Monday 24th Oct 2016 - Logistics Manager

Is the party over?

The number of deals secured in the last few months has made grown men weep with relief, from the agent who will now secure his commission, to the developer who sees a cash flow at last, to the fund manager who no longer carries a tax albatross metaphorically round his neck in the form of empty rates.

At the moment everyone is happy, these deals are being heralded as rain after a drought; even the tenant is happy, because face facts, he’s secured a cracking deal on modern space at second-hand prices.

Would that it could stay like this but we live in the real world and sooner or later someone is going to have to pay.

The backlash could be starting now and it will be directed firmly at the tenant.

For all that there is a huge amount of space on the market not all of it will be suitable for modern logistics needs and with no sight of any speculative development on the horizon, it doesn’t take a genius to realise that there will be shortages fairly soon.

Paul Nicholson of BNP Paribas says: “In the North East, at first glance there is an 11-year supply pipeline across both new and second-hand space.

“However, only 2.7 million sq ft of that is modern space and very little under construction, the supply of new space can be quickly exhausted with just a handful of lettings.

“Frontline space with high BREEAM standards, sustainability credentials and the necessary functionality, in other words space fit for modern purpose, will be found to be in short supply.”

Over in the North West, Jason Print of Cushman & Wakefield, estimates that there is only about ten million sq ft of industrial accommodation available in units of 150,000 sq ft and over, this comprises a total of 31 units.

He says demand for these is currently split between those occupiers wanting short-term functional, flexible storage solutions and those looking to relocate or consolidate into modern/good quality accommodation.

“The former have a number of options available to them as there is a total of 3.4 million sq ft available with an eaves height of less than 8m, consequently such occupiers still have a strong negotiating position.”

However, he says that occupiers seeking modern/good quality accommodation requiring buildings with a minimum eaves height of ten metres will only find ten of the 31 units over 150,000 sq ft suitable.

Remove the mega shed supply from that and there is only 2.7 million sq ft of space available in seven schemes.

“If an occupier wants a unit of say 200,000 sq ft with an eaves height of 12 to 15m they have a choice of just two standalone units in the North West.”

Print warns: “While there is no need to hit the panic button now, the fact there is no speculative development being undertaken, and none on the horizon, should be a cause for concern.

“It only needs three or four of the seven good quality units to be taken in the next six to nine months and there will be a real supply problem for good quality units.

“Occupiers will then be in a much weaker negotiating position, which will lead to reduced incentives and occupiers having to compromise.

“The window of opportunity for occupiers is closing.”

Andrew Aherne of Lambert Smith Hampton agrees: “The net result of the current downturn is such that occupiers who are in the market for good quality premises have a limited selection of properties to choose from as speculative development has ceased.

Therefore, sites able to offer design and build solutions are likely to see greater activity over the next couple of years.

The speculative development sector is only likely to return when the economy does eventually recover.”

The latest Jones Lang LaSalle UK Logistics Market Report shows that following strong speculative development during the past three years, by the end of June 2009 only 1.7 million sq ft of new space had been completed with a further 3.5 million sq ft expected to be finished during the second half of the year.

Compared to 2008, the volume of new completions will be 64 per cent lower this year.

Richard Evans of Jones Lang LaSalle says: “The low level of new construction is currently reducing the risk of a further rise in vacancy rates.

However, Jones Lang LaSalle anticipates that the continuing higher levels of occupancy in prime markets combined with a lack of speculative development could lead to a shortage of good quality supply in key locations such as Greater London, the South East and parts of the Midlands.

King Sturge’s latest Industrial & Distribution Floorspace Today report notes that the first three months of 2009 saw the most drastic fall in demand, when only one build-to-suit transaction of 130,000 sq ft was agreed at the end of the quarter, to a food logistics company for a unit in Kent.

However, by the second quarter, a further five transactions totalling 600,981 sq ft were recorded, bringing the half-yearly total to 730,981 sq ft in six deals.

This compares with 2,654,670 sq ft taken up in 11 schemes over the second half of 2008, representing a 72 per cent downturn in floor space terms.

More recently, the third quarter of the year has seen a further increase in the number of big shed transactions taking place, with six deals concluding so far.

A total of 1,554,814 sq ft has been taken up since June in new units over 100,000 sq ft, with a number of other offers in the pipeline.

Out of the few transactions to take place in the first half of the year, two thirds (65.8 per cent) of the floor space involved speculatively developed units, with the remainder being build-to-suit transactions.

For the third quarter of the year so far, 68 per cent of transactions were speculative.

By comparison, during 2008 transactions involving speculatively developed floor space accounted for one third of total take up.

Developer ProLogis has been particularly successful in shifting speculative space, racking up lettings totalling more than one million sq ft across four schemes in the last two months.

It secured a 550,000 sq ft deal with Amazon in Peterborough, albeit on a very short-term lease, at its Kingspark scheme and has also let a 128,000 sq ft warehouse at its ProLogis Park Stafford to luxury goods group WWRD that owns and operates Waterford Crystal, Wedgwood and Royal Doulton.

Retailer M&S has taken its 382,000 sq ft facility at ProLogis Park Stoke while Taiwan-based global marketing and manufacturing group Kenmark has leased ProLogis’ 150,000 sq ft Eurohub Corby unit in Northamptonshire.

Budworth Hardcastle and North Rae Sanders advised ProLogis; Savills acted for Kenmark.

ProLogis implemented an aggressive letting campaign at the end of last year when it announced that it was offering leases from three years with six monthly break clauses thereafter across the whole of its five million sq ft portfolio in the UK.

Commenting on the move at the time, Alan Sarjant of ProLogis said: “In the current market, we are acutely aware that this is even more imperative and are looking to provide a range of innovative and effective packages that addresses lease lengths, incentives and occupational costs that enables them to operate in this continually demanding climate.

“It is a rapidly changing world and everyone was caught on the hop compared to where we were 12 months ago.

“The property market has had to adjust rapidly and ProLogis has responded well.

“We had 16 empty speculative buildings round the UK and our primary task was to get that stock income producing.”

Other developers are also having success in letting speculative space, indeed Goodman has two of its speculative warehouses under offer, leaving it with just one on its books in the form of The Citadel Centre, a 321,200 sq ft warehouse and distribution centre, strategically located only two miles from Junction 10 of the M6 motorway and six miles from the M5 motorway.

Comprising 304,200 sq ft of warehouse, and office space totalling 17,000 sq ft, Citadel offers the opportunity for either freehold or leasehold occupiers.

It has 12m eaves, two 50m yards as well as 28 dock and four level access doors and a 50kN/sq m floor loading. Letting agents are Knight Frank and Jones Lang LaSalle.

Simon Lloyd of DTZ points out that: “The tenor of deals being done has been kept confidential; leases in general are quite short and there are incentive payments as well.”

Cameron Mitchell of Jones Lang LaSalle adds: “The increased battle for tenants has led to highly competitive incentive packages which today can reach up to 24 months free rent period. Additionally, lease terms, especially lease length, are becoming increasingly flexible.”

Although Goodman’s Jason Dalby agrees there are many areas of the country where occupiers will still be able to secure remarkable deals on existing space, he points out there are areas even now that have a severe shortage, for example in the South.

He says: “Occupiers looking west of London clearly have a problem.”

The only realistic option available to many is to secure a pre-let but even though developers are keen to deal a pre-let will not come cheap.

The main reason for this, he explains, is that investment yields have gone out making it difficult to square the numbers for development unless occupiers are willing to take a long-term lease.

“Occupiers will have to pay a good rent and take a long lease for now anything less than 15 years just is not viable.” In effect, this creates a two-tier market between existing stock and build-to-suit/design & build (D&B).

Wish list
Only a few months ago developers could not even stack up the numbers to do a D&B but with the yield shift and the realisation that the commercial property market has bottomed out investors are tentatively seeking to re-enter and well-let distribution warehouses are at the top of the wish list.

With money coming in developers can now proceed with development, although it is unlikely there will be much speculative development.

However, those that hold sites are being more active at pushing it through the planning system.

Laurie Sice of says: “With unemployment high and still rising, local authorities will be very willing to grant planning permission for new business premises.”

Distribution companies – which according to recent figures employ around one in 12 of the private sector economy – create a lot of jobs for staff who often work around the clock in multiple shifts seven days a week, in the warehouse, in offices and on the road.

There certainly seems to be a change of attitude from the government to local councillors.

Recently the secretary of state overturned the refusal to grant planning for ProLogis’ and PRUPIM’s Hartland Park development in Farnborough, while in Newbury ProLogis’ controversial plans for the development of New Greenham Park at Greenham Common were also given the go-ahead at appeal.

ProLogis says the development would create about 500 jobs.

Developer Goodman also secured full planning consent for its £120m development of the former Andover Airfield site after a lengthy battle with campaigners and councillors.

It has just secured The Co-operative as tenant on a 450,000 sq ft warehouse on the site.

Dalby says: “[Councillors] are being more pragmatic especially when we are potentially bringing in more jobs to an area than before.”

Len Rosso of Colliers CRE says that the fact that developers are willing to put forward schemes in the current climate is “great news for the local boroughs and the economy as a whole”.

Mike Baugh of DTZ agrees: “Planning authorities are getting more pragmatic.

“Warehouses were seen as not providing proper jobs but the realisation is growing that developing warehousing gives rise to a lot of jobs and if as a councillor you are looking to stimulate economic activity this is one way.

“Obviously developers and landlords still have to go through the right procedures but attitudes are not quite as negative as they were in the past.”

Gladman has just secured planning approval for its Bevercotes Distribution Park in Nottinghamshire, which could accommodate 2.7 million sq ft of warehousing on the 200-acre site.

An individual facility of up to two million sq ft could be built with an eaves height of up to 30m.

Looking on the bright side for occupiers, Tim Suffield of BNP Paribas says: “In spite of take up in the last four or five months, occupiers are still being hit heavily in the rush of those offering good terms with 12 – 18 month rent-free periods.

“Supply is not an issue but gradually, bit by bit as the economy recovers new sheds will be the first to go. There will certainly be no shortage today, tomorrow or indeed in 2010.”

Recession leaves warehouse surplus in Staffordshire:
The recession has left the Staffordshire area with a surplus of large warehouses and distribution hubs trying to find occupiers, according to the Annual Review by Instaffs, the inward investment agency.

Within Stoke-on-Trent and Staffordshire 53 per cent of the available square footage is in buildings of more than 100,000 sq ft, which represents eight per cent of the entire building stock.

John de Kanter, InStaffs chief executive, says: “Next year promises to be just as tough, but we refuse to let the recession beat us and we retain confidence in our portfolio and our ability to attract high profile investors to the area.”

In a bid to ease the situation and attract potential occupiers, InStaffs has lobbied the government to try and amend the rating policy, but so far there has been no change.

“It is unfortunate that we are in this situation because Stoke-on-Trent and Staffordshire boasts some impressive buildings which would be an asset to any firm, says de Kanter.

“For example, this year saw the completion of the spectacular Blue Planet development in North Staffordshire – the first industrial building in the world to be awarded an excellent rating by BREEAM,” he adds.

The biggest change on last year is the decline in the number of speculative build projects. 2007/08 saw an unrivalled number of schemes in the market, but this dried up during 2008/09 as a result of the severe credit crunch.

“Speculative build activity is an important part of inward investment, but this faded away last year largely due to the recession, difficulty in obtaining finance and the levy of the Empty Building rating on premises with a rateable value of more than £15,000,” says de Kanter.

“The latter has had an extremely negative effect on design & build decisions by a developer.”