Thursday 22nd Jun 2017 - Logistics Manager

The new normal

It used to be that seeing is believing, but with such severe shortages of immediately available warehouse space, will occupiers have to be more flexible? Liza Helps investigates.

This article first appeared in Logistics Manager, March 2017.

This article first appeared in Logistics Manager, March 2017.

Only eight years ago the amount of immediately available modern Grade A space was four times as much as could be found today and in those days the demand was far lower. Now occupiers are faced with the smallest amount of readily available Grade A space on record and demand is at an all time high.

According to Gerald Eve’s latest Prime Logistics research the UK logistics availability rate sits at just 6.2 per cent, the lowest on record following a year when take-up hit 50.6 million sq ft – another record.

Current availability for institutional grade warehousing in units over 100,000 sq ft sits at 11.66 million sq ft or, according to CBRE research, a six-month supply.

Take-up last year did not rely solely on the availability of brand new speculatively built space rather many occupiers opted to go down the build-to-suit route.

Tessa English of JLL says: “Take-up of new units saw a split of roughly two thirds build-to-suit and one third speculative in terms of the total amount of space taken up.”

It should be noted that although there was a far higher take-up in terms of space the number of deals was roughly on a par between speculative and build-to-suit; it is just that build-to-suit facilities tend to be larger.

As of January this year there are 37 build-to-suit schemes being brought forward across the country according to CBRE and 23 speculative ones.

However, in terms of total space being built there is 13,075,135 sq ft of built-to-suit and just 3,924,379 sq ft of speculative space.

Going forward it is thought that there will be a far higher number of deals done on a build-to-suit basis as over all supply shortages bite.

Richard Evans of JLL explains: “The level of speculative development in the last five years is no where near the rate of previous years. There is not enough standing stock as a percentage as there has been in the market for the last ten years resulting in the lowest levels of Grade A stock availability ever seen coupled with the lowest rate of speculative pipeline. Build-to-suit will become a dominant force.

“The appetite for development risk is lower now than in the last cycle and that will influence the level of speculative development.”

Brexit has also had a role to play recently with many funds holding back on speculative development to see how the market would respond with the result that there is certainly for 2017 a ‘gap’ in the supply pipeline.

Recent research by Colliers International notes: “The mismatch between supply and demand is likely to remain for the next 12 months.

“Funding constraints remain to the fore with continuing difficulties for developers seeking to make the base numbers stack up despite the favourable environment.”

Kevin Mofid of Savills does not see this changing for the present. “Banks are not financing and investors are not funding; where it is happening, it is being done off balance sheet with owner developers such as Prologis and IDI Gazeley.

“Occupiers will just have to become more accustomed to having to take build-to-suit. And with funds looking at build-to-suit as de-risking a development – build-to-suit could be the new normal.”

But is that so bad?

It used to be that build-to-suit was considered almost too risky for the occupier. David Binks of Cushman & Wakefield says: “There are a number of risks involved in terms of planning risk, timescale, construction and finance risks but a lot of those risks can now be managed to a very great degree.

“The market is much more mature and a lot of the developers now have the expertise and experience to secure the deliverability of a project.”

Nicholas Roberts of Drake Commercial agrees: “There is always an element of risk but most of the key players in the market can produce a pretty strong track record. Developers are looking to build long term relationships and in many cases there is probably an existing relationship.

“Certainly with bigger distribution sites, developers are prepared to put infrastructure in and get detailed planning in place ready for a requirement so there are not many delays – most sites are genuinely ready to go.”

Robert Rae of Avison Young adds: “Developers are keen to bring forward sites putting in infrastructure works and services so that they are better able to respond to enquiries as quick as they can.”

Binks puts this down to the fact that around the time of the financial crash [in 2008] developers had to make the decision to get the sites they owned ready for development when the market picked up; now they realise that they have got to prepare to attract the enquiries as there is more build-to-suit sites than existing building supply.

That is not to say that speculative development will not increase throughout the year, Michael Forster of iSec notes: “There has been a bit of a drop off due to Brexit but there is still, in specific situations, a good business case to provide it.”

His company and St Francis Group have just broken ground on a new speculative development in Bristol, known as Horizon 38, a 65-acre £120 million Business Park set to rise at former Rolls-Royce East Works site in Filton, Bristol.

The development of 580,000 sq ft of industrial employment space is being built in four phases and funded by BP Pension Fund. It will consist of 27 units, with the first delivery of completed logistics and manufacturing space coming on stream in the summer of 2017 with later phases completed in 2018. Joint letting agents are JLL and Bilfinger GVA.

It is the largest new speculative development for 20 years in the region. Forster says: “Fundamentally there is a chronic shortage of available space and there is not an oversupply of speculative product and there is nothing of 100, 000 sq ft or below in the Bristol market – when you see those dynamics some would say brave – but it is just a case of common business sense.”

Developer Hamdon Gate has also speculatively developed at its J1 Rugby scheme just off Junction 1 of the M6 motorway. The property totalling 158,000 sq ft has a 12.5 m eaves height, 50m deep yard gatehouse and fully fitted facilities.

“As it is already built,” says Matthew Small of Hamdon Gate, “Our prerogative is to let it. Unlike other developers we are not tied to a restrictive institutional funding agreement and for us forging a relationship with a new tenant is key.”

The property is being offered on a five-year term – something almost unheard of for build-to-suit deals. Letting agents are Drake Commercial and Burbage Realty.

Not all speculative schemes can be offered on such terms but the advantage of an existing scheme is that they are more likely to be open to offers – though with the market as it is, it is unlikely to be for long.