The market has swung in favour of landlords, and rents are increasing, but speculative starts last quarter hit their highest level since the start of 2007, so it is not all bad news for the occupier. Liza Helps reports.
The restricted supply of good quality warehouses of all sizes remains the key theme across most prime industrial markets [in the UK], says Charles Crossland, managing director of Goodman UK Logistics.
And it is a growing concern for occupiers. Richard Sullivan, national head of industrial and logistics at Savills, notes: “Supply levels are at historic lows and, even with the modest increases to supply from the development of speculative warehousing, there is not enough to meet demand.”
Jonjo Lyles of BNP Paribas Real Estate agrees: “Putting it bluntly there are not the buildings available for occupiers to take up space.”
Research by Savills has seen supply decrease as much as 67 per cent since 2009 with total availability now sitting at 34 million sq ft. However, not all of that is suitable space. The significant amount of space, 74 per cent, is deemed as Grade B and C, with 41 units Grade C – in effect they are obsolete. Savills notes that up to 20 per cent of the stock is not fit-for-purpose.
There are currently only 13 units over 300,000 sq ft and the majority, 78 per cent, are less than 200,000 sq ft in size. The research notes that Grade A supply dropped 54 per cent since 2013.
None of this would matter if there was less demand but the last two years has seen record-breaking take-up. Total take-up of UK warehouse space (units 100,000 sq ft +) exceeded 24.1 million sq ft last year, 9.5 per cent above the long term average of 22 million sq ft, while in 2014 some 38 million sq ft was taken up making it the biggest occupational take-up year since 2010.
Savills recorded more than 100 confirmed warehouse deals in 2015, making it the second best year on record for the sector. The North West had its best year ever, transacting over 4.56 million sq ft, against the long-term average of 3.4 million sq ft. One of the largest local deals for the region in 2015 saw Exertis take 543,000 sq ft of space at Burnley Bridge Business Park. The East Midlands remains the most active market with 4.9 million sq ft of transactions taking place last year.
The surge in take-up, combined with a development market that has been sluggish until relatively recently, has seen availability fall to 6.4 per cent, an all time low. This is just half the rate recorded in the third quarter of 2012 and highlights the acute shortage of quality space in prime markets.
Richard Ludlow of Gerald Eve says: “An acute shortage of appropriate space has constrained the occupational market for some time now.”
Indeed, research by Cushman & Wakefield notes that take-up in the UK in the first three quarters of 2015 was 36 per cent down over the same period the previous year,not because demand was not there but because of the severe lack of supply.
Take-up issues are not the only result of an increase in demand and shortage of supply; occupiers face a rise in rent levels and trickier lease terms as well. Andrew Gulliford of SEGRO says: “Rents have moved on significantly [in the Midlands] shifting from £5.50 to £6.50 per sq ft [headline rent]; we are not predicting that sort of rental acceleration in the next year but there will be a shift.”
Sullivan agrees: “Landlords and investors have been witnessing a marked improvement in rent with increases in the Midlands by £1 per sq ft, the same is true in the south east – there needs to be a note of caution around affordability. A pure online retailer will have no exposure to the costs incurred with a high street store and rent will purely be a warehouse cost. The ability to pay more may not be a problem and that may be true of some of the larger high street retailers. However, a 3PL, which relies on low margins and high volumes, may beg to differ. While staff and transport costs are higher up the priority list than fixed costs like rent; rising rents for them means that they are getting squeezed by the property landlord and client customer they are serving.”
Charles Binks of Knight Franks says: “There has been significant rental growth even for second hand properties [in the Midlands] with units at Magna Park Lutterworth previously commanding say £6 per sq ft now at £6.25 or even £6.50 per sq ft headline rent – an increase of say 20 per cent.”
He continues: “A lot of [occupiers] got a shock last year when they could not get the deal they thought, 12 months on they have had a period of acclimatisation and are hopefully attuned to what levels of supply there are and on what terms they make take space.”
Jon Sleeman of JLL says: “Occupiers need to realise the market has shifted significantly. Where there was a lot of space say two years ago that has now been taken up and terms for deals are much harder, occupiers cannot go in an negotiate from a position of strength anymore.”
Lyles adds: “There are now little or no incentives on a lease and landlords are seeking ever longer lease terms and it is not just a problem for those seeking new space, occupiers will have to look out for landlords knocking on their doors for more rent at review.”
It is not just rental hikes; developers are also facing increased costs from both increased build costs and rising land prices. Binks says: “Apart for being difficult to get hold of, land prices have gone up dramatically. A few years ago in Milton Keynes land prices were roughly £500 – 600,000 an acre now it is around £1 million or possibly higher.”
Rumour has it that land being sold by the HCA in Hemel Hempstead is up to £1.25 million an acre, probably more, and Barking Power Station is said to have gone for £1.4 million an acre.
The reason for the hikes in land are similar to those regarding supply there just isn’t that much around. Sleeman says: “Is there really a shortage of land – the key thing is a lot of the sites are not in the right locations and real shortages remain in core areas such as the Southeast and core Midland regions.”
Paul Weston of Prologis agrees: “Land supply in prime areas remains in very short supply and the picture is unlikely to improve because of the pressure of alternative uses such as residential especially in the Southeast and London.”
However, there is a glimmer of hope for occupiers with rent levels increasing, developers are looking to cash in and over the past year there has been a marked increase in the amount of speculative development being brought forward.
In 2015 some 3.3 million sq ft was delivered on the market speculatively and this supply is set to rise further in 2016 says Savills. The firm is currently tracking 7.1 million sq ft of speculative development due for delivery this year.
Paul Baker of JLL says: “With the supply of good quality space at a low, rents growing and occupiers signing longer leases, it is the prefect time for speculative development.”
But it is not just those factors that developers find appealing. Gulliford says developers are keen to push forward with speculative development because anything built, especially in the core logistics locations, does not hang around for very long.
Rob Taylor of Knight Frank explains: “There is a lack of stock in the right locations and units that are coming forward speculatively are going fast.”
He cites the case of new Capital Knowlsey’s Venus 110 in Liverpool, which has gone under offer before completion. It is rumoured that Amazon has taken the building at a rent of £5.25 per sq ft.
The building totals 110,000 sq ft and boasts 13m eaves, 10 dock and two level loading doors and a 50 kN/sqm FM2 floor. Letting agent on the scheme is B8 Real Estate.
In the same way SEGRO saw DHL snap up a speculative unit of 237,000 sq ft at its 125-acre Rugby Gateway scheme, which it is developing in conjunction with Roxhill, before the property was even completed.
On the back of that and a pre-let to Hermes Parcelnet for a 269,000 sq ft facility, the joint venture is speculatively developing nearly 500,000 sq ft in two units one of 180,000 sq ft and the other of 290,000 sq ft which are due to complete in August 2016. “That is how confident we are,” say Gulliford. Letting agents are Cushman & Wakefield and CBRE.
Looking at the statistics he has every reason to be confident. The amount of speculative development in this cycle is nothing like the boom years of 2005 -2008 where some 40 million sq ft of speculative space was developed in the corresponding years between 2012 and 2015 only 14 million sq ft has been developed.
Sullivan says: “The market is much more mature now than possibly in the past, developers have embarked on a much more cautious speculative programme and are only developing in core locations within the size range most popular in demand.”
Weston agrees: “It is nothing like 2007 when the music stopped there was something like 25 million sq ft in big boxes left hanging over. Now there is about 5 million sq ft across the country in total.”
Having said that, says Binks, speculative development is spreading across the UK, where it was previously limited to the Midlands and the South east it can now be found in other markets but mostly restricted to prime locations in each region.
Ludlow says: “What we are seeing is the development market recognising the mismatch between near-record demand and critically-low supply of quality space in the traditional prime locations. An acute shortage of appropriate space has constrained the occupational market for some time now, and this is only just beginning to be addressed.
“Speculative starts last quarter hit their highest level since the start of 2007 and were higher again during Q3, highlighting just how much developers are waking up to the opportunities in the marketplace.”
Crossland adds: “Goodman has responded with a number of key developments on-site in strategic locations in the Midlands and South East, totalling over 1.85 million sq ft in 14 buildings and due to complete this year.
“In October last year we announced a new £1 billion partnership with Canada Pension Plan Investment Board (CPPIB) and APG Asset Management (APG), establishing the Goodman UK Logistics Partnership, and we are looking closely at a number of new site commencements and land acquisitions over the next few months.”
Goodman has several speculative schemes including a 323,895 sq ft unit at its 165-acre Derby Commercial Park, off Raynesway on the outskirts of Derby.
The new unit will feature 38 dock and four level access loading doors, 102 HGV parking spaces, 55m service yard, and a 15m clear height. It also offers over 15,000 sq ft of office space.
CBRE, DTRE and Moriarty & Co have been appointed leasing agents for the new unit at Derby Commercial Park.
Goodman also has two speculative warehouses in Grange Park, Northampton. The developer bought 22 acres at Grange Park in Northampton from RBS Real Estate Asset Management and is developing two logistics facilities one unit of 304,000 sq ft and one unit of 162,000 sq ft.
The larger unit known as Unit A will benefit from 15m eaves, 26 dock and four level access doors, 38 trailer space and 224 car parking space and will have a 50m yard. The smaller unit, known as Unit B, will have 12m eaves, 16 dock and two level access door as well as 23 trailer and 121 car parking space as well as a yard up to 67m. Letting agents are JLL and Lambert Smith Hampton.
Goodman also formed a joint venture with rival developer Wilson Bowden to speculatively develop Interlink 130 in Bardon, Leicestershire. The unit is expected to complete in February 2016. It will feature 12 dock and two level access doors, 12.5m eaves height, a 50m-yard and car parking for 105. Joint letting agents are North Rae Sanders and CBRE.
Another big player, Prologis, is moving forward its next phase of speculative development in the UK. It has announced it will develop a further 1.2 million sq ft in five distribution centres and across its first small-unit scheme in four prime UK logistics markets.
At the third phase of Prologis Apex Park in Daventry, Prologis is starting on-site with two units of 215,262 sq ft and 85,262 sq ft, which will complete in April 2016.
The larger unit will have 12.5m eaves, 20 dock and two level access doors, 30 HGV and 157 car parking spaces. The smaller unit will have a 10m eaves height none dock and two level access doors, 18 HGV and 66 car parking spaces.
Letting agents are Lambert Smith Hampton and Burbage Realty.
At Prologis Park Dunstable, Prologis will build a 358,000 sq ft facility, which will be ready for occupation in March 2016. The new distribution centre will be on the final plot of Prologis’ Boscombe Road site.
At its flagship scheme Prologis Park Ryton near Coventry, the developer is set to build a further two units of 141,500 sq ft and 328,000 sq ft; both buildings will complete in the spring of 2016.
Prologis will also build its first small-unit scheme in the UK at Prologis Dawley Road at Hayes in West London. Offering a total of 120,420 sq ft in six buildings ranging in size from 2,870 sq ft to 52,540 sq ft, Prologis Dawley Road will complete in April 2016. Prologis Dawley Road is three miles from Heathrow Airport, in a well-established industrial location that offers convenient access to the M4 and M25.
“This new phase of speculative development builds on the success of the 1.5 million square foot programme we began in a measured way at the end of 2013,” says Andrew Griffiths of Prologis UK “With the vacancy rate for Class-A industrial and distribution buildings across UK markets at 2.1 per cent, it’s imperative we anticipate demand and ensure we have a range of modern, high-quality facilities in prime locations across the Midlands, London and the South East.”
The first phase of Prologis’ new speculative development programme includes six distribution centres, five of which were let while under construction or shortly after completion. The sixth building, a 316,000 sq ft joint venture with DP World London Gateway at the London Gateway Logistics Park, completed in November 2015.
In addition to those units already announced Prologis has started the speculative development of two units of 113,335 sq ft and 78,780 sq ft at Prologis Park West London, its 30-acre site next to Stockley Park in Hayes, Middlesex.
Volkerfitzpatrick has been appointed as the main contractor and construction work will start in early January. Each distribution centre will include a rooftop solar installation that will generate 10 per cent of the building’s regulated energy. Both new facilities will be constructed to achieve a minimum BREEAM ‘very good’ rating and the best EPC rating possible for their size.
Verdion with its funding partner Healthcare of Ontario Pension Plan (HOOPP) is speculatively developing two units at its six million sq ft iPort scheme in Yorkshire; one 200,000 sq ft unit and one unit of 120,000 sq ft. To get round the problem of not going forward and speculatively developing anything larger Verdion has ensured that the Grade A warehouse space will be specified to suit multiple user requirements with expansion potential to double both units’ initial floor area. “What we have done,” explains Hughes, “is to make sure the buildings can be flexibly extended; effectively we can offer any unit from 120,000 sq ft to 400,000 sq ft.”
The buildings will be constructed simultaneously and are scheduled for completion in Q1 2016. iPort can accommodate individual unit sizes from 50,000 sq ft to over 1.2 million sq ft in a variety of configurations and specified exactly to occupiers needs.
Gent Visick, CBRE and Cushman & Wakefield are letting agents for iPort.
Not to be outdone IDI Gazeley is also speculatively developing warehouses; one totalling 297,320 sq ft in Daventry, known as Daventry Distribution Park, which has 28 dock and three level access doors and 230 car and 120 HGV parking spaces as well as a 50m yard and 12.5m eaves. Letting agents are Savills and Cushman & Wakefield. It is also developing another warehouse at its Magna Park Lutterworth scheme totalling 186,097 sq ft. The unit will have 12.5m eaves, 17 dock and two level access loading doors as well as 36 HGV and 178 car parking spaces. Letting agents are CBRE and Colliers.
It is not just the big developer investors who are speculatively building; Conder Developments has started work on a new £10m speculative distribution centre in Derbyshire.
The 118,000 sq ft unit at Dove Valley Park, to be known as DVP 118, will have 12m eaves; eight dock and two level access doors and be built to BREEAM ‘Very Good’ standard.
Conder has appointed Winvic Construction to build the shed. Work is scheduled to complete in April. Joint letting agents are Salloways and BNP Paribas Real Estate.
And not all speculative units are 100,000 sq ft plus, indeed property regeneration company Harworth Estates will begin the speculative development of a 75,000 sq ft industrial unit at its 17-acre Gateway 36 scheme in Barnsley in February.
Dave Travis, associate director of business space at Harworth Estates, says: “There is a lack of good-quality units of less than 100,000 sq ft in the region and we have taken this decision to steal a march on other developers focusing on ‘big box’ logistics.”
The new unit is expected to be completed in September 2016. It will provide high-quality manufacturing and logistics space with a BREEAM ‘Very Good’ sustainability rating. Letting agents for the development are Knight Frank and Gent Visick.
All developers across the board are bringing forward sites so the outlook for occupiers is not as grim as it would outwardly seem in the short to medium term.