Big Sheds: The demand for warehousing space seems to be continuing unabated. Liza Helps investigates the issues that could arise for occupiers in 2018.
Take up of warehouse space in general across the UK is down on 2016 and depending on which property research consultancy you look to, that can range from 14 to 37 per cent.
According to Colliers International the amount of space transacted for units of 100,000 sq ft and above in 2017 dropped from 32 million to 27 million sq ft. JLL’s figures put it at around 16.4 million sq ft, a drop of around 36 per cent, although they were keen to point out that they did not count deals done on a subject to planning basis, or those which had yet to start development, which may explain the apparent disparity. Savills also recorded a drop of 37 per cent to 23.8 million sq ft.
Whatever the figure there was a consensus that the take-up figures for 2017 were broadly in line with the average long term take-up levels.
Len Rosso head of logistics and industrial at Colliers says: “Everyone said it  was not as good a year but in the cold light of day it was an excellent year landing plum on the 27 million sq ft five year average.”
Savills’ director of commercial property research, Kevin Mofid agrees: “That is not a bad result we need to think where we have come from because in 2009 the long term average was only 18 million sq ft and now the rolling average has increased dramatically in terms of space required.”
Richard Sullivan, national head of industrial & logistics at Savills, adds: “In just five years the long term average take-up of industrial stock has increased by more than 30 per cent as the market continues to adapt, in particular to the growth of online retail.”
Even in the regions the sentiment was the same. According to Andrew Jackson, Avison Young’s principal in industrial development and leasing: “In the Midlands last year total space taken-up fell back from 2016, probably to around about the long term average for the region of 7.5 million sq ft.”
“This drop in take-up seems to have a number of causes but principally seems to be defined by a sense of cautiousness as operators adopt a ‘wait and see’ approach against a backdrop of economic slowdown, Brexit and lower consumer spending,” says Bo Glowacz Collier’s senior analyst in office and industrial research and forecasting.
Savills notes that a key driver of the 2017 decline was the significant fall in take-up of built-to-suit units, which went from 18 million sq ft in 2016 to just 11 million sq ft in 2017. This was, in part, due to wider economic uncertainties, as well as the impromptu general election held in June last year.
John Clements, European development director at Verdion, says: “Occupiers were more cautious of getting new space in 2017 while there was both political and relative economic uncertainty not just in the UK but around the world.”
However, strange as it may seem there has almost been a ‘volte face’ in sentiment from occupiers with a pronounced return to form in the last quarter of the year and in particular the last few weeks in December 2017 continuing through to the early weeks in January.
As John Bell, managing partner and head of business space at Glenny, puts it: “We saw a surprising bounce back in logistics demand [in the Glenny region, which is North London and Hertfordshire, South east London and Kent and East London and Essex], towards the end of 2017, rising 26 per cent from the early year figure to 14.9 million sq ft at Q3 with the most significant increase in demand being for larger buildings (50,000 sq ft plus) where we saw an improvement of 52 per cent over the previous six months, rising to 8.9 million sq ft representing 60 per cent of total demand.”
Tony Nash, director at developer Stoford Developments, says: “Occupier demand and investor confidence has returned and four or five projects which had been put on hold due to Brexit have now been given the go ahead.”
In the last quarter of 2017 the company announced a flurry of joint ventures, schemes and deals. The largest was a £100 million warehouse and logistics development in Manchester with strategic joint venture formed by Stoford Developments and TPG Real Estate, known as Icon Industrial.
Icon Manchester Airport is a build to suit logistics/warehouse development with outline planning consent for around 1 million sq ft, capable of delivering units from 100,000 sq ft to 700,000 sq ft on the 45-acre, fully serviced site.
The development – the first investment made by the new joint venture – was officially launched at an event in Manchester attended by property professionals from the North West industrial market, in October
The site has a gross development value of around £100 million and sits within the Manchester Enterprise Zone, which enables occupiers to benefit from a business rates discount up to £275,000 over five years, super fast broadband, fast track delivery via a streamlined planning process, and enhanced capital allowances.
TPG Real Estate and Stoford Developments intend to build Icon Industrial into a logistics platform by acquiring and developing similarly attractive UK sites, as well as refurbishing existing buildings in prime logistics locations.
The company also announced in November that it had joined forces with Lazarus Properties to jointly develop a £35 million industrial scheme in Doncaster, South Yorkshire.
A reserved matters application has been approved by Doncaster Metropolitan Borough Council for a 404,000 sq ft development at Hatfield Lane, Armthorpe.
The plans for the 30.11 acre site comprise two units with ancillary offices, one of 251,500 sq ft and another of 152,500 sq ft. Both are earmarked for B1, B2 and B8 uses.
It is bringing forward a ream of other developments and schemes with joint venture partners such as Liberty.
The company has also just announced the second pre-let occupier at its £120 million Worcester Six Business Park. Spire Healthcare has agreed a 20-year lease on a 72,500 sq ft unit at a rent of £6.05 per sq ft. Construction is due to get underway in the Spring.
Ian Ball, executive director of income generation at Harworth is quick to point out that the company has also ‘experienced an incredibly successful December and first two weeks of January’ with the completion and letting of two units at the companies flagship 4 million sq ft Logistics North scheme in Bolton. “There was a 13 day void before all of it was let and we did not have to soften rents.
Occupiers are confident
“Occupiers are confident with the [current political and economic]situation stabilising and they have made occupational decisions and we are seeing a strong level of demand for units that we are bringing forward already supported.”
It’s not just the north west where demand has spilled over into transaction at the end of the year, Jackson notes that he knows of several build to suit and existing building deals currently being pushed forward or in solicitors hands in the Midlands. “There are some big ones in the pipeline which in aggregate come to something like 2 million sq ft. At the end of last year there was a sense that the market was gathering momentum. There were areas of reasonable levels of supply but that is now being rapidly reduced.”
In the south east Lidl has just paid a rumoured £90 million for a 58-acre site in Luton where it will build a 1 million sq ft distribution centre.
Richard Evans, director of industrial and logistics at JLL says: “There are lots of deals in solicitors hands going into 2018 – we had hoped these would happen at the end of last year – we are currently monitoring some 7 million sq ft of deals.
In addition we are handling a huge number of active enquiries. There seems to be more positivity and confidence in the market.”
Paul Cook, senior director of CBRE Manchester, says: “There are at the moment four or five strong occupiers wanting between 500,000 sq ft – 1 million sq ft in the North West alone. In fact 2018 has started off with a bit of a bang.”
Savills anticipates that a combination of transactions for existing stock alongside the completion of a number of build-to-suit units in the first quarter of 2018 could see one of the best quarterly figures on record.
Justin Curlow global head of research and strategy at AXA IM Real Assets says: “Demand has been robust and there is clearly a structural shift between retailers and their supply chains that is requiring a shift to new space.”
It is anticipated that this demand will be sustained throughout the year driven by the continued structural changes in the retail and logistics landscape, with both traditional and pure online retailers expanding distribution capability to accommodate a more demanding customer.
This structural evolution of the retail sector is driving change in the logistics world. The shift to online retailing in particular shows no signs of abating, with current figures indicating that over the next five years, 30 per cent of retail sales will be generated online compared with 15 per cent today.
This means that more retailers will accelerate the alignment of their supplier network to differentiate from the competition. The result will be further demand for industrial space in major distribution centres.
Rosso predicts that in order for developers to keep up with demand just form on-line demand there will have to be 19 million sq ft of new space built year on year and 1.3 million sq ft of space for London alone.
Bell notes: “Demand for logistics space is still being primarily driven by increasing activity in online shopping which is not so much a trend anymore but the expected medium through which to buy most goods, particularly food and fashion (and in the case of the latter sector the need to deal with customer returns).”
Occupational demand, according to Colliers latest research, has been outstripping supply for over three years. While developers have responded to the supply shortage with an increasing number of speculative schemes, the response has so far been targeted and measured.
Nash says: “There are certain markets where we are more comfortable speculatively developing than others.”
This sentiment is across the board. Ball says Harworth would only ‘look to put space up in locations considered strong’ while Goodman according to UK managing director Charles Crossland is focussed on prime. “Supply levels are relatively restricted in prime locations and we are confident that demand will remain strong. There is no evidence of over supply and providing that remains the case we are comfortable putting more product in prime locations.”
Goodman in conjunction with Wilson Bowden is currently speculatively developing two distribution units of 335,000 sq ft and 95,500 sq ft at its 40 acre Leicester Commercial Park scheme in the East Midlands, immediately adjacent to junction 21 of the M1 motorway. Construction has commenced with both units being available in May 2018.
Each development will be constructed to the minimum BREEAM Very Good certification and feature 50m-wide service yards, 12m clear internal height, significant HGV and car parking together with two-storey office accommodation.
Letting agents are Avison Young, Mather Jamie and Burbage Realty.
In Bedford the company is developing out a 20-acre plot. The scheme to be known as Bedford Commercial Park comprises the speculative development of a 405,000 sq ft cross docked warehouse/industrial unit along with serviced plots available for warehouse, logistics, industrial, hi-tec and office uses. Bedford405, the speculative unit will have 55m and 35m yards with 403 car spaces.
Reflecting both developer and fund sentiment Peel Logistics Property chief executive Jeremy Greenland says: “Generally we want land where we are comfortable to speculatively develop and that leads us to the higher quality end of the market.”
Colleague and CIO of Peel Logistics Property Neil Dickinson adds: “We are continuing to invest in areas of under-supply and the edges of conurbations, edge of cities and in the more traditional motorway located out of town sites.”
Peel Logistics is bringing forward Peel Logistics Park Sheffield – a prime example of the type of location the company is targeting. Dickinson says: “We are set to get planning for 850,000 sq ft of logistics accommodation. The site is smack between Sheffield and Rotherham and is a combination of both a motorway and an urban logistics location.”
The site totals 50 acres and is located on junction 34 of the M1 motorway. The two phase development envisage five units from around 45,000 sq ft to 345,000 sq ft with eaves height up to 30m. Letting agents are CBRE, Moriarty & Co and Knight Frank.
With a cautious approach towards speculative development – and indeed development in general – being the watchword for developer and funds alike it is hardly surprising to note that supply is limited.
According to Colliers as of January 2018 UK existing availability over 100,000 sq ft stood at 29 million sq ft including 5.5 million sq ft of Grade A space. This is a three per cent increase on the previous year due to delivery of new stock, however, the supply remains currently equates to just 1.3 years supply based on annual average take-up.
Greenland says that figure is ‘very tight’. Mike Baugh director of industrial and logistics at CBRE Leeds notes: “Yorkshire has probably got the least amount of supply against average annual take up. There is probably 1.5 million sq ft of standing stock available against the 10 year average of 2.2 – 2.3 million sq ft – a lot less than a years’ supply available in the market at the moment.”
Luke Tillison of Kirkby Diamond who specialises in industrial space in the south M1 corridor says of his region: “In 12 months time the reality is that actually we won’t have the stock to facilitate [occupiers needs]therefore we need new land…”
At that is where the rub is – securing new land that can get planning permission and actually be deliverable is getting harder to achieve. Land prices are on the up with £1 million an acre not unheard of in the south east and land values rapidly climbing elsewhere.
Bell says: “With regard to rental terms, I would say generally the occupier remains in somewhat of a subservient position in any current letting negotiation as, by and large, the landlord still holds most of the cards…certainly around Greater London.
“Demand still outstrips supply and rents, tenant inducements and lease lengths will all have to be ‘institutionally acceptable’ and to the satisfaction of the landlord for a deal to happen.”
There is a bit of wiggle room for occupiers but there is a catch. Crossland says: “If an occupier is agreeable to taking a longer lease they can secure better terms the deal can be mutually beneficial. Occupiers seem to be well informed about the value they create when they take longer leases and ask to benefit for that with the owners of the properties.”
Stewart Little joint chief executive of Oxenwood Real Estate says this is the sort of thing his company particularly likes to target form an asset management point of view. “Where we have tenant on a short or reducing lease we look to tenants amenable to a conversation on lease extensions and rent improvement – we find that this solves problems and removes risks – looking at fixed costs in particular.
“What we find is that moving for tenants is very costly (unless we are talking about expansion or consolidation) and that particularly in a rising rental market the occupier is keen to sit down to fix the costs of building. They will enter into longer leases and we will settle and fix rents that they can underwrite their rental profile going forward.
“We can secure fixed uplifts with a cap or collar effectively fixing costs for the occupier and still providing return – a win: win situation.”
Curlow says: “The one big point about lease length and rent is that the market is more sophisticated and more flexible than it was; it is not a case of one size fits all anymore.”
For the time being rents are relatively stable. Nash notes: “As investment yield has sharpened we have not had to move on rents and we are still achieving return on capital growth only where there is specific competition for it have rents risen in most other locations rent have moved on naturally.”
However is that likely to remain? There is no particular consensus of opinion for some, yields cannot come in much further for others there is still a great weight of money looking to invest. But it cannot be denied that the cost of construction is rising as is the cost of land.
As a result rents have moved on. According to Colliers UK prime rents for units over 100,000 sq ft maintained a strong upward trajectory, rising on average 4.4 per cent in the last 12 months to a national average of £6.60 per sq ft. The regions with the highest increase include the South West, with 16 per cent, and Greater London, with five per cent, as well as Yorkshire and Humberside, also five per cent.
While the southwest rent leap does seem huge it was off a low base of £4.75 per sq ft it is now at £5.50 per sq ft.
Looking to the future Tessa English of JLL says: “Rents will rise 3.4 per cent over the next four years.”
The future will also highlight other issues affecting occupiers not least the issue of labour, the lack of it and its increasing cost. It could influence the locational aspect of an individual warehouse.
Greenland says: “We think one of the key pressure points for occupier will be the availability of labour. Anecdotally we were told that the immediate effect of a post Brexit economy was the loss of significant level of the workforce as they repatriated back to the Eurozone. This is coupled with the very near full employment particularly in urban areas only takes a small proportion of the workforce to move before shift patterns are under duress especially in peak periods.”
This is something at Andrew Smith of LondonMetric feels is increasingly important. “What is important for an occupier is important to us and we recognise that labour is an operational consideration for our occupiers.
“One of the company’s key focus is urban logistics and the supply chain for urban logistics is driven proximity to chimney pots and availability of labour to carry out delivery.
“Distribution used to be about location and transport but it is moving to be more employment based.”
LondonMetric is bringing forward a scheme in Bedford. It acquired the 40 acre Bedford Link site from the local authority in October 2017 and intends to develop up to four regional distribution warehouses totalling 670,000 sq ft at a total anticipated cost of £60 million delivering a yield of around seven per cent. Graftongate has been appointed as Development Manager with construction anticipated to start in summer 2018.
The site which is close to the M1 has an employment cost 12 per cent lower than that of nearby Milton Keynes which Smith believes is a considerable draw for potential occupiers.
Rosso says: “The issue of labour just keep coming up all the time.” Jon Sleeman of JLL agrees: “The labour issue will come up the corporate agenda and could lead to a revaluation of logistics locations.”
This article first appeared in Logistics Manager, February 2018