Demand is up and supply is down but a return to speculative building is unlikely. What is in store for occupiers?
Nearly all the stock that was built speculatively in 2007 and 2008 has been let,” according to Andrew Griffiths, managing director of ProLogis UK. “As a result, logistics operators have fewer options when they are looking for new space.”
Surely that is over-egging the pudding? There has never been so much empty warehouse space in the country but is it the right type of space? According to Jones Lang LaSalle’s Big Box Report 2012 there is barely more than 9 million sq ft of big shed space remaining to be let across the UK. That equates to less than a year’s take up, even in a reasonably average year such as 2011. In addition says Ranjit Gill of BNP Paribas: “More than 80 per cent of overall stock larger than 50,000 sq ft is second hand.”
What is left may not be in the right location either; Charles Binks of Knight Frank notes: “There is a very diverse position with regards to supply across the country with nearly 30 per cent of the supply of modern space found in Yorkshire, a reflection of space taken up elsewhere as a percentage of the total.”
Mark Webster of Cushman & Wakefield has just completed a relocation exercise for an occupier looking for 200,000 sq ft. “We only had 58 responses [nationwide], some in poor locations, some too poor to even consider. In the end there were only 15 – 20 buildings that could in any way be possibilities.”
Richard Moffitt of CBRE says: “In the first quarter of 2012 total take-up was 4.7 million sq ft, a 59 per cent increase on the last quarter of 2011. Total availability across the UK stood at 28.6 million sq ft, 32 per cent of this available space is classified as ‘New’.”
“However given that design & build acquisitions dominated in the first quarter of 2012, accounting for more than two thirds of total take-up (eg Tesco, Reading; Sainsbury’s, Basingstoke; Clipper Logistics, Teesside and Asda, Rochdale), then the nature of current demand alludes to a massive supply shortfall.”
With this in mind, Carl Durrant of Jones Lang LaSalle warns: “The occupational market is starting to hot up as occupiers realise that if they don’t make a move soon, there will be little choice to satisfy any expansion or consolidation plans. And if they go down the build-to-suit route, which is a growing trend in the industrial market, they could take up to 12 months to find a suitable site and move in. Businesses need to plan much further ahead and that planning has to happen now, if they don’t want to be left high and dry.”
However, there is good news, Durrant notes that there may be a return to limited speculative build, with rumours in the market circulating that a number of speculative buildings might start in the next 12 months.
“This is a big change,” says Lisa Fitch of BNP Paribas, “but it will be done in core sites only.”
Moffitt agrees: “The supply/demand imbalance is presenting a momentary opportunity to speculatively develop. This is because in the core locations such as the South East, North West and West Midlands stock levels are dwindling when compared with average take-up over time. Occupational demand is increasing and no new development is taking place.”
So brand new big sheds all round? Not so says Len Rosso of Colliers: “In my view it may happen but not for the larger sheds. It is far too risky for developers/funds and landowners due to rates. In the Midland a 500,000 sq ft warehouse will cost around £1 million a year in rates, even one at 250,000 sq ft with rates at half that is still a very big risk. We believe that developers will look to do smaller multi let schemes or say a three shed scheme with units from 25- 80,000 sq ft as the risk is more palatable. The chances are you would let one of those three buildings within 12 months rather than one big shed of 250,000 sq ft.”
Johnson agrees: “People are now having a look at speculatively building and looking at sites to see if they would stack up financially. Probably a three shed combination of 40,000sq ft, 60,000 sq ft and 80,000 sq ft – there is a possibility that someone will spec out a larger building later this year but only in a core location.”
Simon Lloyd of DTZ is of the same opinion: “If we are predicting any speculative space it is much more likely to be in the South East and along the M1 Corridor, it will be very generic and likely smaller than we have seen. It is evident that the biggest buildings need to be more bespoke.”
Allan Wilson of Jones Lang LaSalle, agrees that while limited speculative building is likely to return, the unknown fate of the Euro zone and lack of economic confidence is creating caution and that is unlikely to be resolved for some time.
“Those bitten after the boom years are treading very carefully and will be loath to commit themselves at this time. The cost of holding land is much less expensive than buildings due to the absence of empty rates, limited maintenance and reduced insurance.”
But all is not lost. Developers are holding an awful lot of land and they need to develop it. ProLogis which has some 900 acres has come up with a novel solution aimed in particular at 3PLs.
It has announced a new build-to-suit 5 year lease initiative in the UK to meet the needs of customers seeking modern distribution space on a short term basis.
In exchange for a five year lease commitment, ProLogis will develop a high quality, sustainable distribution centre. The offer includes fit-out and because it is available on prime ProLogis sites that already have detailed planning consent, new facilities can be fully operational within 10 months of construction work starting on site.
Griffiths says: “This is the first time that high quality built-to-suit distribution centres have been available on short-term lease agreements in the UK and the initial reaction from the market has been overwhelmingly positive.”
The five year lease offer is open on two sites ProLogis Ryton near Coventry and ProLogis Kettering. Detailed planning consents are for a 310,000 sq ft facility in Ryton and a and 340,000 sq ft warehouse in Kettering.
Griffiths says: “The essence of the offer is to construct a generic building that will appeal to a broad group of occupiers and investors in the strongest market locations, hence the reason to do it on short leases.
“This product is an investment product. If people are looking for a more specialist building, the commitment would need to be longer to justify the investment.”
Binks says he thinks other developers may follow ProLogis’ lead. Tim Johnson of Jones Lang LaSalle agrees: “If you’ve got consent for 300,000 sq ft why not build it and lease it for five years? If you have the right building in the right location you should be able to find a new occupier for it when the lease runs out.”
In fact some investors are taking exactly that view. Joel Duncan of Jones Lang LaSalle says: “While the majority of demand is for the defensive stock as investors become even more cautious in their criteria, [Defensive stock refers to: prime locations, prime buildings, strong covenants, long leases and fixed increases], there is also demand for modern properties in prime locations with shorter leases, less than 7 years. The rationale for this is the lack of built stock and the lack of speculative buildings coming through increases the chance of tenant re-gears and the property’s reliability.”
While not committing itself to a five year build to suit, Nigel Godfrey of Gazeley says: “We would let on short terms leases to 3PLs although it is more difficult to look at a build-to-suit on a very short term basis.” That’s not to say the company would not consider say a ten year lease in the right circumstances.
Godfrey notes: “We seem to have come full circle. The UK is typically characterised by relatively long leases. In recent years there have been shorter ones because of the economic conditions. However now all the speculative space has been taken up and investors are looking for longer leases. In Europe short term leases are prevalent and it does appear that the UK is out of step but is has a long history of commercial property investment that has been driven by the funds. In Europe there is a lot of land and it takes up a lesser [part of the total development cost than it does in the UK where we have a limited supply of industrial development land.”
Developer’s view- It’s time for a longer term view, says Goodman’s Charles Crossland
Charles Crossland is relaxed as he discusses the Big Shed market over the phone – and well he should be. Crossland is managing director of Goodman UK Logistics and “Goodman,” he says, “is in an excellent position to do business following a £100m investment over the last four years putting in place planning, infrastructure and servicing across our UK landholdings.”
The company currently holds just over 800 acres, which can provide circa 15 million sq ft of accommodation. Around 600 acres benefits from planning of which 400 acres comes fully serviced with roads and other infrastructure. In total the company could provide up to 7.5 million sq ft of accommodation on serviced land.
Single building of 1m sq ft upwards can be accommodated at Kingsnorth Commercial Park, Derby Commercial Park, Crewe Commercial Park and Deeside Commercial Park, while buildings of 500,000 sq ft can be delivered at all the sites above as well as Andover Commercial Park, Hinckley Commercial Park, and Lyons Park, Coventry.
“Occupiers have had a good run in last few years with plenty of speculative space available but that is now coming to an end. Data in the key regions of the Midlands and South East show there is very little supply of existing premises. If an occupier wants space they need to consider taking a longer term view. And that is what we have seen. In the last six months we have had more pre-let enquires than we would have had in the last year.”
Goodman has never been into the speculative development game and it is paying off now as the company is in rude financial health and is able to develop schemes without having to go cap in hand to the banks and investment houses for funding.
“This means we can be more flexible, say for example, offering 7-10 year leases though the buildings would have to be as institutional as possible and in the right locations. We can react to the circumstances of the individual occupier although like everyone else we’ve always got to be very careful to look at the occupier, its financial standing, its future contracts etc. It wouldn’t be shrewd investing if we didn’t and we have to be pragmatic as far as possible to do deals. What is for certain is that we might be more flexible than a traditional institution.”
That is certainly true in terms of the speed with which Goodman is able to move on the development front. With so much fully serviced land the developer could secure detailed planning extremely quickly and within four months be on site. It is possible that from starting to talk to an occupier to handing over could take less than a year and in exceptional circumstances even sooner than that.”
Goodman is looking to secure more land preferably in lots of 75 – 100 acres in strategic logistics locations such as the Midlands and South East and it has the capacity to secure smaller plots up to 20 acres as long as these have planning through its Europa Capital fund.
The new sites though will not be available for immediate development as they would have to go through planning, and, although Crossland says local authorities are more accommodating than perhaps they were, the planning process is still slow.
“Many local authorities are beginning to understand [that logistics] does employ a lot of people particularly the e-tailers which are labour intensive. However, typically it takes a site from allocation to putting the infrastructure in, three to five years”