Could speculative development really be round the corner?
The availability of Grade A space totals 1.2 million sq ft. In the absence of any new supply coming to the market and if current take-up levels continue, very little is expected to remain past the summer.
This is according to DTZ’s first quarter UK Industrial Property Times report; it doesn’t make for happy reading for occupiers, though the flip side of the argument gives strength to the rumours that developers could be poised to speculatively build.
David Brooks of Jones Lang LaSalle says: “The dramatic reduction in the supply of Grade A industrial and logistics space in the North West, both ‘big box’ distribution and on the smaller multi-let estates, is now improving the prospects of seeing a return to speculative development over the next 12 months or so.
“In addition to a very limited number of North West based contractor/developers bringing forward smaller terraced format units in the 3,000 – 10,000 sq ft range, conversations are now taking place with a number of Pension Funds looking to fund speculative developments.
“This interest is likely to be focused on small to medium sized units of about 10,000 – 50,000 sq ft in prime locations such as Trafford Park; South Manchester; the M60 corridor and the Warrington area.
“While interest from Pension Funds in any recovery will always initially focus on the London and South East markets, there is evidence that their attention is now starting to spread to the key regional centres including the North West.
“Any increase in development activity however, will be largely driven initially by the lack of supply of quality accommodation rather than any major improvement in occupier demand.”
Andrew Aherne of Lambert Smith Hampton notes that there have been three speculative schemes brought forward in recent months. However, in all cases the schemes have been either pre-let to a degree or pre-sold prior to completion and in some cases before construction even began to take place. There is certainly a lack of availability driving the market.
Julien Kenny–Levick of Colliers International is cautious. He does not think there will be a mad rush to speculatively develop however big the shortage of space at present. “Although the market acknowledges the fact that supply in this sector is verging on the non-existent the likelihood of any speculative development in the short term at least is limited.
“We are now at a stage where developers are actively considering speculative construction in this sector but they are finding that the speculative funding market is non-existent or on terms which make it financial un-viable from a developers perspective (eg typical loan to value ratios of 60 per cent).”
Tony O’Keefe of DTZ says: “The North West has less than a year’s supply at current take up levels and that means for occupiers that where before there were a series of units to consider and landlords had been prepared to offer flexible terms and generous incentives because of the competitive situation, now there is no available standing accommodation and the advantage will be with the landlords.”
Stuart Murray of Savills agrees: “Whereas occupiers have been able to get tasty deals in the not so distant past, they are now finding that they are having to realign their expectations and looking at institutional deals especially on build-to-suit as they won’t get anywhere without them.”
O’Keefe continues: “There is a pressure on incentives on existing stock and for landlords or developers holding land for build-to-suit only longer term lease commitments are being contemplated because a deal will not stack up financially otherwise.”
Jason Print of Cushman & Wakefield sums up the current situation: “Landlords have been on the back foot for the past few years while occupiers have enjoyed massive negotiation strength. However, the tide is turning as supply reduces.
“While D&B developers are always keen to do deals, if the deal isn’t right for them they do not have to do the deal as they normally don’t have huge holding costs such as empty rates, insurance etc.”
Good quality stock where it exists is being snapped up giving landlords the confidence that they can be firmer on incentives. Recently Savills secured an off-market deal for Budget Greeting Cards to buy a 190,000 sq ft warehouse. The acquisition was secured quickly as the occupier felt the need to move decisively in the current market guessing correctly that such an opportunity may not arise for some time to come.
Kenny-Levick notes: “The supply of large new sheds (in excess of 200,000 sq ft) in the North West has been completely eroded in the past 12 months. Due to deals to DHL, Expert Logistics and Matalan the once over supplied region is now experiencing a real shortage of supply issue. Requirements looking for modern well located units are now having to consider either the Design and Build route to securing a property or there is evidence that some occupiers will now look further afield to Stoke/Staffordshire further south and Yorkshire further west.
Indeed Expert Logistics had to widen its locational parameters from a five mile radius of North West Manchester to secure the space it required. It finally opted for ProLogis Park Crewe where it took a 336,322 sq ft warehouse with two-storey offices of 11,722 sq ft, a hub office totalling 3,887 sq ft and gatehouse.
The facility has two level access doors, 32 dock levellers, 15m eaves, a 50-metre service yard, 51 trailer parking spaces and parking for 262 cars; secure, fenced yard and landscaped surroundings.
The environmental specification includes a carbon neutral envelope, 15 per cent roof lights, minimised air leakage, lower energy light fittings in the offices and has been awarded a BREEAM excellent rating and an Energy Performance Rating of A. Joint letting agents were CB Richard Ellis, North Rae Sanders and Lamont. Savills advised Expert Logistics.
The deal was struck on an institutional lease of 15 years.
There is a lot of demand for space. Print says: “Supply is a real issue in the North West. Currently there are only 11 existing units in excess of 100,000 sq ft with eaves heights of more than 10m and just under half of these are secondary in terms of quality. To put this into perspective if an occupier wants an existing unit in excess of 200,000 sq ft with an eaves height of 10m plus in the North West, they have a choice of just three units.
Other units with varying eaves heights are available but many occupiers have to make compromises to make these buildings work efficiently.”
Kenny Levick agrees: “There is a plethora of older accommodation but this tends to be largely un-usable for many of the modern occupiers with low eaves, small servicing areas and poor environmental credentials.”
However, even older stock is being taken up. According to Lambert Smith Hampton’s National Industrial & Distribution Market Report availability fell across the board for the first time since 2007, falling 5.2 per cent to 61.5 million sq ft. The few older quality existing units within the region, namely Manor Park 343 in Runcorn, Austin Park in Knowsley and Phoenix at Ellesmere Port all have strong interest with requirement from Jaguar Land Rover and Hut Group active in the market.
Highcross’ Phoenix totals 405,365 sq ft and is the largest immediately available building in the region. It has 12m eaves as well as 12 dock and 23 level access doors. It is being marketed at a rent of £4.25 per sq ft through agents CBRE, Jones Lang LaSalle and Legat Owen.
While Manor Park, believed to be under offer, totals 343,312 sq ft with 11.8m eaves, 32 dock and 4 level access doors and is being marketed by Cushman & Wakefield. Austin Park in Knowsley is the smallest at 268,298 sq ft with 11m eaves. It is being marketed through CBRE and Mason Owen.
Some poorer quality second hand space is being refurbished in the light of demand. Aherne says: “Centurion Industrial Asset Management has in the last couple of weeks made the decision to refurbish a 90,000 sq ft warehouse it owns in Cheadle and in addition another client has decided to invest in refurbishment of a warehouse where a tenant has recently gone into administration. It will be re-cladding the unit and spending a lot of money on refurbishment; this is a real investment on the back of supply and demand and the prospect of getting a better rent than a year ago.”
Murray points out that in some cases the decision to refurbish or demolish a building is a fine one. In years gone by a large warehouse may have been refurbished and let out as smaller units but with the spectre of empty rates looming in the back ground some landlords have opted to demolish. This is the decision of DTZ Investment Managers, Canmoor and Strathclyde Pension Fund at Bolton 6 Sixty One in Bolton.
The facility was fairly modern but the amount of money required to convert it to make it acceptable for a modern user was too much taking into account empty rates so the site was cleared.
It is now being marketed as an oven ready site for build-to-suit occupiers having planning permission for a 530,000 sq ft warehouse with full infrastructure as well as a 2000KVA power supply. Sole letting agent is Savills.
Kenny-Levick says: “The likes of Aldi, Travis Perkins and Hermes all have North West requirements at present and they are all looking at new build schemes due to the lack of realistic existing options.”
However warns Brendan O’Herlihy of Preston O’Herlihy: “The North West is running short of good oven ready sites.” He says the shortage has been exacerbated by the fact that some very large requirements have been snapping up available land which could in years past have satisfied several companies rather than the one or two that is satisfies now.
Sites available now include Gazeley’s G.Park Liverpool that could deliver up to 425,000 sq ft. It is being marketed by CBRE, Colliers and Jones Lang LaSalle, Marshall and CDP’s 14 acre Gemini 8 site in Warrington could hold up to 250,000 sq ft, while the daddy of them all Kingsway could take 350,000 sq ft.
In Widnes both Stobart and ProLogis’ proposals have been given the go ahead. ProLogis is looking to deliver a 1,180,370 sq ft single rail-served building for storage and distribution which is believed to be for an e-commerce client, while Stobart has planning for three sheds of 850,000 sq ft, 300,000 sq ft and 210,000 sq ft totalling 1,416,150 sq ft, and a 13.7MWe biomass facility at its Stobart Park site. There is also an outline application for a 278,625 sq ft 12 storey office block with rooftop helicopter pad. It has been reported that Stobart Group will look at leasing the warehouse buildings to its customers.
Miller Developments and RBS’ Omega scheme has 134 acres that could deliver more than 1 million sq ft in time and UK Coals’ 212 acre Cutacre site just off the M60 in Bolton could certainly accommodate up to four million sq ft. It is being marketed by DTZ and Jones Lang LaSalle.
National Grid Properties has appointed property consultant DTZ to dispose of its 67 acre Voltage Park, Partington near Manchester. The site which has outline consent could accommodate up to 1 million sq ft of warehousing.
Tony O’Keefe of DTZ said: “The site comes to the market at a time when supply of consented sites is limited, has a large potential power supply and is offered for sale as a whole or in constituent parts.”
“The biggest question,” says Bruce Topley of Gazeley, “is just how fast can these sites deliver? Build-to-suit has a different risk profile for occupier as there isn’t a building to be seen.”
He says both G.Park Liverpool and G.Park Skelmersdale where it has planning for three units from 100,000 sq ft to 275,000 sq ft are ready for development now and could be operational much faster than expected.
At G.Park Enfield it took a mere four months for Tesco’s e-tail fulfilment warehouse to go live.