Shifting the balance

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The requirements are there but the availability is not. Is design and build now the only option or will it spell the comeback of speculative development? Lucy Tesseras reports.

As the remaining few sheds built during the height of the market get snapped up the shift in balance is most certainly moving towards design and build in the key locations.

“The options for existing buildings are starting to run out,” says Kevin Ashfield of IM Properties. “Occupiers are increasingly aware of that and don’t want to miss out. The era of cheap deals because of oversupply is finished, now occupiers have to consider D&B.”

In fact, some 2.8 million sq ft of space was pre-let or pre-sold during the second quarter of 2011 – the highest amount since 2007, according to Gerald Eve’s latest Prime Logistics report.

And it predicts that pre-let space will continue to drive letting activity for the remainder of the year, particularly among retailers, which have dominated take-up activity of late.

Over the past year Tesco has taken 800,000 sq ft at ProLogis’ DIRFT site, Marks & Spencer has agreed a lease on a rail-connected distribution facility at East Midlands Distribution Centre in Castle Donington, Ocado has taken 350,000 sq ft at IM Properties’ Birch Coppice Business Park in Warwickshire, Amazon    is building a 1m sq ft hub in Dunfermline, and the Co-operative Group has started work on its $ 20 million 435,750 sq ft regional distribution centre in Avonmouth.

Looking forward, Jon Sleeman of Jones Lang LaSalle reckons D&B will be the primary route for companies wanting new space in the short-term.

“This reflects the fact that we expect the moratorium on new speculative development in this market (involving large units) to continue at least for the remainder of 2011 [and into the]first half 2012. While there has been some return to speculative development in certain markets recently (notably around London) this has been for smaller unit sizes.”

The good thing about D&B is that the occupier can specify exactly what they want. Ranjit Gill of BNP Paribas Real Estate says: “Occupiers are very selective. They want to make sure what they are after is delivered. Many are looking for rail-connected sites, not necessarily because they want to use rail now, but so their operation is future proofed.”

It’s a view which Kevin Ashfield of IM Properties agrees with: “For almost anyone you speak to [rail]is a tick in the box for future proofing. Ocado is a good example, while they’re not using rail immediately it might be something they use in the future.”

However, the move towards rail has come about more quickly than first anticipated for some occupiers. When a number of occupiers first moved into IM Properties’ Birch Coppice development access to rail was seen as a nice to have option, but Ashfield reckons that almost 50 per cent of occupiers are now already using it.

There is still up to 1,250,000 sq ft of design and build space available at Birch Coppice, which is at Junction 10 of the M42 motorway and located near to the Birmingham Intermodal Freight Terminal.

DB can be a daunting prospect, particularly financially, according to Gill who says that while existing sheds in the golden triangle are going for around £5 psf on a ten-year lease with 12-18 months rent free, “if you look at D&B, rent is around £5.50 psf on a minimum of 15 years, but more likely 20 years with index linked increases”.

On a more positive note, Tunde Adegbemile reckons occupiers can benefit from long-term cost savings by being involved in the design process from an early stage.

“On paper occupiers can find more competitive deals on existing buildings,” he says, “but when you review the overall operator costs over a longer period D&B could deliver more efficiencies. With a spec building you have to take it on as it is and adapt it to work for your operation, whereas D&B will be built to the occupier’s exact specification.”

However, he agrees that there are fewer options from a letting perspective.

“It’s very difficult for occupiers to procure a D&B deal for less than 15 years, and incentives are much reduced. You also don’t get as flexible a deal, but you have to balance out the overall cost.”

When it comes to the re-emergence of speculative development, Ranjit Gill says a lot hinges on whether the double dip happens because companies are fragile which could mean good quality stock is returned to market.

“There are two scenarios,” he says. “If the economy goes in the wrong direction then the prospect of buildings coming back to market is much greater and it would be good quality stock as some will only be a year or two old. On the other hand, if the market stabilises then existing stock will be taken up and there will be very little beyond 12 months.”

Mike Baugh of DTZ adds: “Given the current trends, there is an opportunity for well-funded developers to take advantage of the likely undersupply of stock in prime locations. The market eagerly awaits who will be first to start speculative construction again.”

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