With take up at an all time high and new space slow in coming forward what is the outlook for the North West? Liza Helps reports….
It sure looked good at the beginning of 2016 according to Savills with some 2.2 million sq ft of new space due to be delivered across 11 schemes in 2016. But even then there was cause for concern.
“Although this is the second largest pipeline of any UK region, it will still not be enough to absorb anything close to last year’s record-breaking take-up of 4.56 million sq ft or even the longer term average take-up of 3.44 million sq ft.
“Similarly, while the current supply of existing industrial stock in the North West appears relatively robust at 5.71 million sq ft, a closer look reveals that 81 per cent of this is classified as Grade B or C. In fact, much of the latter is unsuitable for occupation.”
And it seems as if the warnings were true. Steve Johnson of B8 Real Estate says: “Around 3.15 million sq ft of speculative space was built, is being built or committed to being built by the end of 2016 however, on current take up and taking into account those units under offer supply is down to 900,000 sq ft; 3 – 4 months supply we go from feast to famine.”
Take up has been extremely strong over the year. Simon Hampson of WHR notes: “We have seen a real flurry of take-up activity vindicating the decisions of developer and funds who built and funded speculative development. Stock is now tight.”
Jonathan Atherton of Savills believes that with deals in the pipeline completing over the next few weeks that by the end of February occupiers looking for brand new Grade A warehousing over 200,000 sq ft will not be able to find a single one. “A lot of the larger available units are under offer and occupiers will have very limited options with up to 1 million sq ft of space looking to complete at the beginning of the year.”
Deals in the pipeline include Amazon taking Omega Warrington (OWL)’s Prime@Omega, which was forward funded by London Metric Property to the tune of £30 million at the beginning of 2016.
The 356,000 sq ft cross-dock facility boats a 333,286 sq ft warehouse with 17,136 sq ft of ancillary office. It has 53m yard depths, 15m eaves 40 dock and sic level access doors as well as a 50kn/sqm floor loading. It also has 152 HGV parking bays and 231 car parking spaces. Letting agents are DTRE and JLL.
Speaking on the announcement of the funding deal LondonMetric chief executive Andrew Jones said: “Black Friday and Cyber Monday are timely reminders of the structural changes taking place in the retail sector as consumers continue to change the way they shop. The winning retailers this festive season – and forever more – will be those who can get products into consumers’ hands as quickly, reliably and efficiently as possible.
“This is strengthening the demand dynamics for well-located distribution space as the growth in retailers’ omni-channel strategies continues to soak up constrained market supply.
Amazon is also rumoured to have opted for another speculative big shed at Harworth Estate’s four million sq ft Logistics North scheme in Bolton totalling 357,700 sq ft. The unit, known as 360 at Logistics North, is being brought forward by First Industrial with the backing of US property investment company Exeter Property Group.
The building has 15m eaves, 34 dock and two level access doors as well as 74 HGV and 280 car parking spaces. Letting agents are Savills and JLL.
M&G Real Estate’s 225,031 sq ft speculative unit at Logistics North is also thought to be under offer. The property has 12.5m eaves as well as 20 dock and four level access doors. It has 50 trailer parking space and room for 222 cars. The facility was built by Harworth Estates and is being marketed by JLL and B8 Real Estate.
Jonathan Gardner of Delin Capital Asset Management says: “Occupiers have continued to take-up space at a steady rate over the year and as a result in certain markets, particularly in the North West, there is quite a serious likelihood that supply will become constrained.
“There is less than a years’ worth of supply in the market, and with take-up expected to continue at its current rate, anything coming forward in terms of new development is going to do nothing more than maintain supply rather than add to it.”
With that in mind Chris Brown of Cushman & Wakefield notes: “There is still a bit of a misconception from occupiers in that they think they can let their lease run down to around six months to go and then move to a property that fits the bill; the reality is quite different and while there has been a lot of development it has been absorbed at a fast rate. We are going to see an underlying level of under-supply in the next 12 months and on that basis we are generally taking an 18 to 24 month approach to critical date management on clients’ leases.”
Of the eight units that are currently available on the market only five have no named company attached. These include M&G’s second speculative warehouse at Logistics North totalling 175,087 sq ft. The unit has 12.5m eaves, 17 dock and two level access doors and is being marketed by B8 Real Estate and JLL.
There is also American investment company Harbert Management Corporation’s speculatively built unit totalling 145,320 sq ft at Heywood Distribution Park; known as H2. The development was built by Russells Construction and completed this autumn. Letting agents are B8 Real Estate, Savills and JLL. Heywood Distribution Park is managed by CBRE Asset Services and currently comprises 1.8 million sq ft of warehouse and industrial space across almost 200 acres.
The fund also has another speculative warehouse at Trafford Point on the market through DTRE and B8 Real Estate. Known as T2 the warehouse extends to 98,627 sq ft benefits from a yard depth up to 100m and is being marketed at a quoting rent of £6.50 per sq ft.
The larger unit of the two that the fund developed at Trafford Point was let on completion to SIG Trading on a new ten-year lease at £6 per sq ft in November 2016. The facility totalled 141,480 sq ft.
Johnson says: “This represents the second speculative warehouse letting in Trafford Park, where terms were agreed prior to completion reinforcing the level of occupier demand in the 100,000 – 200,000 sq ft size bracket which we believe will be replicated on the remaining unit”.
Trafford Point forms part of the 4.4 million sq ft Trafford Park portfolio owned by Harbert European Real Estate Fund III. The portfolio is asset managed by CBRE Asset Management. Cushman & Wakefield represented SIG Trading.
Over in Liverpool there is Peel Logistics’ L175 at Liverpool International Business Park. L175, the 175,000 sq ft industrial and logistics facility reached practical completion in August and is the largest speculative development for a decade in Liverpool.
The building was constructed by Eric Wright Group and designed by AEW Architects. It has 18 dock and two level access doors, 50 trailer spaces, 188 car parking spaces, 12.5m eaves, a 50kn per sq m floor loading and a 50m service yard.
While there is strong steady take-up it has to be noted that the development of new space is constrained. Hampson says: “There isn’t a second tier of speculative space coming out of the ground; developers and funds are marking time to see just how robust the market is before committing to anything new.”
You don’t have to go far to understand the reasons for the hesitancy. Gardner says: “2016 has been characterised by uncertainty before and after Brexit that has had a bigger impact on the investment than on the occupier market.
“One of the things we have seen is that immediately post Brexit major institutions and others became concerned whether speculative development was still the right thing to do. A number of funding deals had the plug pulled in north west and other areas. At present there has been very limited interest in restarting that market – it is just a perception of risk.
“As an observation the speculative development market has taken a knock but it is starting to creep back a bit; however major institutions are staying away at present,” says Gardner.
Atherton agrees: “There has been a pause [in the development of speculative space] due to the combination of Brexit and the weight of space coming forward through 2016/ Developer and funds needed to see how successful those schemes were going to be before starting to look again at speculative development. Brexit has had a strong influence in the market but it looks like more speculative development will start in the New Year.”
Robert Taylor of Knight Frank says: “There will be some speculative development in 2017 but it will be in key locations.”
Db Symmetry and joint venture partner Pochin have committed to speculatively developing a 160,000 sq ft unit at their Magnitude scheme in Middlewich. The site has planning for 1.75 million sq ft in 10 plots and can accommodate units from 90,000 sq ft to 600,000 sq ft. Letting agents are Legat Owen, B8 Real Estate and Savills.
Over in Winsford Keir, Eric Wright are pushing ahead with a 150,000 sq ft speculative warehouse. Known as R150 the facility totals 150,847 sq ft and has 143,000 sq ft of warehouse space, a two-storey office totalling 7,000 sq ft as well as 14 dock and four level access doors with a 12.5m eaves height. It also has 31 HGV spaces and 112 car parking spaces and a yard depth of 48m all on a secure 6.8-acre site.
Other speculative developments in the pipeline are thought to include a proposal by Stoford in Irlam.
With brand new space in such short supply Taylor predicts a flight to good quality second-hand space. Knight Frank and B8 Real Estate are marketing M&G Real Estate’s 379,000 sq ft former Asda DC in Warrington. The quoting rent is £4.75/sq ft.
Colliers International is also marketing a former Asda unit in Wigan totalling 322,000 sq ft and St Modwen has appointed Knight Frank and JLL to market a 199,250 sq ft warehouse at Moorgate Point in Knowsley, Liverpool.
With good quality space in poor supply rent levels and leases have tightened. Robert Dunston of Bilfinger GVA predicts: “Lease terms will be much tighter next year.”
He says that rent levels in areas such as Trafford Park are already over £6 per sq ft. “Quoting rents are £6.25 per sq ft and upwards.”
Atherton agrees: “Deals on units over 200,000 sq ft have seen rents hit £6 per sq ft and units in Trafford Park of around 100,000 sq ft have seen quoting rents in the region of £6.50 per sq ft. I sense we will see an upward movement in rents due to lack of supply.”
Even second hand rent levels are on the up. Johnson says that he has a second hand unit due to come on the market in June 2017 which will have a quoting rent of £5.75 per sq ft. “Twelve months ago that would have been £5.25 per sq ft: probably seen rents increase 10 per cent in 12 months.”
Hampson says: “Just 18 months ago it was very much in the tenants favour but that has swung the opposite way now.”
Property pundits predict that with such a supply constraint occupiers will have to opt for build-to-suit.
“Its at the stage when the lack of stock is stifling expansion plans,” says Hampson. “Companies which would have preferred to have struck a deal on a second hand unit will have to bite the bullet and go for build-to-suit even if it means higher rents and longer leases.”
At present there is a good amount of land for development with space still available at Omega and Logistics North. Dunston says there is space for up to 700,000 sq ft on Zone 1 at Omega in units from 165,000 sq ft and the is still 1.5 million sq ft available on a build-to-suit basis at Omega West.
Kingsway in Rochdale can take units up to 200,000 sq ft and there is still pace at Airport City. Other sites are coming forward include Bericote’s 1.4 million sq ft scheme in Haydock.