The supply of warehouse space built before the recession will soon be exhausted. The facts speak for themselves – the supply of new units over 100,000 sq ft fell by 18 per cent during 2009, according to King Sturge’s latest Industrial & Distribution Floorspace Today report.
And Lambert Smith Hampton’s National Industrial & Distribution Report 2010 says that there is only 26 million sq ft of availability in buildings of 100,000 sq ft and above.
Obviously that sounds quite substantial but it includes second-hand building.
In fact the Lambert Smith Hampton research says that the total amount of new space on the market fell to below 60 million sq ft, a decline of 19 per cent from the previous year and concludes that shortages of new built stock have become apparent in particular areas of the market, for example in large buildings in the south of England.
King Sturge reckons that at the end of December 2009 there were some 20,302,790 sq ft immediately available in 80 new units of 100,000 sq ft and over.
While big shed supply remains high in some regions such as Yorkshire & Humberside and the North West, in other regions, such as the South East, good quality supply is tighter and in certain size bands occupiers have very little choice.
Chip Mitton of Altus Edwin Hill agrees: “We have no supply at all in the South East due to take up and we are now at the point where you can count the number of big sheds on one hand.
“In terms of availability of new buildings [in the South East] there is 12 Point at Bow totalling 140,000 sq ft, Sandpit Road in Dartford at 160,000 sq ft and that is all that is there.
“Anyone looking 150,000 sq ft plus within the M25 is limited to only one modern building.”
Paul Farrow, of CB Richard Ellis, explains: “Occupiers who had previously placed property strategies on hold are beginning to take action and acquire new space.
“However, this will have the effect of further reducing supply levels and, when coupled with a lack of speculative development, it will inevitably lead to under supply in a number of prominent industrial locations across the UK.”
The spate of deals across the country in the past few months has meant that, even in areas where there seemed to be a large amount of space, supply is dwindling.
According to David Binks, of Cushman & Wakefield, of the 15 buildings over 250,000 sq ft in the Midlands at the beginning of 2009, two thirds have been let.
Mike Eagleton of Eagleton & Co, who has brokered one of the latest deals in the West Midlands with Euro Car Parts taking 256,000 sq ft at IM Properties Birch Coppice scheme, says: “This letting virtually exhausts the available supply of well located distribution units in this size bracket in the region.”
Euro Car Parts secured the new facility on a 15-year lease at a rent of £5.50 per sq ft. Colliers CRE acted for Euro Car Parts.
Robert Rae of North Rae Sanders agrees. He says: “Occupiers looking for big sheds capable of accommodating a 300,000 sq ft requirement have very little choice.”
What choice there is includes The Duke on Wellington Road in Burton-on-Trent, totalling 300,000 sq ft, which was built by Standard Life in conjunction with Anson Properties.
It boasts a 12m eaves height, 24 dock and four level access doors, a 50m deep yard and 15,000 sq ft of two-storey offices.
It is being marketed by M3 and Knight Frank, who were quoting £5.25 per sq ft.
Then there is Hydro at Magna Park totalling 422,784 sq ft.
It has 15m eaves and incorporates substantial features from 36 dock level doors and a large secure yard up to 92-metre depth.
It is an eco-friendly building with reduced running costs, one of the first in the county to incorporate Gazeley Eco Template in 2005.
It is being marketed by North Rae Sanders and CB Richard Ellis on a short or long-term basis at £5.50 per sq ft.
Over in Kettering there is Crackerjack totalling 528,108 sq ft. The building has 15m eaves as well as 50 dock and four level access doors. It is available through joint letting agents M3 and GVA Grimley.
Some property gurus are saying that with a growing shortage of modern new space developers could be incited to develop speculatively.
However, even the most bullish have caveats attached to their prediction. Mike Alderton of Lambert Smith Hampton says: “In certain areas, speculative development will return earlier than expected but only on a restricted basis, and development completions are not expected to outstrip demand.”
Mitton, who agrees that the balance has got to be weighing in the favour of building speculatively in the South East, adds a proviso that any developer doing so will “scrutinise the site on the basis of what demand there is rather than just putting a big shed or a multi-user scheme on the site, which they may have done in previous years”.
“Developers will spend more time looking at research to decide upon the right building rather than going ahead and building what might be in vogue.”
Ranjit Gill of BNP Paribas Real Estate says: “If they do build it [speculatively], it will be on the best sites and in core areas.”
Many developers will have to get their nerve back before they speculatively build and anyway the fundamentals for speculatively building distribution warehouses are not all lined up.
Stuart Mair of Jones Lang LaSalle says: “A few more sheds will have to be got rid of before anyone decides to speculatively develop.”
Despite ProLogis securing leases on the majority of the 18 units it had available at the beginning of last year, Alan Sarjant says the developer has no plans to develop speculatively yet.
“The market needs a period of time between the take up of empty stock and any decision to develop speculatively.” He says ProLogis will go down the route of build-to-suit but only on “more landlord-friendly terms with longer leases and less incentives at market rents as we got to know them in 2007: without that there is no financial incentive”.
David Binks of Cushman & Wakefield notes that the case for speculative development, and in some cases even build-to-suit, has been skewed by the fact that many of the recent lettings have been done on soft terms to get the buildings occupied and will not reflect a bankable deal for a build-to-suit let alone a speculative warehouse.
“As yet there is no price justification to develop. In order for it to be so, lease lengths are going to have to get longer, with a minimum of ten years, ideally 15 years, with full market rents and minimal rent-free periods.”
Sarjant says occupiers, and in particular 3PLs, are going to have to expect much longer leases than have been prevalent recently.
“The 3PLs typically desire a lease commitment that was concurrent with their own three to five year contract cycle and for a while the institutional market could offer shorter leases as capital values were coming in.
“To a 3PL that may have looked like the developer was enlightened but actually it was just a reflection of financial liquidity. Now developers cannot make [development appraisals] work on those short leases, ten years will be a minimum and that won’t change for quite a while.”
Looking at rent levels in 2010, King Sturge’s latest research indicates that in certain markets or prime locations, the lack of speculative activity may lead to a shortage of quality stock with the result that the market balance may start to tilt back in favour of landlord and developers by the year end.
Indeed, Jones Lang LaSalle’s UK Industrial & Logistics research noted that “prime rents are edging up in some areas during the last quarter of 2009”.
Such rent increases were concentrated mainly in the Greater London market.
“We saw rents rising in Hemel Hempstead as well as the East and North London area between three and three and a half per cent. Rents also increased in Maidstone (+3.9 per cent) and Milton Keynes (+4.4 per cent) quarter-on-quarter.”
Lambert Smith Hampton also noted that there was likely to be upward pressure on prime new built rent values with increased competition from occupiers for new space, in areas where supply is tight.
One area where occupiers can still secure a cracking deal on existing new build sheds is in Yorkshire. There are currently at least 20 new build/modern properties over 100,000 sq ft available.
Dave Cato of CB Richard Ellis says: “A major characteristic of the current supply figures is the presence of key buildings offering in excess of 400,000 sq ft in the Yorkshire region.
These being Sherburn Distribution Park (666,000 sq ft), CrossFlow 530 in Barnsley (530,000 sq ft), Thornton Road in Bradford (750,000 sq ft), Nimbus in Doncaster (750,000 sq ft), SIRFT 1&2 (647,000 sq ft), Blade, G.Park in Sheffield (412,000 sq ft) and Vulcan, Firstpoint in Doncaster (415,000 sq ft).
“Landlords are offering deals which can secure between two and two and a half years rent free on ten-year leases with up to three or three and a half years on a 15-year lease.
Therefore, occupiers who are in a position to act quickly can take advantage of the flexibility offered by Landlords with excellent deals available,” says Cato.
“Once the available space starts to get taken up, landlords will begin to be less flexible and rein in their offers.”
Obviously those occupiers which can be more flexible could opt for second-hand space of which there is plenty.
Binks says: “Second-hand space often comes with added benefits such as racking, heating and lighting.”
Mike Baugh of DTZ adds that occupiers opting for second-hand space, even if it is offered on similar terms to a new build, may get a better deal on day one than if they took a new one which is likely to be hit harder at rent review.”
Julien Kenny-Levick of Colliers CRE says: “There is no doubt that occupiers have taken advantage of economic circumstances and managed to secure softer deals in full knowledge that rates liabilities continue to press landlords to do deals.
“These deals will not be available indefinitely and occupiers will begin to feel that they need to act now or may well have to look at design and build options in the future.”
Already there are a lot of build-to-suit deals taking place. Butchers Pet Care took a pre-let at Gazeley’s G.Park Crick and only recently Dunelm secured an additional 250,000 sq ft build-to-suit at ProLogis Park Stoke.
One of the largest build-to-suits in the North West is set to act as a catalyst for the further development of Kingsway in Rochdale. JD Sports is thought to have signed for a 620,000 sq ft operation.
Marks & Spencer has opted for a D&B of some one million sq ft at East Midlands Distribution Centre, and Co-op took a 400,000 sq ft D&B at Goodman’s Andover Commercial Park earlier this year. Tim Johnson of King Sturge says: “With limited new speculative development underway, there is more bespoke design and build activity and with a shortage of good quality supply on the horizon, pre-let development will continue to increase.”
Many developers are securing planning and getting sites as oven ready as possible. Indeed IM Properties has submitted plans for the 123 acre second phase of its Birch Coppice scheme which could accommodate up to two million sq ft of distribution space.
Gladman has secured planning for Vertical Park in Nottinghamshire for up to 2.7 million sq ft on 200 acres, while Gazeley has a selection of oven ready sites at G.Park Strood and G.Park Sittingbourne, as well as its Magna Park Developments at Milton Keynes and Peterborough.