Land availability for logistics development is under pressure from all sides. The question is: is there enough to satisfy demand in the next decade? Liza Helps reports.
Land availability for logistics development is under threat. But this is nothing new. David Binks of Cushman & Wakefield says: “It’s an age old problem when it comes to supply of land; in the normal economic cycle you do get these gaps.”
Richard Sullivan of JLL agrees: “The one thing with big sheds is that we have always struggled to get pipeline supply, it is not a new phenomena.”
But this is different. It is a prefect storm really with a combination of factors suddenly making land availability an issue, like never before.
Due to the recession there has been very little development of new space which has lead to increasing amounts of shortage nationwide, there has been the phenomenal growth of on-line shopping and subsequent changes in the supply chain leading to ever more demand, planning is taking longer as the government brings in cuts across the board to reduce the deficit, and sites which were once ring fenced for employment are being lost to alternative uses such as residential as population pressure grows especially in the South East and London.
While the amount of Grade A supply at the end of September 2015 was up nearly 20 per cent on the previous quarter at 13.3 million sq ft, statistics from JLL’s latest Big Box Industrial and Logistics research, points out that it is still 72 per cent lower than its most recent peak at March 2008 (28.8 million sq ft).
Jon Sleeman of JLL says: “Aside from this recent uplift in availability, a direct result of a pick-up in speculative development over the course of 2015, the availability of new space has been on a downward trend for the last six years – very little new space has been delivered to the market since 2009.
Savills has also been carrying out research into the availability of logistics space and partnered the UK Warehousing Association to publish a report “The size and make-up of the UK warehousing sector.”
The report found that supply of warehouses over 100,000 sq ft in the UK currently stands at 32 million sq ft, giving a vacancy rate of 7.5 per cent.
However, the true vacancy rate is even smaller as Savills classifies 6.5 million sq ft as grade C stock, which may never be occupied again as a distribution warehouse due to it not being fit-for-purpose for today’s logistics requirements. There is currently 21.9 million sq ft across 131 units.
“This is a sharp decrease from recent times when as recently as 2009, the choice of units on the market across the country reached 94 million sq ft.”
The report explains: “The economic downturn saw development and finance for development, decrease rapidly.
“As a consequence stock was not replaced once an occupier was found. Indeed based upon current supply levels and long term average take-up levels, most regions have less than a years worth of supply left.”
The report also reveals that 51 per cent of take up has been for design and build, meaning that land will become increasingly scare in prime logistics locations.
The report identifies over 1,500 individual warehouse units used for storage and distribution, which in total account for almost 424 million sq ft of warehouse space.
By region it comes as no surprise that the majority of warehouse space is located either near the major population centres or within the “Golden Triangle” at the centre of the country.
Indeed the East Midlands accounts for 18 per cent of all warehouse space within the country, equating to 78 million sq ft.
However, by combining the South East and London together this region accounts for 25 per cent of all warehousing stock, just over 93 million sq ft.
The report goes on to highlight how occupiers from different sectors have a need to be in certain locations and require diverse unit sizes.
Kevin Mofid of Savills, warns: “The availability of modern and fit for purpose warehouse space has the potential to be a real pinch point for the logistics industry in the coming years.”
He is particularly keen to point out that because of the changes in the supply chain that have taken place in recent years, much of the land that is available for logistics use is, in fact, not the right size and more importantly in the wrong location.
“The report really showed that different types of operator were clustering in different places and also different types of different units are clustering.
For example in the North there is a clustering of high street retail operators while in the south, it is the food retailers.
Is there enough land coming forward to match this type of clustering?”
Mofid notes: “There are currently 31 schemes across the country being developed on a speculative basis, which total 5.8 million sq ft. While this may sound substantial if we add this to the existing levels of stock there would still be a shortfall if occupier demand remains strong.”
Also not all regions are benefitting from the increase in developer confidence and many requirements are remaining unfulfilled by lack of options.
Two such requirements were reportedly seeking sites around Bristol; Home Bargains and Waitrose both have been forced to reconsider due to the lack of suitable options – even though there are technically plenty of sites.
In some areas the rate of take-up has escalated not in terms of deals done but in terms of unit size.
Where once a scheme of 1.8 million sq ft would have taken nearly a decade to fill now it is a mere couple of years if that.
Final two units
SEGRO and Roxhill’s 125-acre 1.8 million sq ft Rugby Gateway scheme is now all but let with the final two speculative units due to be built shortly.
The scheme secured its first tenant fashion retailer H&M in 2014 and the two new speculative units of 180,000 sq ft and 290,000 sq ft are expected to be available in Summer 2016 – if they have not been snapped up before.
Letting agents are Cushman & Wakefield and CBRE.
If that were not enough, the prime minister’s call for a ‘national crusade’ to get homes built for the nation is further jeopardising land availability for employment and specifically logistics development.
The government wants one million homes built by 2020, as laid out in its forthcoming Housing Bill, and has told councils to draw up Local Plans for new homes by 2017 or else the government will intervene.
Building in the green belt and on open countryside will not be looked at favourably and so with such pressure it will be all too easy for councils to opt to reallocate employment land for residential.
There are no national statistics as to how much employment land has been lost to residential over the years but it is considered significant.
Sleeman says: “Trying to quantify land supply has always been a bit of a challenge.
A lot of land for big boxes [logistics warehousing] has come through from former heavy industrial and manufacturing land uses such as coal mining sites.
There is an assumption that the decline in manufacturing will feed demand but it has been too easy for this land to be lost for alternative uses especially if the sites are close to major conurbations such as London.”
In fact in London alone, in the last 14 years, more than 2,000 acres of industrial land has been released for residential development.
While many will say that that is because London no longer has an industrial base others point out it could be driven by property speculation – after all industrial and logistics use doesn’t exactly carry a financial premium in terms of land value.
Sleeman adds: “The danger is if that stock of land is being lost there may not be enough land being recycled the result of which can only be to the detriment of the capital.”
The housing issue goes head-to-head with the growth and demand for urban logistics a relatively new type of warehousing specifically to deal with the issue of last mile delivery in particular for the fulfilment of on-line shopping.
Barry Allen of Savills says: “The urban distribution function, which is a requirement of market and a growing requirement about last mile delivery has a growing demand.
It requires good well located sites but the research we have been doing about loss of industrial land in urban areas, particularly in south east and London, to primarily residential is pointing up the competition for brownfield urban land.”
Richard Evans of JLL notes: “Developers are finding it increasingly difficult to secure sites for urban logistics particularly in London.
We know of one urban logistics occupier desperate to find a site in London and cannot secure one.”
In essence logistics is priced out of the market.
Sleeman notes: “The price someone can pay for land is determined by its expected end value of the property to be built; if you are a warehouse operator or a 3PL margins are small and returns form a property are too.
There is a value to logistics but it is difficult to capture.”
David Binks says: “It is important that the local authorities recognise the need for urban logistics and protect employment land as time goes by.”
Gareth Osborne of SEGRO agrees: “Logistics is about getting the right land in the right locations. There needs to be some central government encouragement to do that to reflect the needs going forwards. Employment land strategy has to have parity with residential strategy. The thinking needs to be joined up.”
The Mayor of London Boris Johnson thinks he may have hit upon a solution with announcement that the Greater London Authority (GLA) and developer SEGRO have signed a joint venture for the redevelopment of 86 acres of industrial land in London Riverside.
The development will have the potential to create 6,500 new jobs in east London and will support the development of new housing with job creation in the area.
The project takes in a number of sites known collectively as East Plus, in locations spanning Newham, Barking & Dagenham and Havering on both sides of the A13 corridor – a key route giving access to both central London and the Port of Tilbury.
Johnson said: “London’s population is at a record high and people are increasingly looking to the east as a place to live and work.
“We are already working hard to build the houses that people need, so I am delighted to welcome SEGRO aboard to help create the jobs.”
The planned ten-year partnership between the Greater London Authority and SEGRO will see 86 acres of land across five sites rejuvenated for a range of industrial uses.
The land will be transferred to SEGRO in stages over the life of the partnership.
SEGRO estimates that the sites can support approximately 1.4 million sq ft of new urban logistics and light industrial spaces, suitable for occupiers ranging from blue-chip companies to start-up firms. SEGRO’s investment is expected to be approximately £180 million.
Ric Blakeway, deputy mayor for housing, land and property, said: “In stimulating the return of industry to London Riverside, this development shows a real commitment to supporting local trades and presenting new opportunities to attract businesses, keeping east London’s industrial heritage alive.
While it is good to see a nod in the right direction regarding the importance of employment land running alongside housing in urban areas, Richard Sullivan of Savills says: “While local authorities have got more forward thinking and recognise its importance, it is nowhere near high enough on their agendas.”
Gareth Osborne of SEGRO is of the opinion that one of the reasons for this is that many local authorities are using out of date data when producing their local plans.
“Under the current planning system there is a requirement to produce employment land allocations in the local plan. A lot of these plans use base data that is wildly out of date and pre-recession and so the local employment plan does not reflect where the economy has moved on.”
“One authority in the East Midlands,” he says, “uses data that goes back to 2001 – the world has changed a lot in the last 15 years.
“It needs to be updated!”
The developer’s tale
db symmetry, the logistics property development platform recently formed following the purchase of a 60 per cent holding in Barwood Development by clients advised by Delancey, is promoting over 1,330 acres of strategic land holdings with an expected development value of over £1.4 billion.
It is expected to receive planning consent for over 20 million sq ft of primarily logistics property over the next four years.
Christian Matthews of db symmetry says: “We are therefore working very closely with both planning authorities and senior executives within the respective councils up and down the country. Our experience typically is that Local Authorities have recognised that large scale distribution does produce a significant number of jobs – most occupiers operate on a 24/7 365 days a year basis and to do this use a 3 shifts a day policy.”
So the age old argument that warehousing does not create jobs is no longer valid and is not a credible argument for officers to put forward.
Further the jobs that are created are far from being of a pure manual nature and include jobs across the full spectrum of skills including computer/software experts to keep the automated systems running, customer services/ sales, as well as admin and accounting not to mention the warehouse staff and HGV drivers.
“The cuts to local authority budgets from central government are well documented and while the knee jerk reaction is to look to cut costs Local Authorities are now looking to also increase revenues.
“The government reforms to the commercial rates system gives that opportunity with local authorities now able to keep a significant proportion of the rates generated within their jurisdiction, which is a year on year addition to their budgets.
“We are also seeing local authorities recognising that… they need to create further employment opportunities within their area so they do not suffer from residents travelling outside the local authority area to work which is not meeting the sustainable agenda and loses income to other areas.
“On line retail is here to stay and is a growth sector – those boxes and packages received at your front door typically come from a distribution warehouse, Local Authorities are recognising this and in our experience want to share in the economic benefits that today’s distribution buildings bring.”