Recent take up figures for warehouse space are declining but does that mean demand is too?
Demand for Grade A units of 100,000 sq ft and over, fell in 2012 compared with 2011, according to take up figures from Jones Lang LaSalle’s latest UK Industrial & Logistics On Point.
Grade A take up in 2012 totalled 11.9 million sq ft, nine per cent lower than 2011 and 26 per cent lower than the six-year average of 16 million sq ft.
“As a whole, only around 7 million sq ft [of new previously unoccupied floor space] was taken up. This was 4 per cent lower than 2011 and 2 per cent lower than 2010. New floor space taken up in 2012 was 37 per cent lower than the 10 year average level of 11.1 million sq ft.
Jon Sleeman of Jones Lang La Salle says: “People have been saying for years that surely there cannot be any more demand for big sheds. The market must be saturated if logistics and supply chain management has improved so much.
“Indeed reducing inventory in the supply chain will mean that there is less need for warehousing space but actually that is wrong. The trend is broadly growth in terms of retail sales and manufacturing output so there are still requirements to hold more stock especially with growth in more global sourcing. By its very nature that means there is more stock in the supply chain because it takes so long to get to the end user and that in turn increases the need for storage.”
And it’s not just where goods are being sourced that is putting pressure on demand for warehousing space but also the changes in the way we shop are contributing factors to warehouse demand.
The explosion in on-line shopping has meant that retailers have had to change their supply chains radically to meet customer expectations.
Research by CBRE noted that 70 per cent out of a worldwide group of 500 bricks and mortar retailers intended to go multi-channel, and 63 per cent of those indicated they would be fully integrated within two years.
It was estimated that online retail could drive the take up logistics space 60 per cent in core markets in the same time period.
Forrester Research predicts that by 2015 internet shopping will be worth $184 billion, a massive 16 per cent year-on-year growth.
To meet this phenomenal growth, logistics property needs to adapt to accommodate changing shopping habits.
Prologis research suggested that every additional £800 million of online sales resulted in an average additional warehouse demand of approximately 775,000 sq ft in the UK over the last five years.
There is the potential for existing stock to be adapted to accommodate direct delivery, alongside delivery to store but, says Charles Binks of Knight Frank: “The issue is that an RDC or indeed an NDC is geared up for sending out large volumes via lorries and pallets and getting nothing back. It is not geared up to do internet fulfilment.
“Internet shopping can be down to single item picking and in addition there can be up to 20 per cent returns to be dealt with. Non-food online needs to have separate facilities from shop fulfilment because of the picking aspect. You cannot pick from a traditional RDC.”
However specialised RDCs do seem to be the way forward for retailers. CBRE research shows that retailers across the board are pursuing multi-channel expansion opportunities, and 95 per cent of the retailers surveyed indicated that they would need at least as much regional distribution space in the next two years as they do now, and in some cases significantly more.
Binks notes: “John Lewis saw a 44 per cent increase in online sales with similar increases experienced at House of Fraser and Debenhams. Next is growing its online offering and even M&S is online with the market requirements for those guys in the region of 600,000 sq ft each.”
Charles Crossland of developer Goodman agrees: “Grocers, such as Sainsbury’s, Co-op and Tesco, as well as established high street names such as John Lewis and Marks & Spencer have been responsible for some of the biggest deals, typically seeking facilities at around 600,000 – one million sq ft mark, and there remains healthy demand in this part of the market.”
Robin Woodbridge of Prologis says: “There is still demand for big sheds. Only recently Prologis secured a build-to-suit for a 1m sq ft facility for Sainsbury’s. Planning was submitted in October last year and we expect to start on site shortly. It will be 18 months in the making and currently this is the biggest deal in the market for a couple of years.”
Sainsbury’s has agreed to take a 1 million sq ft rail connected warehouse at Prologis’ Daventry International Rail Freight Terminal (DIRFT II).
Cushman & Wakefield acted for Sainsbury’s, while Jones Lang LaSalle and Burbage Realty represented Prologis.
Woodbridge notes: “Fifteen years ago you would not have thought to buy flat screen televisions or indeed wellington boots from your local supermarket. We are all consuming more stuff and that means that supermarkets are trying to provide it and trying to make their supply chains more efficient and cost effective.”
Roger Burnley, managing director, general merchandise, clothing and logistics, at Sainsbury’s says: “This depot will provide us with a central location to support our growing general merchandise business.”
Located beside the M1 motorway and the West Coast Mainline railway, the new facility will have both road and rail operations. A new intermodal terminal, which will connect to the existing DIRFT railway sidings, will be installed alongside the building.
The distribution centre itself has been designed to achieve BREEAM 2011 Very Good accreditation and the best possible EPC rating for its size.
Woodbridge says: “While we are not seeing huge numbers of enquiries we are seeing incremental demand for bigger buildings. The average size of a warehouse built by Prologis over the past five – ten years has grown to around 300,000 – 400,000 sq ft and the trend seems to be continuing.
“There are two key drivers to this one, retailers are looking to eventually improve efficiency for example M&S had over 100 warehouses and is now consolidating down to four mega sheds and secondly warehouses need to be bigger to hold the growing number of SKUs.”
It’s not just the big names says Crossland. “Separately, budget names, such as Poundland and TJ Morris have also expanded their logistics portfolios to service growing consumer demand for their products, and have taken space in developments offering upwards of 500,000 sq ft.”
TJ Morris’ Home Bargains subsidiary plans a new 700,000 sq ft regional distribution warehouse at Barwood and Clowes Development’s Imperium scheme at Solstice Park in Amesbury, Wiltshire. The RDC will support up to 300 new Home Bargains stores across the south of the country.
Home Bargains currently has 270 retail stores in the UK, including one in Trowbridge, it wants to open southern stores from Cornwall to East Anglia, including several in Wiltshire.
Outline planning permission has been approved, and if final permission is granted, work could begin in April. It is expected to take about 18 months before the site opens. Savills and Colliers acted for Clowes and Barwood.
TJ Morris was unrepresented.
And just recently discount grocer Lidl has been given the go-ahead for a 414,000 sq ft regional distribution centre at Southampton.
The site, at the Barker Mill Estates next to the M271 and M27, needed planning permission from both Southampton City Council and Test Valley Borough Council. Turley Associates, Lidl’s consultants, argued that there was a significant and pressing need to bring forward B8 floor space to support the sub regional economy.
Lidl has been looking for a suitable site in the Southampton area for several years. In 2009 it submitted plans for a 450,000 sq ft distribution facility at Wade Park Farm on the edge of the New Forest National Park.
The building will have both ambient and chilled storage and has been designed to include a variety of sustainable features, including a heat recovery system. It will be developed to achieve a BREEAM rating of Very Good.
The development will increase the efficiency of Lidl’s distribution network, providing a hub on the South Coast.
It’s not just the traditional retailers that are looking for space, says Crossland: “There is existing and in parts growing demand from other areas, not least the rise in the popularity of online shopping which has already translated into significant take up from online-only retailers such as Amazon and ASOS.
“As well as contributing to the large shed market, these types of retailers have also accelerated growth in the take-up of smaller, specialist parcel hubs on the outskirts of urban areas, which facilitate the rapid delivery of items to consumer’s homes.”
There have been several enquiries for large warehouses from specialist parcel companies and indeed 3PLs.
Lisa Fitch of BNP Paribas Real Estate says: “DHL and DPD both have requirements of around 400 – 500,000 sq ft along M1 corridor.”
It was only recently that express operator DPD announced that it was investing £175 million to build a hub in the East Midlands and expand capacity at its other sites to match online retail growth.
DPD chief Dwain McDonald, says: “The online retail market is expanding rapidly with consumers now prepared to buy a much wider range of goods online.”
Royal Mail subsidiary Parcelforce Worldwide has also announced expansion plans to the tune of £75 million. The subsidiary recently acquired a 97,000 sq ft hub in Preston.
Jones Lang LaSalle’s Daniel Burn, who advised on the deal, says: “Strong growth in e-commerce is continuing to drive demand for strategically located distribution space. This is the fourth deal we’ve completed for Parcelforce in recent months and we’re continuing to support the business’ expansion plans in the North West.”
Ruth Tytherley of CBRE agrees: “There has been a growing demand from 3PL and parcel companies to acquire more space recently. It is much more bespoke and specialist than in the past. A lot of 3PLs are looking at shared occupation.”
Simon Lloyd of DTZ adds: “What we are seeing is an increased specialisation. The occupier now is more bespoke than previously.”
This is certainly true of the increasing numbers of dark stores cropping up across the country. The dark stores or e-commerce warehouses have been built to cater more efficiently with the growing increase in on-line grocery shopping.
Tesco is set to open its sixth dot-com store in Erith to fulfil online grocery orders in the Greater London area in October 2013.
Paul Bench, head of distribution acquisition at Tesco, says the 122,082 sq ft facility is a vital part of the physical infrastructure to support the growth of Tesco’s online business.
“The facility at Erith will be the most automated dot-com warehouse to date meaning that staff will be able to fulfil a higher number of orders more quickly and efficiently than ever before. Not only will it enable us to meet demand in the London area, it will allow us to further drive growth in the online business.”
Tesco opened its first dot-com only warehouse in Croydon, South London, in 2006. It has since opened dot-com warehouses at Aylesford, Greenford and most recently Enfield, with another due to open in Crawley shortly.
Woodbridge says: “We are seeing an evolution around building design: we are seeing cross-dock doors on both sides allowing goods to flow through the building more efficiently, sometimes we see an occupier wanting more doors put on both sides, the size of cross dock doors is getting smaller and the amount of yard size differs from occupier to occupier in general yards are getting bigger.
“The one size fits all distribution warehouse is becoming a challenge; a warehouse is no longer just for storing goods. If goods are in the warehouse they are not making money but if you can get them somewhere or do something with them, they do make money. It’s all about the handling of them efficiently.”
Tim Johnson of Jones Lang LaSalle agrees: “Different types of retailers are changing the function of warehousing. It is now more diversified than ever. It used to be about stock holding, now it’s about rapid throughput and channelling things along multiple distribution channels in contrast to traditional retailing.
“With online and multichannel retailing you have multichannel distribution from home shop or click and collect; it is a much more complicated process and requires a wider range of warehouses and warehouse functions.”
So how are developers meeting these challenges? In the majority of cases it will be through build-to-suit as there are very few large sheds still available in the UK.
It is no surprise the developers are pouring money into infrastructure, joint ventures planning and land acquisition in an effort to offer potential tenants the fastest route to occupation.
Roxhill has entered into several joint ventures to increase its existing land bank. It’s most recent deal is a 50:50 joint venture with Forth Ports to bring forwards the 70-acre London Distribution Park at the Port of Tilbury. The scheme already has outline planning consent for up to 940,000 sq ft of space.
In its master plan for the scheme Roxhill envisage seven units with the largest totalling 250,000 sq ft. Infrastructure works are due to start shortly and buildings will be available on either a pre-let or pre-sale turnkey basis, with occupation possible by the end of the year. Lambert Smith Hampton and Knight Frank are letting agents.
The developer has also joined forces with SEGRO to bring forward Rugby Gateway in the Midlands. The 90 acre has a resolution to grant outline planning permission, subject to the conclusion of negotiations on the Section 106 Agreement.
The planning application limits the floor space to 904,000 sq ft of B8 and 506,000 sq ft of B2.
Other joint venture sites with SEGRO include Navigation Park in Enfield totalling 8 acres which could accommodate 200,000 sq ft and Voyager Park in Portsmouth that could accommodate 275,000 sq ft of space.
It’s not just developers, Lisa Fitch points out: “There are a few funds that are buying up empty sites in prime locations to take advantage of the build-up in demand and lack of supply.”
Legal & General Property secured a 31 acre site on Lockett Road in South Lancashire Industrial Estate, near Wigan in the North West with joint venture partner Barwood where it intends to submit planning to build two single, cross-docked warehouse units comprising of 555,000 sq ft and 100,000 sq ft, which will be available on a design and build basis.”
CBRE acted for LGP and Barwood on the transaction. CBRE, B8 and Moriarty & Co have been appointed as the joint agents on the development going forward.
With no speculative development on the cards then all sites are equal, and thus in competition with each other for what build-to-suit contracts are available. As these take a long time to negotiate it will be the developer who can deliver that fastest who will secure the tenant.
Roxhill is spending some £25 million on securing infrastructure to its Gateway Peterborough site just off the A1(M) at Junction 17, while Gazeley announced that it has started on a £5.2 million investment in infrastructure and enabling works across its UK portfolio.
Goodman is ploughing £12 million into infrastructure at Phase 2 of its Hinckley Commercial Park in Leicestershire as well as the rest of its 850 acre land bank.
Crossland says: “This investment will reduce the time it takes for a facility to be fully operational and will allow customers to respond quickly to their changing logistical needs.”
Case study- The big five of the warehouse world
There are only a handful of really big sheds left in the UK these include Moorfield and SEGRO’s Logistics Property Partnership Sheffield, formerly known as Blade, totalling 412, 519 sq ft, located half a mile off the M1 at junction 34 within the Sheffield City Region Enterprise Zone.
The facility offers 15m eaves, 40 dock and two level access doors, and a 50kN/sqm floor loading. It is located half a mile from Junctions 33 & 34 of the M1 motorway. Agents are CBRE and Knight Frank.
The partnership also has LPP Corby, previously known as Crackerjack, offering 528,108 sq ft of space just off the M1 in Northamptonshire. The cross-docked warehouse has a 15m eaves height as well as 50 dock and four level access doors.
It has capacity to store 77,000 pallets. The building has two service yards and parking for 98 HGVs and 336 cars. Letting agents are Burbage Realty, CBRE and GVA.
Back in the north there are two further facilities that could accommodate tenants looking for more than 500,000 sq ft.
Two units of 334,781 sq ft and 291,143 sq ft at Sheffield International Rail Freight Terminal (SIRFT) can be joined to create a mega-shed of some 630,000 sq ft. Both have 15m eaves, 50kN/sq m floor loading and 30 dock and two level access doors.
The units are located one mile from Junction 33 of the M1 and are available leasehold or freehold through letting agents GVA, Jones Lang LaSalle, CBRE and Moriarty & Co.
Evander and Anglesea Capital also have two large units that can be combined at the 1.4 million sq ft Sherburn Distribution Park near Leeds just off Junction 42 of the A1(M) motorway.
The two industrial units can be linked to create a 550,000 sq ft super-shed. The 190,000 sq ft and 330,000 sq ft units were originally constructed on a common grid to allow their combination at a future date.
Sherburn 550 would benefit from 15m eaves, 4 level access doors, 57 dock level loading doors, and could potentially be cross-docked. It would also have up to 14 MVA power supply and 65 kN per sq m floor loading. Letting agent is DTZ.
The final big five building is Crossflow550 a cross dock warehouse in Cabot Park, Bristol totalling 549,626 sq ft. It was built in 2008 as the largest speculatively developed distribution unit ever constructed in the South West.
It boasts 12m eaves, 50 dock and eight level access doors, two 50m deep yards, 172 HGV/trailer space as car parking for 403. It stands on a secure site of 27.64 acres with gatehouses. It is being marketed by Knight Frank and Savills.
Case study- 1m sq ft site comes to market in Durham
Merchant Place Developments has appointed DTZ and CBRE to market its 105 acres Amazon Park development at Newton Aycliffe in County Durham.
The Newcastle office of DTZ has been appointed regional consultant, while CBRE has been appointed national consultant.
Chris Noyes, MPD’s development director, said the next stage in the marketing of the site has been reviewed now that the development plan for the 460,000 sq ft Hitachi Rail Europe (HRE) project is ready to start.
“2013 will be a landmark year with construction of the Hitachi development on site starting this year. Now is a great opportunity for other occupiers to come to the site and join the excitement that will be generated as we move forward,” says Noyes.
Toby Vernon, senior director at CBRE, said: “We see this as a great opportunity for Amazon Park where we can build almost a further one million square feet of industrial or warehousing buildings to sit alongside the new exciting Hitachi building. Amazon Park is a major regional strategic site that is large enough to accommodate large space users and occupiers in the HRE supply chain.”
Case study- Empty rates change
Warehouses built from October 2013 will be exempt from empty property rates fuelling expectations that there will be some growth in the spec-build market by the end of the year.
In the Autumn Statement 2012 Chancellor George Osborne announced that new developments built between 1 October 2013 and 30 September 2016 will be exempt from empty property rates for 18 months.
The move followed severe criticism of the government’s failure to reduce the tax burden on owners of empty commercial property. The UK Warehousing Association said it was partly to blame for a shortage of usable warehousing and storage space that was stifling Britain’s economic recovery.
Arguing for a change of policy, Roger Williams, chief executive officer of UKWA, pointed out: “When the Empty Property Rate Tax Rules were changed in 2008, ministers justified the move on the grounds that the reforms would provide an incentive for owners to re-use, re-let or re-develop their empty properties. It was also felt that the changes would result in an increase in the supply of commercial property available to new and existing businesses, thereby helping to reduce rent levels which burden the competitiveness of the UK. Neither of these things has happened.
“The fact is that the tax has not only encouraged the early demolition of older empty warehouse buildings but could also be said to have discouraged the construction of new speculative warehouses.”
The hope is that the new regime will reawaken interest in speculative development and open the way for increased availability of good quality buildings.
Uneven activity in continental market
With around three million sq m taken-up, demand across Europe for logistics warehouses of over 5,000 sq m in size (10,000 sq m in the UK) held steady in the third quarter of 2012, according to research by Jones Lang LaSalle.
Even so, activity remained uneven across Europe. Over the first nine months of 2012 activity was down 15 per cent on the same period last year.
“Prolonged uncertainty about global economic growth and the Eurozone crisis has led to a general slowdown in take-up levels. Slowing activity is driven by limited modern supply and tightening occupier conditions for build-to-suit schemes,” said Paul Betts, head of logistics & industrial EMEA at Jones Lang LaSalle.
“With cost and risk management remaining on top of the occupier and landlord agendas, negotiations are starting to become tougher. Despite this, we continue to see plenty of demand in the market as occupiers re-align their existing supply chains to meet the requirements of internet-retailing and multi-channel distribution. Therefore, we currently see consolidation in take-up taking place on a high level,” said Betts.
Overall, take-up volumes remained volatile in Q3 2012 with both upward and downward trends in evidence. Significant increases in activity were seen in the UK (+68 per cent), the Czech Republic (+56 per cent), France (+54 per cent) while Poland and Russia both recorded a 35 per cent uplift quarter-on-quarter. Meanwhile only three markets saw rising year-on-year take-up over the first nine months: the Czech Republic (+18 per cent), the Netherlands (+16 per cent) and somewhat surprisingly Spain (+8 per cent). Despite a slightly weaker activity, Germany (-4 per cent) and France (-8 per cent) proved relatively resilient.
Following two quarters of slightly softening completion activity, new completions reached 1.9 million sq m in Q3 2012, 34 per cent more than in the previous quarter. During the first nine months of 2012, overall completions totalled 4.9 million sq m, 33 per cent ahead of the same period last year but still more than 20 per cent below the 5-year average. However, prolonged tight finance for new developments in combination with increased occupier caution has kept new development starts below 1.6 million sq m in Q3, down 35 per cent quarter-on-quarter. As a result, total floorspace under construction by the end of September amounted to 4.7 million sq m, down 10 per cent over the quarter and a marginal 1 per cent year-on-year.
“While we continue to report robust occupier demand for new build stock, with development activity still facing significant headwinds we expect the momentum in occupier activity to slow as required conditions such as lease length and the overall rental package from occupiers and developers are drifting further apart,” said Alexandra Tornow, head of EMEA logistics & industrial research at Jones Lang LaSalle. Take-up for the full-year 2012 is now expected to remain below 13 million sq m. This would reflect a 15 per cent decline year-on-year albeit it would be still 30 per cent ahead on the 10-year average.
“Looking ahead, we see an exciting long term market perspective as global supply chains will continue to grow and change. Over the next few years, in particular internet retail, the rising scale of container shipping and a shift in manufacturing locations but also the growth of new markets will boost occupier demand.”
Prime logistics rents remained under downward pressure over the short term. Although most markets recorded stable rental levels in Q3 2012, the Jones Lang LaSalle pan-European index edged down 0.4 per cent over the quarter and now reflects a 1.0 per cent decline year-on-year. Indeed, by Q3 2012, annual rental growth was limited to Antwerp (+2.1 per cent), Brussels (+9.8 per cent) and Frankfurt (+1.7 per cent) while rents fell in seven of the 25 index cities (Amsterdam, Barcelona, Budapest, Dublin, Leeds, Madrid and Manchester).
-PRUPIM has acquired a 1m sq ft warehouse on a 42 acre site on the Brackmills Industrial Estate, Northampton. The building is let to Howden Joinery Group until March 2019. PRUPIM acquired the property for £47m (£48 psf) and will receive a rent of £6,905,113 p/a representing a yield of 13.89 per cent. Saul Western of Bidwells, which advised PRUPIM, said: “This is just the opportunity that a large Life Fund like PRUPIM should be acquiring – it will provide a high income return for the next few years, but with a tremendous underlying site value being situated on a 42 acre prime development site on Brackmills.”