A period of reduced economic growth is anticipated over the next year and, since no industry, particularly the logistics sector, operates in a vacuum we must acknowledge that this is likely to have a dampening effect on the market as a whole.
Partly due to inflated oil prices and rising interest rates depressing consumer expenditure, predictions suggest that the UK GDP will average around 3.4% in 2004, falling to a more moderate 2.8% in 2005. Forecasts for export growth however are more encouraging – a rise of 2.1% to 4.9% in 2005 is estimated.
Surprisingly and encouragingly, manufacturers are planning an increase in production towards the end of the year, despite the rising cost of borrowing. Recent Confederation of British Industry (CBI) figures suggest that 32% of firms expect a rise in output volume in the next quarter, against only 13% who foresee a downturn. This more buoyant outlook though will be tempered by an inevitable squeeze on profit margins bearing in mind the hike in oil prices by some 40% since the beginning of the year. Something has to give, and it is likely that price increases will at least partially offset these swingeing overheads.
The long awaited launch of the M6 toll road has had a major impact on the region’s industrial warehouse market in a rather unexpected way. Although truck usage is minimal, its growing popularity among car drivers has eased traffic flows on the original stretch of the M6, which it effectively ‘bypasses’.
The toll road, linking J4 to J11 of the M6 via J9 of the M42 and Cannock, has already stimulated an increase in occupier demand and development activity in areas such as Burton upon Trent, Fradley, Lichfield and Cannock itself, which is directly attributable to its opening. Why the dearth of lorries? The Freight Transport Association (FTA) has explained disappointing volume on the toll – £11 for the average lorry; suggesting that pricing was prohibitive for most truck operators. In response, the M6 Toll Company has reduced the charge to £6 – the effects of which will be eagerly awaited.
Demand has been characterised latterly by the increased take-up of new spec build units – a relatively sluggish market throughout 2003. In the past 12 months well over 186,000sq m (two million sq ft) of new space has been let, particularly in the mid-sized bracket – units between 1,860sq m (20,000sq ft) and 9,300sq m (100,000sq ft).
In the Birmingham area these transactions – both leasehold and freehold – have included deals such as:
lPalletline – 8,021sq m (86,250sq ft) at Merlin Park, Erdington, let at £5.50 per sq ft.
lPonsonby – 7,068sq m (76,000sq ft) at Hurricane Park, Bromford, let at £5.50 per sq ft.
lParcelforce – 3,906sq m (42,000sq ft) at Nexus Point, Witton, sold at £60 per sq ft.
lSCH plc – 5,208sq m (56,000sq ft) at Neo Park, Tyseley, sold at £56 per sq ft.
In the larger size bracket, demand for larger distribution units of more than 9,300sq m (100,000sq ft) is still dominated by distribution occupiers serving both the food and non-food retail sectors, such as Tesco, Sainsbury’s, B&Q and Matalan, together with their third-party logistics operators.
Average requirements vary widely and can range from 9,300sq m (100,000sq ft) up to 46,500sq m (500,000sq ft), depending on the contract in place at any given time. Major retailers such as Asda and B&Q are now demanding larger footprints, and single units of 65,100sq m (700,000sq ft) and larger are being built to serve their needs.
As logistics operators increase their penetration of the market with mergers and consolidations, the larger end of the distribution sector is becoming dominated by fewer and fewer names.
As pressure increases on land supply in the Midlands, there are fewer and fewer options for occupiers within the M6, M1 and M42 corridors, making competition for remaining sites more intense. At the same time, with the prevailing economic uncertainties, neither distributors nor their customers are sure of their demand levels from year to year and lease terms are rarely correspondingly flexible – usually five, ten or even 15 years.
Where an existing large building is available, even with relatively low eave heights and signs of age, demand is outstripping supply and terms are hardening with better higher rents, longer leases and less rent-free accommodation as a sweetener. At the same time, the desire to cut costs means that occupiers are more ready to consider locations away from the traditional ‘honeypots’ in pursuit of lower rentals, despite the inconvenience of additional journey time.
Demand requires immediate satisfaction in these days of just-in-time (JIT) delivery. Once a contract goes ‘live’, the accommodation needs to be in place. The market leaders, ProLogis and Gazeley, have responded to this phenomenon by speculative development on a scale unimaginable five years ago. They have simultaneously conceived a fast track construction process for the delivery of a completed building within 12 weeks of a deal being negotiated – a revolutionary concept for an industry which has always been characterised by average lead in times of between 20 to 25 weeks.
At the Hub in Birmingham, Prudential has committed major investment up front in essential infrastructure so plots are ready for construction with no other preparatory work necessary. Opus Land and Frontier Estates’ close working relationship with Birmingham City Council will help to further shorten delivery times and a full project management team is on hand including leading distribution property architect Burks Green to complete the support ‘package’.
Last, but certainly not least, demographics have a key role to play in the location decision. Retail-focused high volume, quick turnaround warehousing demands a large and diverse workforce, despite the commonly held myth that the converse is true, and as such demographic studies, wage rates, variety of available skills and an adequate local transport service are all critical issues for the potential occupier.
New build units around the UK’s Second City and the M42 stands at 114,562sq m (1,231,850sq ft). A large proportion of the available stock – 67,890sq m (730,000sq ft) – is offered by Hams Hall Distribution Park in two units of 20,925sq m (225,000sq ft) each. Of the 46,500sq m (500,000sq ft) remaining, most buildings are in the 1,860sq m (20,000sq ft) to 3720sq m (40,000sq ft) range – a category experiencing a drop in demand over the past 18 months.
Healthy take-up of larger existing stock has prompted new schemes and spec build including 19,530sq m (210,000sq ft) at Eden Park’s First Point at Burton upon Trent, at £4.95 per sq ft and 15,531sq m (167,000sq ft) at ProLogis Park, Erdington at £5.50 per sq ft.
The 95-acre, Prudential-funded Hub scheme, is located between J6 and J7 of the M6 – a prime position that might just prove to be the region’s strongest selling point in the challenge to attract national distribution centres to the area. n
Simon Spencer is with the Hub’s joint agent, Knight Frank.
Tel: 0121 233 6408.