The good news is that Yorkshire still has some large warehouses available, but other areas are increasingly seeing shortages. Liza Helps seeks out the best of the available stock.
According to provisional figures from Jones Lang LaSalle, new supply at the end of September 2011 fell to 10.4 million sq ft from 11.9 million sq ft at the end of June 2011 and 15.6 million sq ft at the end of September last year.
Agents are reporting a continuing general erosion of stock, and there are now discernable gaps in certain size ranges and locations around the country exacerbated by the fact that there is nothing being built (speculatively) and nothing is coming back to the market.
Developers are down to their last few immediately available units. Gazeley just has its Blue Planet facility at Chatterley Valley following the lettings at G.Park Rugeley, Magna Park Lutterworth, G.Park Hemel and G.Park Liverpool.
Amazon took the 707,488 sq ft Flair building at G.Park Rugeley in July on a 15-year lease at a rent believed to be in the region o £3.95 per sq ft, nearly £1 per sq ft less than originally quoted by joint letting agents CBRE, Cushman & Wakefield and Burbage Realty.
DHL secured Gazeley’s 361,600 sq ft warehouse at G. Park Liverpool on a ten-year lease at a rent thought to be in the region of £4 per sq ft. Letting agents are CBRE, Jones Lang LaSalle and Colliers International.
Palmer & Harvey secured G.Park Hemel. The 167,730 sq ft warehouse was let on a 25-year lease at an initial rent of £5.95 per sq ft. Letting agents are Savills and CBRE. And finally Gazeley’s Solar warehouse at Magna Park Lutterworth is under offer and in solicitors’ hands.
Developer ProLogis is also down to its last unit standing following the recent letting of ProLogis Crewe 360 to Expert Logistics on a 15-year lease at a rent in the region of £4.25 per sq ft. Letting agents were CBRE, North Rae Sanders and Lamont, while Lamont and Savills acted for Expert Logistics.
“With this agreement, we’ve nearly completed the lease-up of our development portfolio in the UK,” said Phillip Dunne, president of ProLogis Europe.
ProLogis just has DC123 ProLogis Park Kettering and DC139 ProLogis Park Pineham remaining (although DC139 is under offer). DC123 totals 123,000 sq ft of new warehouse space, including 6,000 sq ft of offices on two storeys with an EPC A 24 rating. It has 12 dock and two level access doors a 11.5m eaves height, 50kN/sq m floor loading and parking for 96 cars and 18 trailers. Letting agents for DC123 are Budworth Hardcastle and Burbage Realty.
Ranjit Gill of BNP Paribas Real Estate adds: “Occupiers should be concerned and start to make decisions while there is still stock because with no further development there will definitely be a shortage. There may be an oversupply in Yorkshire but everywhere else there is not a large amount.”
Indeed Tom Davis of B8 Real Estate cites a 148,000 sq ft warehouse at Northern Gateway in Knowsley as one of the last new buildings left in the region. The building, owned by Gresham House, has 12m eaves, nine dock levellers and one level access door, a 50kN/sq m floor loading and a 50m yard. It is on the market through B8 Real Estate and Jones Lang LaSalle.
Commenting on the Yorkshire big shed market Mike Baugh of DTZ says: “Compared with the rest of the UK, Yorkshire still offers the highest proportion of grade A versus non-prime space, at 31 per cent of total availability.
“Yorkshire’s big shed market has seen significant activity in the last 12 months, with the region attracting predominantly retail-led distribution operators such as Debenhams, ASOS, Amazon, Asda and Scotts Miracle-Gro.
“It is true to say that some of this activity has been driven by a lack of available space in the South East, Midlands and North West, in addition to availability of attractive deals in the Yorkshire area.
“Although activity in 2010 was encouraging; there is a shortage of space in certain areas of the region, in particular size ranges, for example 150,000 sq ft to 300,000 sq ft in the M62 motorway corridor, there is still in total a good supply of accommodation in the region in excess of 100,000 sq ft.
“If take-up continues, it is likely that availability will be low in 2012, as there is no speculative development planned or likely. The window of opportunity for occupiers to secure an attractive deal is closing and they will have to be more organised and forward thinking in their search for new premises.”
Rob Oliver of GVA agrees: “We have still got an oversupply but it has shrunk dramatically.” He cites a recent relocation deal at Sherburn Distribution Park where Evander has let a 140,000 sq ft shed to manufacturer Optare on a 17-year lease with rent free and stepped rent to £4.50 per sq ft. Letting agents were DTZ, CBRE and Moriarty & Co.
Up until now says Steve Williams of Lambert Smith Hampton: “Tenants have never had it so good, they held the whip hand but that is no longer the case.”
And the reason for this is that there is no new stock coming onto the market. “It would be a brave person [who would develop speculatively],” says Mark Webster of Cushman & Wakefield.
As one developer put it bluntly: “The whole spec thing has reduced as the sheer weight of money has gone and the chances of it happening again in the near future are basically highly unlikely.”
To be honest one could say that the last few years have been misleading for occupiers. Paul Weston of ProLogis explains: “Looking back it was effectively the access to cheap capital that allowed so much speculative building. In addition, relatively cheap build costs and high land prices left no option other than to speculatively build out as [one] could not sit on the land.
“Another issue was the big institutional demand. There was a lot of money chasing nothing much.”
Weston continues: “In 2005 ProLogis had 5.5 million sq ft under construction; in 2006, 3.5 million sq ft; and 3.6 million sq ft in 2007 but in the core markets you were seeing take-up of around 20 million sq ft that rapidly tailed off in 2008 and we [ProLogis] were left with 4 million sq ft – a massive headache.
“Since then what we focused on was getting those buildings let and offering attractive terms to get them [tenants] in.”
Nigel Godfrey of Gazeley agrees: “The last three years have been unusual. It has been period when developers have been looking to actively shift the speculative pot that they built and those developers have been keen to get rid of schemes on very short lease terms.”
Simon Lloyd of DTZ says: “There has been a significant oversupply of stock and building owners have been very flexible but that window of opportunity is finishing quickly.”
Williams says the reason for a lack of speculative build now is that there is a general nervousness of where the market is going. “There is bad news on the economy and retail confidence is not there, it’s a one way story.”
One could say the boom in demand in the last three years was the result of shed developers doing their utmost to get rid of stock and occupiers cashing in on the opportunity. “This is not” as one developer says, “reflective of a healthy economy; rather a desperate industrial market”.
Godfrey says: “Now that the significant proportion of speculative units have been taken up developers such as Gazeley, ProLogis and Goodman will be looking at D&B/build-to-suit we will be looking for occupiers to take longer leases – 15 years institutional terms. There isn’t an opportunity to do bargain deals.
“Because the opportunity for those bargain deals really only existed when there was an oversupply. Nowadays external financiers are not going to give cash for developers to do cheap deals and short-term leases. Deals have to be economic. I think the market has swung from being heavily in favour [of occupiers] to being more in balance.”
Tom Davis of B8 Real Estate says: “Many occupiers have made the most of it. The days of hugely discounted building are over because there are none left and occupiers have either got to prepare to compromise and recognise the fact that developers and landlords will only make deals that make financial sense.”
Looking at the market now Gerald Eve noted in its most recent Prime Logistics Bulletin: “In 2011, we are now in a position where, as the majority of this pent-up demand has been satisfied, the primary drivers of activity are now more contemporary and organic, such as from natural expansion, consolidation or lease events. As such, take-up volumes are now more genuinely reflective of current demand. However, what is perhaps of concern to occupiers is that the gradual erosion of good quality well-located stock has necessitated a substantial rise in the amount of space transacted on a design & build basis.
“At 2.8 million sq ft, the amount of space pre-let or pre-sold during Q2 was the highest since Q3 2007. We anticipate this trend to continue as occupiers are forced to look to build-to-suit to ensure they secure the space they require.
“While for secondary stock in off-prime locations the market is still tenant-friendly, the prime end of the market is close to the watershed where there will not be suffcient space available to meet demand. This will ultimately lead to increased rents and reduced incentives in the particularly restricted and in-demand locations.
“As such, the development market is still very much driven by design & build schemes, with almost no market-driven speculative development since the start of 2009. For the large retailers, with the covenant strength and appetite for long leases to justify bespoke development, design & build schemes have proved very effective.
“However, for weaker-covenanted tenants or 3PLs servicing short-term contracts, the ability to design & build has proved much more diffcult. This has been exacerbated by occupiers also coming under the added pressure of securing shorter lease lengths as a result of new lease accounting standards.
“A solution may be that developers will begin to be more amenable to tenants with weaker covenant strengths taking shorter leases. In these cases, buildings are more likely to be built to a more generic design than buildings taken on longer lease terms. However, location is key and developers, with an eye on the prospects of rental growth, will be focusing on in-demand locations for such schemes.”
Tim Johnson of Jones Lang La Salle says: “Occupiers need to be conscious of not having as much bargaining power as they used to have and this means that lease terms, rent and delivery timetables will change.”
But the news is not all bad as Jones Lang LaSalle’s Jon Sleeman adds: “If occupiers look at existing stock they can get short leases. There is a huge stock of big units on the market.”
There will always be a second-hand market and not all space needs to be anything more than wind and water tight.
Indeed for 3PLs looking to secure short-term leases a second-hand shed may be a wise move if for the only fact that many of those returning to the market are already fitted out saving capital outlay costs.
Indeed many occupiers are on this scent says Williams. He has a 100,000 sq ft shed in Northamptonshire which Tesco has just relinquished. It is fitted out and already two parties are in discussion with others in the wings.
As to the resurgence of speculative development Johnson says: “Never say never. We will see speculative development again when the economics are better.
Lloyd agrees: “There will be a spec market but the questions are when, where and what size.”
E-commerce set to drive property market growth
Retail, particularly e-commerce, is set to be a key driver of growth for European logistics property markets, according to Rob Hall, head of DTZ CEMEA logistics.
Unveiling a DTZ report on the European logistics property market, Hall said: “With the exception of a few locations, speculative development of logistics space is unlikely to be a realistic option for a while. The first half of 2011 got off to a positive start with strong take-up in locations such as Belgium, Germany and France, however, given current market uncertainty we anticipate a slow-down in the second half of the year. Despite these uncertainties there are still positive signs of growth in the logistics sector with some recovery in prime rents expected by 2012.
“Furthermore, retail sales, a key driver in the logistics markets, are forecast to return to growth in all major markets. E-commerce is emerging as one of the fastest growing sectors in Europe with Amazon signing two of the largest transactions of the first half of 2011 and anticipated business growth linked to e-retailing is already evident in the UK, France and Germany.”
The European market for logistics property which was showing a strong recovery in the first half of 2011 has lost some momentum, according to the DTZ study entitled “Property Times – European Logistics”.
In the first half of 2011, a strong economic resurgence drove the logistics markets forward, it said, and take-up increased in the top five markets to a total of 6.9 million sq m (74 million sq ft), up from 5.5 million sq m (59 million sq ft) during the same period in 2010. German and CEE logistics markets were boosted by the economic recovery with retailers and manufacturers taking advantage of improving sentiment. Take-up in Germany increased 42 per cent and in CEE 28 per cent.
In addition, the UK market experienced a large decline in grade A space as demand from retail and manufacturing sectors continued to absorb the limited supply of this space, the report said. As a result, the demand for built-to-suit schemes has increased as occupiers seeking well specified buildings in the most popular locations have had fewer options from within the existing supply.
However, austerity measures and weak economic growth predictions are leading companies to act with caution, says DTZ.
Moving into 2012, the logistics markets will be influenced by two contrasting factors: strong growth prospects in CEE and Nordics in respect of industrial and consumer activity, pitted against the impact of austerity measures across Europe. A general sense of caution in the market is already evident with a number of industrial and logistics companies continuing to keep under review their property requirements until there is more economic certainty.”
In the short term, industrial production forecasts reveal a mixed situation across Europe. Germany, CEE and the Nordics are predicted to grow between seven per cent and nine per cent. In contrast, the UK and France remain below the European average of 5.7 per cent. Consumer spending across the wider European region is expected to remain subdued over the next three years. However, the UK, France and Germany are predicted to perform above the regional average. Furthermore, CEE and Nordics will again outperform with two per cent to three per cent per annum (2011-2014) set to benefit from low exchange rates and minimal levels of public debt.
The report also shows that prime rents stabilised in the majority of the European logistics markets during the first half of 2011 and are forecast to increase in core markets during 2012.
Between 2011 and 2015, prime logistics rental growth is forecast to increase on average 1.5 per cent per year, albeit slightly behind the recovery rate of the office and retail sectors. Some European markets such as Barcelona are predicted to experience a more dramatic rental recovery reversing the declines over the past three years.