Thursday 23rd Feb 2017 - Logistics Manager

An all time high

A shortage of space and climbing rents could make the West Midlands too hot to handle. Liza Helps reports.

This article first appeared in Logistics Manager, October 2016.

This article first appeared in Logistics Manager, October 2016.

Rents could hit an all time high of £7 per sq ft in the near future in the region, according to property pundits. Knight Frank says that the £7 per sq ft rent for prime industrial properties is now “in sight”. IM Properties recently achieved £6.75 per sq ft at Birch Coppice, on an 80,000 sq ft pre-let to bathroom products supplier HiB.

But according Jon Ryan-Gill of Knight Frank, one deal on a 40,000 sq ft unit believed to be located in Hams Hall, has already been done off-market at £7 per sq ft, and he believes others are in the offing.

“It’s not that long ago that landlords and developers would have been more than happy with rents starting with a six. Now they are aspiring to seven,” he says.

It certainly seems to be the case for smaller units, John Dillon, managing director at GJS Dillon says: “Demand is far outstripping supply for industrial units between 3,000 sq ft and 40,000 sq ft in Worcestershire, as manufacturing and distribution businesses in the county continue to invest in new premises and show increasing confidence in the post-Brexit economy.

“This is placing upwards pressure on prices, so within the next six months I would expect to see new build industrial units up to 5,000 sq ft in the right location in the county touch as much as £120 per sq ft, while similar units to rent could reach £7 per sq ft.

While David Binks of Cushman & Wakefield agrees smaller units could hit this mark he says: “The £7 per sq ft threshold maybe a sought after headline rent but there is a quantum discount on larger units.”

He is backed up by Robert Rae of Avison Young, who notes: “With the exception of the Birch Coppice deal the general tone is £6.25 – 6.50 per sq ft for quoting rents on new stock.”

Simon Norton of Colliers International agrees. “Due to the shortage of space and continued demand rents and incentives have held post-Brexit – there have been no doomsday scenarios. Quoting rents are around £6.50 per sq ft but these are linked to what it costs to build and construction costs are not going down.”

Ranjit Gill of Savills is of the same persuasion: “We are constantly breaking new headline rents and while we have a shortage of space, occupiers will have to take a view on paying that extra. It must be noted that construction costs across the board continue to go up pushing rents and freehold prices.”

It is not just new stock where rental levels are being pushed. Rae says that rents on stock that is 15 years old are being pushed ever upwards.

He notes a deal done at Middlemarch Business Park in Coventry where the landlord was looking to re-let a 165,785 sq ft unit formerly occupied by Wincanton. The property was undergoing refurbishment when it was snapped up and a deal was done at around £6 per sq ft. Prior to refurbishment the landlord had been looking at a quoting rent of £5.75 per sq ft.

The property is thought to have been let to Gist for a contract. The facility has 12m eaves, 20 dock and two level access doors as well as a two-storey office, an 80m-yard and 77 HGV and 161 car parking spaces. Savills and Cushman & Wakefield advised.

“Although they are not going to achieve the same levels as for new builds, prices of good quality second hand units in established business park locations are increasing quarter on quarter, and when they do become available are highly sought after, frequently going to best and final bids,” says Dillon.

A number of factors have combined to push up industrial rents, not least pressure on stock availability.

Knight Frank’s latest LOGIC (‘Logistics and Industrial Occupier and Investment Market Commentary”) report shows that prime stock levels in the Midlands have now diminished to around nine months’ supply with existing new build stock in excess of 50,000 sq ft now just shy of two million sq ft across 12 buildings.

Take-up of units larger than 50,000 sq ft reached 6.04 million sq ft in the first half of this year, 34 per cent up on the same period last year and 37 per cent up on the H1 five year average.

Richard Meering of CBRE notes: “The Midlands is the Mayfair of sheds. It is home to the country’s biggest warehousing units and the epicentre of its distribution network. This is reflected in the record levels of take-up we have seen so far this year and the consistent levels of commitment to the region.”

Among the deals over 100,000 sq ft contributing to the 5.61 million sq ft total take-up in the Midlands were JLR’s commitment to a further 468,955 sq ft across two units at Prologis Park in Ryton, Coventry; retailer Ted Baker’s acquisition of 325,000 sq ft at Angle 325 at Derby Commercial Park, and Boden’s pre-letting of 275,220 sq ft at Wilson Bowden’s Optimus Point in Leicester.

The East Midlands accounted for 23 per cent of total UK take-up – the highest in the country, with the West Midlands taking second place with 19 per cent.

The high level of take-up has had an impact on stock levels. According to CBRE, of the 1.9 million sq ft of recently completed speculative stock in the 100,000 plus sq ft bracket, more than half is now either under offer or the subject of strong occupier interest.

There is a further 1.9 million sq ft of new space currently under construction.

Meering adds: “Over the last few years average void periods for speculatively built stock have shrunk to low levels, removing much of the risk associated with building without a pre-let.

“At the current level of take-up we have less than six months worth of supply [in units of 100,000 sq ft plus].”

Looking specifically at the West Midlands, Rae notes: “We are running out of space; take up so far this year in Grade A units over 100,000 sq ft with 10m eaves has hit 3.3 million sq ft – take up for the whole of 2015 was 3.2 million sq ft – and there is another 2.6 million sq ft believed to be under offer as build-to-suit or in existing units.”

Such is the strength of demand many speculative units are being snapped up prior to completion.

Developer St Modwen managed to let and sell its 53,000 sq ft speculative unit at Centurion Park in Tamworth long before practical completion.

National furniture brand, DFS, leased the unit and the resulting investment was forward sold for £5.1 million to Limes Developments off an annual rent of £314,255 equating to some. £5.95 per sq ft.

Doncaster-based DFS took the warehouse and distribution unit at Centurion Park to facilitate the delivery of orders to its Midlands’ customer base.

The unit offers 49,959 sq ft of warehouse space and 2,861 sq ft of offices and provides a substantial yard and multiple loading doors, including seven dock level loading doors.

Jonathan Green of St Modwen, said: “We built the new unit in response to the need for high quality warehouse space in an accessible, prime location. Selling the warehouse and securing an occupier like DFS before construction has completed is testament to that decision.”

Gill says: “We are currently experiencing a high level of demand for modern industrial premises but availability across the region is very limited.”

St. Modwen secured consent from North Warwickshire Council last July for a 200,000 sq ft extension at Centurion Park.

Savills and BNPParibas Real Estate are marketing the site where a further 153,000 sq ft unit is available.

WSB Property Consultant advised St Modwen on the sale of the warehouse while Shuttleworth Real Estate acted for Limes.

Up until now the fact that stock is moving fast has not been an issue as such with plenty of speculative space coming to the market. Indeed Strutt & Parker notes that during 2015 the majority of speculative development was concentrated in the industrial hot spots in the Midlands accounting for 52 per cent (7.4 million sq ft) of total stock.

Nick Hardie of Strutt & Parker, says: “In 2015 development to date had been heavily geared towards the Midlands where supply levels were lowest.”

With Brexit funding for speculative development stalled says Gill. “No one is pushing the button on new speculative schemes though there are few still going forward where funding was agreed pre-Brexit. Institutional funding is on hold but it is expected it to come back.”

Speculative schemes already going forward include M&G’s Imperial Park in Coventry where three units of 350,000, 165,000 and 60,000 sq ft are being constructed.

The development is a partnership between M&G Real Estate, Rigby Group and Evander Properties. M&G Real Estate acquired the 29-acre site earlier this year, has committed over £50 million to the development.

Paul Crosbie, head of logistics and industrial at M&G Real Estate, says: “Our commitment to speculatively develop these prime units underlines our belief in this West Midlands location as a core UK logistics hub where there is a diminishing supply of Grade ‘A’ accommodation and robust demand from a variety of industrial occupiers.”

Another large speculative unit is Exeter Property Group and Graftongate’s £20 million facility at Kingswood Lake Business Park in Cannock.

The 372,000 sq ft unit is the largest being constructed speculatively in the country at present.

In addition, London & Cambridge Properties is moving on with is 260,000 sq ft extension to The Pensnett Estate in Kingswinford with a 130,000 sq ft speculative development which should be completed at the end of 2017.

If that were not enough then, Birmingham developer Stoford is working with Liberty Property Trust to build three speculative industrial and warehouse units on the £38 million Liberty Park complex in Lichfield in Staffordshire. The units will be 102,000 sq ft, 31,500 sq ft and 27,000 sq ft respectively. Letting agents are CBRE and Avison Young.

The availability of land for new developments is a bone of contention as sites are rapidly being snapped up. Rae says: “Sites that were expected to last 10 years have gone in five.”

Prologis has just one plot left at its Prologis Park Ryton scheme and SEGRO and Roxhill’s Rugby Gateway is all but full with just two speculative units remaining following lettings to Hermes and DHL.

The two units are RG2 totalling 290,000 sq ft and RG3 totalling 180,000 sq ft. The larger unit is thought to be under offer. Joint letting agents are CBRE Cushman & Wakefield and Gerald Eve.

The 125-acre scheme secured its first letting in May 2014, infrastructure works started only a few months prior to that which means from infrastructure commencing in Autumn 2013 to completion of all the buildings taking a mere three years.

Stock supplies are likely to remain a concern given that employment land is now at a premium – with prime consented land achieving in excess of £600,000 an acre.

Knight Frank is urging local authorities around Birmingham and Coventry in particular to release greenbelt land to reduce the pressure.

Ryan-Gill says: “The market has lost around 150 acres to HS2. We are now at a stage where the region couldn’t accommodate a requirement of 500,000 sq ft from the likes of Amazon or Jaguar Land Rover. We urgently need better land options if we are to create and retain jobs in the region.”

Meering agrees: “There is a significant scarcity of oven-ready sites across the Midlands with planning consent that can accommodate large bespoke distribution units. There’s a real danger we will lose occupiers to other parts of the country.”

There are sites being pushed forward but Binks says: “These are all at least 18 months to two years off.”

Prologis is working through a 40-acre site in Hams Hall, which formerly accommodated the cooling towers of the power station. Such a site should be brownfield but a quirk has meant that it is allocated greenbelt. Getting it reallocated is proving challenging.

The site, to be known as Prologis Hams Hall, could accommodate up to 800,000 sq ft of space. The developer expects to make a £70 million investment to develop it. It will be rail connected.

Prologis is also actively bringing forward its 65-acre Fradley Park scheme. It has started infrastructure works worth £4.75 million to open up the site, which could accommodate up to 1 million sq ft. The largest single unit could be up to 700,000 sq ft. Letting agents are Savills, JLL and Harris Lamb.

In an effort to create more land Birmingham Council is proposing land at Peddimore to be reallocated for employment. The site totals 80 acres.