A good choice of speculatively developed warehouses on competitive terms has led to a reversal of historical trends. Liza Helps looks into the brave new world.
The total amount of available industrial floor space fell for the first time in five years, King Sturge’s latest report, Industrial & Distribution Floorspace Today, has revealed. Indeed this concurs with other research in the market place which shows that despite the recession occupiers have been exceedingly busy this year consolidating and even in some cases expanding.
Research by Jones Lang LaSalle says that occupier demand for large industrial and logistics units over 100,000 sq ft made a strong recovery during the first half of 2010 totalling 10.2 million sq ft – a 67 per cent increase on the previous half year.
In the same time period a total of 4.8 million sq ft of space was taken up in 13 new units, says King Sturge, of which two thirds was speculatively developed space with the design and build market accounting for the remainder.
“This is a reversal of historical trends whereby speculative space has generally accounted for only one third of the transactions. The increase in speculative take-up is a result of occupiers generally benefiting from a good choice of speculatively developed warehouses, available on competitive terms.
Already in the third quarter of the year there has been at least five further deals totalling nearly 1.075 million sq ft, with a few more in the pipeline that will continue to push take-up higher.
Research by DTZ shows that the total UK take up of industrial buildings over 50,000 sq ft in the first half of the year was 43 per cent up on the first half of 2009.
“A key driver of take-up was grade A stock accounting for 48 per cent of the total, as occupiers took the opportunity to trade up.”
This has continued into quarter three with a further two per cent drop in the amount of available grade A space. Indeed such is overall demand at present that in those areas with a relative shortage of grade A space, attention switched to good quality grade B stock; thereby reducing grade B availability by three per cent, although overall volumes of grade B stock remain elevated at 121 million sq ft.
With very little new space being built there are now regions such as Wales, Scotland and the South West where less than ten per cent of total availability can be described as grade A stock.
“Prospective tenants with urgent requirements for prime space in these regions are faced with a distinct lack of choice”.
The strongest occupier activity was recorded in the Midlands which accounted for 50 per cent of the total figure. In comparison with 2009 volumes, take-up almost tripled in the East Midlands alone.
Not surprisingly, the Midlands also recorded the largest reduction in available floor space during the first half of 2010, as a number of big shed transactions created a notable dent in the overhang of supply.
Robert Rae of North Rae Sanders says: “There are a number of deals going through now in time for Christmas and by January the pitch will be a lot clearer as to what is left.”
Recent deals have included US fashion retailer Urban Outfitters taking PRUPIM’s 240,000 sq ft Rushden Link development in Northampton, on a ten-year lease at a rent believed to be in the region of £3.50 per sq ft, considerably less than the £4.75 per sq ft rent quoted. DTZ advised Urban Outfitters, Jones Lang LaSalle and Burbage Realty advised PRUPIM.
As well as Gem Distribution securing CBRE Investors’ 245,000 sq ft Fourteen:45 warehouse at Warth Park. North Rae Sanders advised.
Other key deals include Boots’ occupancy of Opus Axis, a 463,000 sq ft building in Burton upon Trent; Oxford University Press’ 402,000 sq ft letting at Zone C, ProLogis Park, in Kettering; and 99p Stores’ 373,000 sq ft letting at ProLogis Park in Northampton.
Commenting on recent research, CBRE’s Richard Meering says: “The Midlands continues to be the dominant region in the industrial and logistics property sector. Take-up in the region accounted for more than 50 per cent of the market, with the majority of the deals during the quarter being a combination of existing speculative buildings, built in the past few years, such as Opus Axis and Zone C, ProLogis Park, and large design and build commitments, with one of the first notable pre-lets being Gazeley’s deal with Butcher’s Pet Foods at Crick for a bespoke 240,000 sq ft new production facility. As a result of the high level of demand, there has been a significant reduction in the number of existing modern speculative units.”
Indeed a number of warehouses that have been on the market for some time have now been, or are shortly due to be let; the most predominant being the letting of The Big Swan to Pets at Home. The pet retailer has taken the 330,000 sq ft warehouse at a rent considerably below the £5.75 per sq ft quoting rent.
The property boasts a 12m eaves height and 36 dock and two level access doors, as well as a 50kN/sq m floor loading, and was being marketed by North Rae Sanders and CB Richard Ellis.
It benefits from two secure yards with a minimum 50m depth and has a gatehouse and 1,900 sq ft transport office. There is room for 45 HGVs, as well as 233 car parking spaces.
Another property which has been on the market for a while was finally occupied by AT Logistics. Max Park in Corby has been on the market since 2006 when it was acquired by Kaycee Estates through Perland Properties.
Totalling 212,000 sq ft, the facility, one of two warehouses on the site, has 16 dock and two level access doors as well as an eaves height of 12m. It was marketed through GVA Grimley and Burbage Realty with a quoting rent of £4.50 per sq ft.
Following a sustained period of marketing, North Rae Sanders and Knight Frank successfully let PRUPIM’s 105,000 sq ft Express Point scheme on Wood Lane, Birmingham to local occupier Stapleton Tyres. The company took the building on a ten-year lease with a break at year five. The headline rent equated to £4.75 psf. The unit developed by Astral Development is a modern distribution warehouse boasting 12m eaves as well as a 50kN/sq m floor loading.
Such has been the take up in recent months that Daniel Miller of Strutt & Parker says: “If you are looking along the M1 Corridor in the Midlands for a 200,000 sq ft warehouse there is hardly anything there.”
All over the country there are pockets of severe shortage of space. Along the M27 motorway to Southampton, Jerry Vigus of Lambert Smith Hampton says: “A number of large manufacturing and distribution facilities have been successfully let in recent months, leading to a shortage in supply. While it’s obviously encouraging to see this increase in demand for units over 30,000 sq ft, if there is no supply for future demand then there could be significant long-term consequences for occupiers.
“The global economic climate, coupled with the government’s implementation of Empty Property Rates legislation, put a halt to speculative development. Now that the market has turned a corner, the knock-on effects of that halt are being felt.
“We have a number of developers and institutional clients who are well aware of the shortage of stock along the M27 corridor, but due to funding issues and – more importantly – Empty Property Rates legislation, there is no incentive for them to speculatively construct units to satisfy the demand.
This will mean occupiers will have to consider the D&B opportunities, although there is even a shortage of these sites – particularly in and around Southampton and Eastleigh.”
There has been an upturn in activity in this region over the last couple of months, including the letting of Unit 3 Trilogy, a 44,000 sq ft unit at Segensworth North owned by SEGRO, to Runfold Medical. A further transaction is under offer at Unit 1 Trilogy, amounting to 50,000 sq ft. Once this deal completes, there will be no units above 40,000 sq ft available along the M27 corridor.”
The same can be said for the South East where Tim Johnson of King Sturge says: “New floor space continues to decline causing a shortage of good quality product, and occupiers are now experiencing a severe lack of this space particularly in the core industrial areas.”
Gerald Eve’s latest Prime Logistics report highlights many of the areas where occupiers may find difficulty in securing big sheds. In fact, in the 150,000 – 250,000 sq ft range there are three regions where there is less than a year’s supply of standing stock and seven regions where there is less than 2.5 years’ worth of available supply in both new and second-hand space.
When looking at larger units, says Sally Bruer of Gerald Eve: “It is unsurprising that there are a much larger number of regions with constrained supply; there are fewer of these units currently standing and they are demanded less frequently than the smaller unit sizes. There are six markets with less than a year’s worth of supply and another six markets with 1-2.5 years’ worth of available supply. Of these markets, seven have above-average take-up activity levels.
“It is important to note in sizes over 250,000 sq ft, it is far more likely that units will be taken as design and build schemes rather than as standing stock. Of the seven markets that have activity levels over the average, five have enjoyed demand for units of this size band for standing stock – either as new speculative schemes or second-hand buildings – in 2008 and 2009.”
These markets are the Southern East Midlands, West Yorkshire, Northern West Midlands, London East, and the North East.
Mark Webster of Cushman & Wakefield says: “If you want a building of 500,000 sq ft plus you are really going to struggle.”
The Prime Logistics report bears that statement out. It reports that the majority of take-up in this size range has been via D&B due to the very nature of such a commitment. Looking at standing stock, both new and second-hand, the report says: “There are currently only 13 available representing 8.3 million sq ft of floor space. Of these 13 units, only four are newly developed, three of which were completed in the past three years and one developed five years ago.
These include Gazeley’s 700,000 sq ft Flair unit at G.Park Rugeley. The huge cross-dock warehouse is set on a 40-acre site and boasts a clear internal height of 14.3m to underside of haunch and a floor loading of 50kN/sq m. It has 80 loading docks, eight level access doors and 260 HGV spaces. Letting agents are CBRE, Cushman & Wakefield and Burbage Realty.
There is also CBRE Investors’ SIRFT facility built by HelioSlough. The scheme consists of two high bay distribution units of 334,781 sq ft and 291,143 sq ft, which can be combined to provide 647,000 sq ft. There are two private rail sidings providing direct rail access to the Tinsley line and each building has an integral two-storey office block.
In Bristol there is ProLogis’ brand new Crossflow 550 at ProLogis Cabot Park. The 549,626 sq ft cross-docked warehouse has 50 dock and eight level access doors as well as a 12m eaves height. It is available through letting agents Knight Frank and Savills.
On the second-hand front, there is DHL’s 750,000 sq ft Nimbus warehouse in Doncaster which the company has been trying to offload ever since MFI folded. The cross-docked property was taken on a ten-year lease with a five-year break in 2007 at a yearly rent of £3.075 million. It was forward funded by CBRE Investors to the tune of £45 million in 2006. The cross-docked facility has 75 dock and 13 level access doors, as well as a 15m eaves height. It has racking for 76,610 pallet spaces and comes heated, lit and fully sprinklered. Letting agent is CBRE.
There is also the Crackerjack warehouse in Corby totalling 528,108 sq ft. The cross-docked facility has 50 dock levellers and four level access doors as well as a 15m eaves height. It is being marketed by GVA Grimley and CBRE.
Even in areas where there is relatively high availability there has been a surge in take-up. According to DTZ, in Yorkshire and Humberside take-up increased 27 per cent in the third quarter, with demand again squarely focused on grade A buildings. Retailers such as Asda, Amazon, Scotts Miracle Gro, Poundworld and others have collectively taken nearly 1.75 million sq ft of space out of circulation.
With no new development, take-up in the region has reduced but not wiped out the amount of grade A space in West Yorkshire, particularly along the M62 corridor. “This is expected to fall further with Debenhams taking Sherburn 666 at Sherburn Distribution Park.” The warehouse built by Gladman and owned by Evander Properties totals 666,898 sq ft and has a 15m eaves height, as well as 58 dock and two level access doors. Letting agent is CBRE.
“However, the wealth of prime space available in South Yorkshire means the region as a whole still has the highest ratio of available prime space of all UK regions.”
Over in the North West, David Brooks of King Sturge says: “There has been renewed activity in the high bay warehouse sector above 250,000 sq ft with on going positive interest in many of the speculatively built units of a similar size. This is the result of occupiers taking advantage of strong negotiating positions and being opportunistic on both a freehold and leasehold basis to cover existing and future requirements. There is now a shortage of supply in some size ranges and consequently interest in design and build solutions has increased.”
According to King Sturge the amount of available new space in units over 100,000 sq ft stood at around 16 million sq ft in 76 units. All agree that this supply varies from region to region highlighting a strong North-South divide with Yorkshire and Humberside and the North West accounting for large shares of current supply, and with demand remaining patchy in these areas there is still a window of opportunity for occupiers to secure soft deals.
Rob Oliver of GVA Grimley says: “There are a few more deals yet in these regions before landlords are out of the ‘burning hand’ territory in terms of rents and lease terms.”
It is definitely an occupiers’ market. Both Asda and Amazon secured extremely flexible deals of just two years on the space occupied in Yorkshire this year, while ASOS, which found itself surprisingly footloose, was able to secure an excellent deal at ProLogis Park Barnsley.
The internet fashion retailer was searching for space in Bedford but failing to get satisfaction opted to look further north. It secured ProLogis’ CrossFlow 530 building earlier this summer at a rent considerably below the £3.95 per sq ft headline rent through letting agents BNP Paribas Real Estate, Dove Haigh Phillips and Fisher Hargreaves Proctor.
The cross-dock facility totalling 530,168 sq ft is situated 20 miles north of Sheffield, close to Junction 36 of the M1 motorway and Junction 37 of the A1(M). It has 15m eaves and boasts 77 dock levellers and four level access doors, as well as 15 per cent roof lights. In addition, it has three-storey offices with double-glazing and a separate transport hub office. Outside it has a 50m deep yard as well as parking for 157 lorries and 392 cars.
Since the building has been on the market for some time the deal struck is thought to be advantageous and could even include fit out as well as other incentives.
In areas where there is a relatively large amount of stock there are also opportunities for occupiers to secure freeholds. Indeed Miller says there have been a number of freehold deals in recent months.
These include Cadogan Tate securing the 142,918 sq ft Cubic warehouse in Hemel Hempstead for around £4 million or roughly £28 per sq ft, discount retailer B&M getting Rockpoint’s 618,839 sq ft The Vault facility at Liverpool International Business Park for about £14.85 million or around £24 per sq ft and Asda supplier Forza securing PPG Land’s 105,000 sq ft Link 62 warehouse for well under the £65 per sq ft asking price.
In contrast, in the wider South East and South West markets the supply of new or good quality distribution is rapidly diminishing. In these locations occupiers are less likely to be able to negotiate bargains and will be forced to consider design and build solutions or modern, second-hand stock to satisfy their demands.
Prime headline rents have remained stable, although these are largely propped up by generous incentive packages.
In most area, the market is still more favourable to tenants with occupiers tasking advantage of very competitive deals. Rent-free periods of up to 12 months are being offered for five-year terms, while stepped rents and capital contributions to fit-outs are still common.
Reducing void levels and increasing rent income is seen as the key to the success of large industrial landlords. These landlords are proving flexible to tenants requests for building specification or fit-out to secure lettings and are actively trying to differentiate their stock to entice new occupiers.
In fact in general terms, rent levels according to the latest forecasts by King Sturge are expected to see further downward adjustments this year and next before returning to modest growth in 2012.
Indeed earlier this year Jones Lang LaSalle reported that over the last 12 months prime distribution warehousing headline rents decreased across all main distribution warehousing markets.
Rents declined by more than 20 per cent in Edinburgh, by 12.5 per cent in Glasgow, by 8.3 per cent in Leeds, by six per cent in Manchester and by 1.6 per cent in London year-on-year.
Gazeley starts work on £70m B&Q shed
Gazeley has begun work on site for the 796,649 sq ft B&Q distribution centre at G.Park Swindon. The £70m build-to-suit regional hub will serve B&Q stores across the south of England.
Bob Brown, senior investment & development manager at B&Q, said: “This investment in a new regional distribution centre will help to improve customer service across the south of England. We are delighted that Gazeley is developing the facility and look forward to seeing the finished building in the near future.”
Nigel Godfrey, UK senior vice president for Gazeley, said: “This is the biggest development of its kind currently being built in the UK and to deliver the warehouse to B&Q by June 2011 is a challenge that we look forward to meeting.”