proportion was recorded in the West Midlands, totalling almost 25 per cent of all floor space under development. The East Midlands accounted for 24.1 per cent of the total floor space under construction. And although hardly a beacon for distribution, East Anglia is the only region in which no speculative development was recorded in the past half year.
Work began on only 14 new speculative schemes in the first quarter of 2008 compared with 26 in quarter four of 2007, says Gerald Eve’s latest Prime Logistics Report, not surprising given the abolition of empty rates relief and the drying up of available speculative finance.
Indeed the Second Quarter 2008 RICS Commercial Market Survey stated: “New development starts declined at a regional level for the fourth consecutive quarter and at the fastest pace in the survey’s history.
“New development completions declined at a regional level for the third consecutive quarter and at the fastest pace in the survey’s history.”
However, there is a little ray of sunshine according to Savills there is currently 129 million sq ft of potential development on available sites across the country – but as you may guess very little of that is going to be speculatively built.
The impact of the empty rates changes is likely to be widely felt, not only in the slowing of speculative supply but also in the cost of vacant stock. Gerald Eve says about two thirds of speculative schemes built in quarters one and two last year are still available today.
Where there is a perceived over supply of space many are agreed that it is definitely an occupiers’ market. Sleeman says: “At the moment there is quite a lot of supply in certain regions and tenants have the balance of power. They are able to negotiate potentially very good deals by way of incentive packages that they would not have got 12 months ago.
“Some buildings have been on the market for a long time, in some cases even a couple of years or more and where developers are paying empty rates and there is competition good deals can be had.”
Jane Dobie of Knight Frank agrees: “Tenants have the upper hand at the moment and developers are having to adjust. In some cases rents have come down – Goodman was marketing its Pioneer Point site at £4.25 per sq ft – this is now down to £3.50 per sq ft.”
On the back of this German corrugated cardboard manufacturer Prowell has secured a 210,000 sq ft letting at the 625,000 sq ft scheme.
Originally Pioneer Point had been marketed as a single cross dock unit offering 62 dock levellers and 18 level access doors. It has 55m yards and 76 lorry trailer and 316 car parking spaces on a 30-acre site. The building also has 20,000 sq ft of offices as well as 18m eaves, which can accommodate 128,000 pallet spaces with VNA racking or 70,000 pallet spaces with a reach truck. Letting agents are CB Richard Ellis, M3 and Lamonts.
Evans says: “Where there is pressure for a landlord to let there will be more flexibility, and provided the covenant strength is significant, developers and landlords will be prepared to look at innovative deals.”
Where there has been take-up one would expect developers to be pushing forward with schemes, but in the current financial crisis this does not seem to be happening.
Paul Nicholson of Atisreal’s Newcastle office says there has been a spate of retailers taking space in the region, including the Argos Direct facility on the Faverdale Industrial Estate, Darlington. This leviathan provides 740,000 sq ft of space, complete with offices and a large number of loading bays, enabling quick deliveries to the regional market.
Another retailer, Asda, will shortly open a 360,000 sq ft distribution unit at Teesport, following on from its 330,000 sq ft unit opened in Washington nearly two years ago.
“The scale of these buildings, for the sole purpose of distribution, is something very new to the region, which, less than five years ago was not a feature of the market. Thus the ‘big shed’ is a sector seemingly in its infancy.”
Both Faverdale and Wynyard are big shed clusters, as is eastern Co Durham where there is a 140,000 sq ft shed available at £4.55 per sq ft. Again this has a good number of loading bays with 12m eaves height.
South of Newcastle, at Chester-le-Street, Gladman is developing a big shed cluster on the Drum Industrial Estate. In all, 348,000 sq ft is available in two units, one of 264,000 sq ft and the other 84,000 sq ft. A 270,000 sq ft unit has been let to the Co-op.
Continuing this trend HelioSlough has completed and sold a 300,000 sq ft speculative unit at Wynyard Business Park, Teesside, and has planning permission for an additional 400,000 sq ft unit.
One would expect in normal circumstances that developers and investors would be keen to develop speculatively to secure potential occupiers from under the noses of their rivals but it is not the case.
Merchant Place Developments has categorically said it will wait for pre-lets for its 1.4 million sq ft Amazon Park in Newton Aycliffe, and there is no movement by Helios to speculatively develop out again at Wynyard Business Park.
As time goes on and space gets taken up there will be a lag before new speculative space is built. Evans says that: “With one or two exceptions there will be nothing like the level of supply we have had in the last few years and therefore it’s going to get tougher for the occupier market to do deals as there will not be the supply. In these circumstances a lot of occupiers will be making more strategic acquisitions happy to do deals on the design and build (D&B) basis.
“There will be more of a trend towards bespoke building than there has been in the past five years and this is a different negotiating environment.”
David Brooks of DTZ warns: “There is almost a two-tier market between existing buildings and build to suit. On the one hand D&B provides a service where occupiers can get exactly what they want but developers with D&B are looking to get returns reflecting higher build costs. D&B is significantly more expensive than acquiring a speculatively built high bay building.”