Almost every property agent is agreed that supply of good quality modern warehouse space is diminishing and diminishing fast. According to Anna Behan of King Sturge: “Transactions and requirements have continued to pick up for new units [during 2010], and as no new speculative development has completed since the beginning of 2009, supply is diminishing to the extent that good quality stock in certain locations is now very limited.”
At the end of September 2010, available new speculative supply across the country stood at 15,075,771 sq ft in 62 units of 100,000 sq ft and over – some 47 per cent lower than its 28,212,209 sq ft peak in March 2008.
Admittedly, the level of second-hand space did increase over the same period. The largest increase in secondhand supply took place in the second half of 2008 and since then, supply has increased steadily but more modestly. The supply in second-hand distribution units increased by only two per cent in the first half of 2010 to reach nearly 70 million sq ft, compared with the much larger increase of ten per cent in the second half of 2009.
The increase in second-hand stock reflects company failures, property downsizing and the consolidation of warehousing networks resulting from mergers and acquisitions over the past few years.
The Co-op for instance is offloading some one million sq ft in Scotland through Colliers following a consolidation to a 500,000 sq ft warehouse built by ProLogis at Newhouse in 2009. At the same time, Tesco has released almost one million sq ft of space onto the market following the restructuring of its North West supply chain operations.
The retailer has appointed Lambert Smith Hampton to dispose of the three high quality warehouse/distribution facilities; a 460,000 sq ft and 180,000 sq ft unit in Middlewich, and a 300,000 sq ft temperature-controlled unit in Middleton.
Meanwhile, Biffa is disposing of its 230,000 sq ft DC3 warehouse at Midpoint which it never occupied following an acquisition shortly after it negotiated the original lease with ProLogis. BNP Paribas Real Estate is sole agent.
One of the largest second-hand sheds to come back on the market is the 422,784 sq ft Hydro unit at Magna Park in Lutterworth. The building has 15m eaves, as well as 36 dock level doors and a large secure yard up to 92m deep. It is an eco-friendly building with reduced running costs, one of the first in the country to incorporate Gazeley’s Eco Template in 2005. It is being marketed by North Rae Sanders and CB Richard Ellis on a short or long-term basis. The property was originally let to TNT/Primark at a rent of £5.25 per sq ft.
However, while there might be a plethora of secondhand space Paul Farrow of CBRE points out: “Occupiers have traditionally selected new space over second-hand accommodation – in fact, over the past five years, more than 60 per cent of logistics space take-up has been new build space.”
Despite that, according to DTZ’s latest industrial report: “Take-up of grade A and B stock outweighed the release of space back to the market, with activity largely driven by demand from retailers looking to take space to service new business streams or expand their online retail offering. The shortage of grade A space in some locations has meant attention has switched to good quality grade B stock, availability in the latter having been reduced by three per cent in the third quarter of 2010. The shortage has also meant that many occupiers are having to be flexible about location and building specification with a number opting for design and build.”
In fact, researchers at Jones Lang LaSalle feel that occupiers looking for brand new modern warehouse space in the near future will be faced with the stark reality that they will have to opt for build-to-suit.
According to Jones Lang LaSalle’s recently published research, occupier demand for large industrial and logistics units over 100,000 sq ft made a strong recovery during the first half of 2010 totalling 10.2 million sq ft, a 67 per cent increase on the previous half year with the result that they are now facing a limited choice for space in most traded markets across the UK.
And many have opted to go down the D&B route rather than try to compromise. According to CBRE’s latest research take-up of UK industrial property was dominated in the third quarter of 2010 by the highest quarterly levels of pre-let activity recorded since the fourth quarter of 2007. Total take-up of pre-let logistics space stood at 2,034,000 sq ft in the third quarter of 2010 as compared to 503,577 sq ft in the same quarter of the
Talking about the larger enquiries from occupiers in the South East, Dominic Whitfield of Savills says: “I think it has dawned on the larger occupiers that pre-lets are the only way forward at the moment.”
Indeed there have been a number of pre-lets in the market to date with more rumoured to be on the way. Knightsbridge retailer Harrods is close to closing a deal on a 320,000 sq ft pre-let at SEGRO’s 24-acre Origin site in Park Royal, West London. The deal is thought to have been secured off a rent of £12 per sq ft with a long lease.
Ken Butcher of SEGRO, while not naming the potential occupier at Origin says: “This proves that there are very few, if any, sites capable of taking that size of building. If the deal goes through there will be a six acre site available, which could accommodate up to 120,000 sq ft of space. If the occupier has a good covenant and is happy to take a long lease they will get good incentives. In overall terms, now is a pretty good time to secure a warehouse.”
A planning application for Origin is due to be submitted before the end of the year. Letting agents are King Sturge, CBRE and Dohertybaines.
Other significant pre-let deals include Butchers Pet Care’s 300,000 sq ft warehouse at G.Park Crick, JD Sports 616,000 sq ft warehouse at Kingsway Park, Euro Car Parts 256,000 sq ft shed and Ocado’s 350,000 sq ft at IM Properties’ Birch Coppice Business Park in Warwickshire, B&Q’s occupancy of 796,649 sq ft at Gazeley’s G.Park Swindon, Tesco’s 825,000 sq ft at ProLogis’ DIRFT site and M&S taking 814,000 sq ft at Clowes Development’s East Midlands Distribution Centre.
For occupiers though, taking on a pre-let scheme is raught and more expensive as Rob Oliver of GVA Grimleypoints out: “It will cost more than compromising with an existing building.”
In addition, Ranjit Gill of BNP Paribas Real Estate, says: “Occupiers going down the D&B route will be held on long leases.”
And the reason for this, says Mark Webster of Cushman & Wakefield: “is that deals need to be fundable”. As Daniel Miller of Strutt & Parker says: “Developers need to see longer leases and good rents and a decent covenant for [a D&B proposal]to stack up. The key for D&B is really more a question of making the appraisal stack up no matter what you think the market rent will be.
If the developer/landlord is not going to make profit in the appraisal they will not do the deal.” However there are benefits to the occupier in taking a build to suit option. Firstly, they will get exactly what they want, where they want and in addition, says Webster: “Modern buildings offer operational savings.” According to ProLogis the energy savings on one of its build to suit facilities compared to an already standing modern new build can be as much as 69 per cent.
Charles Binks of Knight Frank says: “Many people will not compromise and if there isn’t the right building they will opt for the D&B route where they will accept long leases with operationally more efficient buildings rather than looking at poorer quality second-hand units where they may not get volume, height or circulation.” Developers look keen to be risk averse but such is the
speed at which most developers can build a shed these days that it looks like there will not be any speculative development for quite some time.
According to Robert Rae of North Rae Sanders, Evans of Leeds has put in a detailed planning application to Lichfield Council for a building to be known as Hercules totalling 430,000 sq ft with a 15m eaves height. Rae says the developer believes that it can put the building up within 26 weeks and is actively looking to secure a pre-let off a quoting rent of £4.95 per sq ft.
While developers may not be keen to speculatively build there is a surge of movement in securing planning and getting sites “oven ready” for occupiers.
Ian Kissane of CBRE says: “Speculative development of logistics space of over 100,000 sq ft is scarce across the UK but a very inspired few have bought or are starting to buy land and pre-letting it.” Anna Behan of King Sturge agrees: “Some developers and funds have started the first strategic site acquisitions since before the recession and if the gradual improvement in demand continues, speculative development could be considered for selective locations next year.”
Mark Coxon of Caxtons warns: “Although there are funds who will speculatively build, they remain extremely cautious about location and demand.” Goodman has teamed up with real estate investment management group, Europa Capital, to form a joint venture to acquire land sites suitable for the development of distribution and logistics property across the UK.
The joint venture is able to invest in immediately deliverable land in prime locations that have outline planning permission, and to undertake the development of logistics facilities on a pre-let basis. It will have a particular focus on land in the Midlands and South East, with investment opportunities sourced separately to Goodman’s existing UK logistics land bank.
The joint venture will actively seek to recycle assets and has the capacity to invest up to £60m at any given time.
The first land site to be acquired by the joint venture is a 16-acre site in Aylesford, Kent, located close to the M25 and M20 motorways. Goodman and Europa are expected to submit a detailed planning application shortly.
Goodman has a variety of sites already that include Derby Commercial Park on Raynesway Derby where the developer has planning for up to two million sq ft of space. Letting agent Rae says: “All infrastructure is now finished and we are in discussion with potential occupiers on sites of two to ten acres. There is a large plot that could take a single cross-docked unit of up to 1.2 million sq ft.” Joint letting agents are North Rae Sanders, CBRE and Innes England.
The developer is also seeking planning permission for the Slough International Freight Terminal. The developer has submitted an outline planning application on the 215-acre site it acquired from Argent two years ago. The new application will total some two million sq ft of railconnected distribution warehousing.
This forward thinking has certainly paid off for IM Properties at its Birch Coppice scheme where it has secured two major deals in the past year, one to Euro Car Parts for a 256,000 sq ft shed and the other to Ocado for a 350,000 sq ft warehouse.
Letting agent Mike Eagleton of Eagleton & Company says: “Birch Coppice Business Park has secured planning consent for two million sq ft of B8 warehousing accommodation on its a 124-acre phase two extension. Ground works contractors are currently on site and development plateaus are promised for early next year.”
Developer St Modwen has around 50 live industrial and distribution projects across the UK, around 1,900 acres of developable land and the capacity to provide around 33 million sq ft of new build accommodation for industrial, logistics, manufacturing and warehousing purposes.
Rob Skelston of St Modwen says: “There is no doubt, with almost zero speculative development and rapidly diminishing grade A stock available, occupiers are increasingly looking to design and build solutions to satisfy their future property requirements. The benefit of this approach is that occupiers now have a greater control and influence over the built product they require.
“However, with planning and construction timescales of no less than 12 months before practical completion of buildings, occupiers need to consider opportunities which benefit from deliverable planning consents. Certainty of planning is becoming a fundamental issue for occupiers,” says Skelston.
“Of equal importance is the lack of available third party funding which some developers require to commit to certain occupier-led requirements. This can add further time pressure and uncertainty on delivery dates.
“St Modwen is better placed than most developers since we are not reliant on third party funding to progress design and build projects St. Modwen has a UK wide portfolio of design and build opportunities on strategic road/rail networks most with infrastructure and outline planning consents in place.”
Gazeley also has a number of sites including its 95-acre G.Park Crick scheme where it has secured planning for up to 1.1 million sq ft in a single building. Bruce Topley of Gazeley says: “The building will be designed as a crossdock on a D&B basis. Rents at £5.95 per sq ft and as ever we are open to negotiation on each individual deal.”
Letting agents are CBRE and Dowley Turner. According to the latest research from Gerald Eve head researcher Sally Bruer says: “There are currently 50 sites being marketed as capable of accommodating units of more than 500,000 sq ft. Many sites – 23 – are in the North, mostly to the east of the area in South Yorkshire and Humberside. In the Midlands and Wales, there are 17
sites including several ProLogis sites in the East and West Midlands, Goodman’s scheme in Derby and Gladman’s Vertical Park on the site of the former Bevercotes colliery, near Nottingham. Just ten sites are available in the South including ProLogis RFI Howbury, Dartford and several sites at Magna Park Milton Keynes.”