Competing land uses are making it more and more difficult for developers and landlords to deliver logistics space… just how bad is the problem? Liza Helps investigates.
The problem with land is ‘they are not making it anymore’ or so said Mark Twain more than a century ago.
Actually he said ‘Buy land: they are not making it anymore’ but the problem for logistics occupiers is that someone else is likely to pay more for it.
That simple fact is one of the major drivers behind a very worrying phenomenon: the loss of industrial land especially in London and the South East.
Demand for logistics space has hit unprecedented levels driven by the growth in online shopping and new technology, which is changing the shape of the supply chain entirely.
The UK has become a crucible for the fast-growing trend towards instant delivery says a report from City law firm Addleshaw Goddard. “Living in a small, dense nation, with an online retail penetration rate far higher than in other European countries, helped along by widespread Smartphone, 4G and wi-fi access, British consumers are more likely to be online and within easy reach for delivery.
“As of August 2016, according to the Office of National Statistics, online sales constituted 14.3 per cent of UK retail, and are projected by the Centre for Retail Research’s Retail Futures 2018 report to grow to a 21.5 per cent share of retail sales by the end of the decade.”
This is putting the pressure on available supply, not just of existing space, but also of the land on which to build it.
According to property consultancy Savills, the UK warehouse market (units 100,000 sq ft +) saw the highest level of take-up ever recorded in 2016, hitting 34.6 million sq ft. This increase can largely be attributed to the on-going demand from occupiers and, in particular, online retailers looking to fulfil their supply chain requirements.
In the past 12 months to March 2017, supply has fallen by up to 20 per cent and now stands at just 26.4 million sq ft across the UK. This, coupled with a 55 per cent decrease in speculative delivery in 2017, means that stock levels are now critically low.
“There is just 3.8 million sq ft of speculative space across 17 units set to be delivered this year,” says Kevin Mofid head of logistics research at Savills.
Notable schemes include DB Symmetry’s four geographically spread sites in Swindon, Blyth, Middlewich and Bicester, which will account for as much as 17 per cent of the total figure for 2017. This is in contrast to 2016, when 8.6 million sq ft came on to the market. Furthermore, 82 per cent of the schemes coming forward are for sub-200,000 sq ft units, despite 69 per cent of requirements seeking space of that size or above.
Since 2009 the supply of existing available warehouse space has fallen by 71 per cent, which equates to just over 14 months worth of supply. For this reason, the availability of consented land, ready for warehouse development, will become increasingly important if online retailers are to continue building their supply chains.
Mofid comments: “Up to 45 per cent of current logistics demand is from retailers, with Amazon, for example, accounting for just over a quarter of total take-up in 2016 to date. If we drill down further still, this represents 82 per cent of take-up specifically by online retailers.”
According to research in 2015 by Prologis and Aberdeen Asset Management, three times as much warehousing space is required for online fulfilment compared with store-based fulfilment, and for every €1 billion spent online, an additional 775,000 sq ft of warehousing space is required.
As of August 2016, according to the Office of National Statistics, online sales constituted 14.3 per cent of UK retail, and are projected by the Centre for Retail Research’s Retail Futures 2018 report to grow to a 21.5 per cent share of retail sales by the end of the decade.
To meet this projected demand Colliers International has estimated that 18 million sq ft of new industrial space – equivalent to 251 Wembley Stadiums – will need to be built annually.
Alex Verbeek, senior vice president & managing director UK at IDI Gazeley says: “We need, as others will, more land to satisfy the unprecedented levels of market demand we are experiencing. At present these look like – on current trajectories – to amount to the same if not exceeding the 2016 level.
“We are experiencing an imbalance between supply and demand far greater than has ever been seen before.”
Jonathan Powling, partner at Addleshaw Goddard, explains: “A lack of new development and an overhang of inactivity since the recession have caused this growing supply-demand imbalance.”
Christian Matthews director of dbSymmetry agrees and adds that the ‘situation will continue further over the next few years’.
With the UK having 424 million sq ft of existing warehousing space, most prime locations for logistics have long since been developed. Developers face a conundrum: many of the sites remaining that are conveniently located by motorways suffer from other problems, such as high remediation costs for brown field, or poor utility connections, which both pose a threat to scheme viability at the development stage. Compounding the issue is the UK’s notoriously restrictive planning system, which restricts development on the green belt, as well as the typically limited popularity of proposed green field industrial developments for logistics with locals.
If that were not enough many sites also have competing land use issues especially those in urban areas such as London and the South East.
Long term, Savills calculates that at the end of 2016 only 1,600 acres of land remains available and primed for development in the South East, where demand for logistics and last mile distribution sites are their highest. As a result, there remains just over five years worth of deliverable stock in the region.
In the Midlands Robert Rae, head of industrial at Avison Young, says: “There was 13 million sq ft of take up in the Midlands in 2016 equating to 600-acres of land, we are not seeing that amount of land coming forward quickly enough.”
Richard Sullivan, national head of industrial & logistics at Savills, adds: “The sector remains incredibly resilient in the face of economic and political uncertainty, due in part to the phenomenal growth of online retail. Although it appears to be dominating the industrial and logistics landscape, demand still remains high from a diverse range of occupiers and as a result take-up has hit unprecedented highs.
“To maintain this momentum into 2017 and beyond, it is now crucial that we tackle the supply issue and policy makers recognise the need to allocate more land for industrial and logistics, whether that be in a pure or mixed-use sense.”
Predictably the case is most acute in London as has been highlighted by developer investor SEGRO in a report it commissioned with planning consultant Turley entitled “Keep London Working.”
The report warns that to do just that industrial land in the capital must be protected.
“London is a thriving city and as the capital grows the demands placed on businesses to get their goods and services to their customers’ increases, with consumers expecting certain deliveries within the hour. This, combined with technology, has led to an explosion of e-commerce, driving the demand for industrial land to ensure we can all get our goods delivered.
“At present industrial land is being lost rapidly in the capital at a rate three times greater than the Greater London Authority had expected.
“At the current rate of decline, the GLA’s expected release of industrial land by 2031 could be reached this year. The loss of industrial land is happening across all London boroughs, with the greatest impact in Newham, Greenwich, Bexley and Wandsworth. The boroughs that have experienced the greatest estimated losses since 2001 are Newham, Havering and Tower Hamlets.”
And why is this loss happening? Basically, it is down to the demand for housing as the population of the capital grows.
According to the report London’s population is projected to increase from 8.7 million to over 10 million by 2031, the equivalent of the populations of Birmingham and Coventry moving to London.
Mayor of London Sadiq Khan was voted in on the promise to tackle the housing situation in London and has carried his predecessors’ strategy of allowing industrial land to be reallocated to residential. It should be noted that residential land values are considerably higher than those for industrial/employment.
It is not just the Mayor of London who seeks to increase the amount of housing in the capital; it is in fact a national government strategy. Because of this Jonathan Dawes, planning director at dbsymmetry, says: “I think the majority of local authorities primary focus is on the housing side of the planning process. Employment is seen as secondary with the perception that there is a high level of employment and therefore there is no need to look for significant amounts of employment land instead, they will need to accommodate a high housing figure.”
Verbeek agrees and adds: “There is considerable political pressure in the UK to provide residential land to satisfy projected household growth numbers.”
David Binks, head of industrial at Cushman & Wakefield notes: “There is a real tension between government policy and also providing the right amount of employment land, which housing tends to win more often than not.”
In terms of strategic land, Len Rosso, head of industrial at Colliers International adds: “planners are reluctant to release it. It seems any real thought is about the residential target rather than the employment target.”
Despite this, Andrew Gulliford, chief operating office at SEGRO says “A lot of land is lost to higher land uses particularly residential, we are not picking a battle with the housing shortage, we need more homes and we need to contribute to that but there is a balance to be had. We need to look for the right land in the right locations with the right credentials. We need to bring homes and jobs and the facilities and the service infrastructure forward together. We are looking for a balance.”
Gulliford continues: “The game [logistics]has changed and the needs of the last mile delivery and indeed central fulfilment centres have changed and to some extent the planning and governmental system needs to understand that.”
As an aside, Matthews says: “None of us could predict the wholesale changes in the logistics market.”
And that is a problem.
According to Jasmine Whitbread, chief executive of London First: “There is still a misconception that industrial land is all smoking chimneys and heavy machinery. Today’s industrial estates are occupied by e-commerce businesses, technology start-ups, caterers, manufacturers and R&D users.”
Indeed, Melanie Leech, chief executive of the British Property Federation, adds: “The industrial and logistics sector is an important part of our modern economy, but the vital part it plays in our everyday lives can often be overlooked. The provision of industrial land does more than just ensure that online deliveries arrive on time – it also creates skilled jobs and delivers significant economic growth.”
This misconception can lead to awkward situations. Binks notes: “In most cases logistics is recognised as something that will add to the general economy but there is still in certain locations an attempt by local authorities to buck the market and influence what goes on employment land. For many manufacturing is far more desirable and while that is not necessarily wrong in certain locations it is not the right thing to do. Basically when this happens it prevents quick regeneration and quick development and slows down inward investment and job creation.”
The planning system itself also holds up the creation of industrial land with sites taking upward of five years to be allocated and costing roughly £1 million per 1 million sq ft to secure outline planning in the first place. That coupled with the increase in land prices, which in have gone up dramatically makes the situation more complicated.
However there are suggestions on how to ease the problem. For Gulliford this involves more lateral thinking. He suggests the intensification of land use particularly in an urban setting with both residential and logistics developed alongside each other.
SEGRO is doing just that at the former Nestle factory in Hayes where it is partnering with Barratt Homes, which will provide 1,100 housing units on the site, while SEGRO itself develops out a 250,000 sq ft urban logistics scheme at the other end of the site.
Rosso says: “Logistics and residential will go hand in hand as there is no other way to go especially in places such as London.” He cites a Travis Perkins depot at St Pancras below a block of residential flats. There are also calls for multi-storey warehousing as seen being developed in Paris and Germany.
While there is as yet not that much call for multi-storey logistics warehouses outside London, there are certainly moves to see taller warehousing where mezzanine floors can be installed.
Amazon secured a design and build warehouse from joint venture partners Roxhill and Port of Tilbury for a two million sq ft facility at London Distribution Park in Tilbury. The property itself actually only has a floor plate of 550,000 sq ft but it is 22m in height and will be built over four floors. The project will also involve building a decked car park extending to four levels for nearly 2,000 cars and a service area for 94 lorries.
Verbeek says: “Where planning and developer sentiment allows it is more cost effective to take a taller building than to take a larger unit to make maximum use of cubic capacity.”
IDI Gazeley is currently speculatively developing a 574,000 sq ft warehouse at Magna Park, Milton Keynes, which will have an eaves height of 21m. Construction is expected to complete by the end of the year.
Binks notes: “You do see a push towards taller buildings it is basic economics partly driven by rents and better technology handling and racking systems which allow you to operate more efficiently. These taller units frequently have more automation and they generally have lower rents as they occupy smaller square footages.” Taller units also feature more strongly in areas where land prices or rent levels are highest.
The shortage of land for logistics also puts the focus on one of the more controversial aspects of the UK Planning system: greenbelt land. In particular greenbelt land in the Midlands where a lack of sites suitable for logistics development is acute.
“The West Midlands,” says Jonathan Wallis, development director at dbsymmetry, “is the most competitive markets in the country alongside the M25 and it is characterized by a severe shortage of large deliverable logistics sites countered by unprecedented levels of demand.”
It has been said that while the West Midlands combined authority has employment land and employment on its radar they can only deliver with a planning strategy that enables them to do that but the planning strategies of the local authorities have been so focused on housing that the surge in demand for industrial space has taken them all by surprise leaving many authorities in the position where there is little or no significant land supply for employment.
Simon Lloyd of Cushman & Wakefield notes that many sites, which are allocated for employment are ‘far too small and bitty and utterly unsuitable for modern logistics use’.
To fix this problem Birmingham Council has done the impossible it has released land from the greenbelt – 197 acres at Peddimore. The site will be marketed through Bilfinger GVA.