There were more deals done, more rent paid and more space built in 2018 but what does this mean for occupiers now? Liza Helps reports.
The amount of space in units of more than 100,000 sq ft transacted in the UK during 2018 has hit record levels.
According to research by Colliers, Savills and CBRE there has been more than 30 million sq ft taken up give or take a few million sq ft. DTRE and JLL post more modest findings but it is important to note that each company has slightly different statistical criteria. Some will look at warehouses over 100,000 sq ft that are classed as Grade A only, others accept deals over 50,000 sq ft, while others still will only look at the footplate size of a deal not its mezzanine floors, some will only accept deals where planning permission has actually been granted rather than deal being signed.
However, whichever way it is looked at, 2018 was extremely active and far more so than in 2017.
Savills, with the most bullish of figures, records 34.1 million sq ft of take up in 2018, a 32 per cent increase on 2017 and 14.1 million sq ft above the long term average.
Tessa English of JLL, which only looks at Grade A buildings totalling 100,000 sq ft or above, says: “Overall, 2018 saw a strong level of take-up with around 22.6 million sq ft transacted 47 per cent up on 2017 and 15 per cent higher than the five year annual average and 28 per cent above the historic ten year average.”
DTRE research notes: “Average take-up over the last three years (2016 -2018) for Big Boxes has reached 27.3 million sq ft, 25 per cent ahead overage witnessed from 2007 – 2015.”
“Demand for distribution warehouses in the UK is relentless,” says Len Rosso of Colliers. “Demand is mainly driven by online retailers and the 3PLs serving them.”
Research partner Andrea Ferranti of Colliers explains: “Occupiers at present are benefiting from both a relatively healthy economy and the positive change in consumer behaviour towards online shopping.”
E-commerce continues to grow
English says: “E-commerce directly accounted for 27 per cent of total Grade A take-up equating to 6.1 million sq ft last year.”
With this in mind, Bill Page of LGIM Real Assets says: “Many operators still need to right size to ecommerce. There is a lot of portfolio engineering still required and this will mean new take-up.”
When comparing demand from e-commerce retailers in 2018 with 2016 – another strong year with take-up exceeding 20 million sq ft – it is interesting to note the diversity of e-commerce retailers taking space. Amazon dominated demand for logistics space in 2016 and accounted for the majority of the e-commerce take-up (82 per cent). However, 2018 saw a much wider diversity of retailers take space for e-fulfilment highlighting the changing nature of the retail market and the need for retailers to be able to fulfil their online offering.
Jonathan Compton of CBRE says: “As we are all aware Amazon were once again the main contributors with seven big box deals and at 7,300,768 sq ft accounted for 23.18 per cent of the UK take-up. However, there was representation from other online players such as ASOS, Shop Direct, Wayfair, Soak.com, Internet Fusion, Yours Clothing, MH Star and World of Buzz. In total, online take-up was 9,978,489 sq ft accounting for 31.6 per cent, which is the highest on record. Combined with food retail and other retail the Retail sector accounted for 52 per cent of all warehouse take-up in 2018.
Mark Webster of DTRE notes: “Enquiries from 3PLs has been on the rise and there are some names that have appeared that we have not seen in the last 10 years – they are back in the market to expand.
“It may be that they are picking up business where their clients – who have in recent years bought or leased direct – do not want to pick up a long lease. With a general lack of supply, lease lengths are moving upwards and not everyone is happy to do that but they are happy to give a contract to a 3PL on a pallet position basis for example.”
As well as a general increase in demand the actual size requirements, especially for ecommerce facilities, has grown too.
Richard Sullivan of Savills says: “The average deal size is at its highest level ever and now stands at 281,000 sq ft.”
Compton explains: “Take-up in the UK in 2018 for big box logistics – with a minimum size of 100,000 sq ft and with 10m plus eaves – was 31,495,611 sq ft in 101 deals, which gives an average lot size of 311,838 sq ft. This contrasts to an average of lot size of 261,000 sq ft in 2016 and 256,000 sq ft in 2017.
“So why the increase in average building size? It is simply because in 2018 there were more XXL warehouse deals of 500,000 sq ft plus than ever before. There were 14 XXL warehouse deals with an aggregate floor area of 13,831,228 sq ft (average 987,945 sq ft).
Deals included Amazon securing a 1.99 million sq ft pre-let at Integra 61 scheme in Durham, which has been forward funded by Tritax to the tune of £147.3 million.
The development will comprise a new prime, state-of-the art, purpose-built facility, with a gross internal floor area of 1,992,061 sq ft inclusive of three structural mezzanine floors and a low site cover of around 32 per cent. The high specification facility will be cross-docked with an eaves height of over 20 metres. The property will also benefit from significant capital investment by the occupier, including high levels of automation.
The site has direct access onto Junction 61 of the A1(M) and is also easily accessible by air or rail, being located close to Durham Tees Valley Airport, Newcastle International Airport and Durham railway station. The location is also near to the ports of Tees, Hartlepool, Sunderland and Tyne.
As well as its excellent connectivity the location was chosen because of its ample supply of appropriately skilled and flexible labour within close proximity, which underpins the appeal of the area as an increasingly important UK distribution location.
Upon practical completion, due in summer 2020, Amazon will take up a new 20-year lease, subject to five yearly upward only rent reviews.
DTRE represented the Company, CBRE represented the occupier and Avison Young represented the Citrus Group.
In the southeast dbSymmetry secured a 661,000 sq ft pre-let with the Co-op on its 50-acre Symmetry Park, Biggleswade scheme in Bedfordshire
The £45 million distribution depot will support the retailer’s ambitions for continued growth across London, the South and South East. It is expected to open in early 2022 creating up to 1,200 jobs.
Symmetry Park, Biggleswade was purchased by developer db symmetry in the summer of 2017 and has subsequently been granted detailed planning consent for up to 1 million sq ft of logistics space. Co-op has secured a 20-year lease on the site. It is anticipated that construction will commence towards the end of 2019.
Andy Perry, supply chain & logistics director, Co-op, says: “The infrastructure and site selection will deliver greater agility, scale and efficiency – improving service and availability at existing stores while building capacity to support our store investment programme and ambitions for continued growth.”
Reducing its environmental impact is also at the core of Co-op efforts, and the new distribution centre will be developed with a number of features including low energy lighting and refrigeration, the ability to harvest rainwater and, working towards a BREEAM Excellent rating, an independent assessment of a building’s environmental, social and economic sustainability performance.
Take-up on the rise
While there has been an inordinate amount of take-up in 2018 there has also been a strong delivery of supply. Indeed according to JLL research of all the space taken up last year 17 million sq ft was new floorspace and 5.6 million sq ft was good secondhand space. The take-up of new space increased 56 per cent on 2017.
The majority of new floorspace taken up in 2018 comprised new build to suit facilities rather than speculatively developed space. Almost three quarters (74 per cent) of all new floorspace taken up in 2018 was BTS, totalling 12.6 million sq ft.
Andrew Jackson of Avison Young says: “The East Midlands dominated take up last year with a total of 9.475 million sq ft of take-up in 27 units.”
According to JLL this accounted for the largest share of total take-up in 2018, at 43 per cent. The region attracted a number of large build to suit deals, notably in Castle Donington, Lutterworth and Corby, which boosted overall take-up.
With such a high amount of take-up there could be concern that there is little space available going into 2019. But according to JLL research, at the end of December 2018 total Grade A availability was 16 per cent up on mid-2018 and 57 per cent higher than at the end of 2017.
Grade A availability stands around 23.6 million sq ft, of which 15.9 million sq ft is in new units, including floorspace speculatively under construction. The remaining 7.7 million sq ft comprises good quality second hand space.
Of the 15.9 million sq ft of new space available, 8.5 million sq ft is immediately available and 7.4 million sq ft is being speculatively built.
Ed Cole of JLL says: “There was a large increase in big box speculative development over the course of 2018 with approximately 7.2 million sq ft of speculative floorspace completed in 2018.
“However, despite an overall increase in new supply last year, the level of new supply at the end of 2018 was still 45 per cent below the pre-recession peak, and, at the end of 2018 overall Grade A supply represented just 14 months of demand compared with the average level of Grade A take-up over the last five years.”
Kevin Mofid of Savills says: “While there is more space being built it is being taken up just as quickly, so we are still sub two years’ supply and that is not going to change anytime soon.”
Ferranti agrees: “While the amount of speculatively developed distribution warehouses has picked up over the last 18 months this has done very little to bolster availability as demand also continues to pick up.”
Compton says: “There remains a demand/supply imbalance which in normal market conditions would indicate that we would be seeing continued and tangible rent increases going forward – however there is the BREXIT affect yet to be taken into account.”
Landlords and leases
That aside rents and leas terms in 2018 remain firmly in the landlord’s favour. JLL research saw prime headline rents increase 2.8 per cent across the 32 distribution locations nationally that it monitors and it predicts that rents will grow on average 2.1 per cent a year over he next four years to 2022.
Phillip O’Callaghan of developer Mountpark says: “Rents and lease terms on most schemes have been rising steadily and the general trend is upward.”
Webster notes: “When the market is tough [for landlords]occupiers are customers but when it is the other way round occupiers become tenants again and that is definitely the case now.”
For landlords it is simple with the supply/demand imbalance as it is there is no need to short change themselves with five-year flexible leases when they don’t need to.
Looking ahead then for occupiers rents are set to continue to rise but not at as much of a rate as they have been while lease terms will remain firm at 10 to 15 years. Supply levels while not overly generous will give the majority of occupiers a choice across a wide range of sizes.
CBRE research notes that there are 133 warehouses available in the UK at present totalling some 28.129 million sq ft. Of these, three existing second hand XXL warehouses are available in the form of the former Toys R Us unit at Coventry (660,000 sq ft), the former Tesco unit known as Tectonic 620 (618,000 sq ft) at Fenny Lock, Milton Keynes and Poundworld’s former 547,000 sq ft unit at Wakefield.
There are five available buildings in the 400,000 sq ft to 500,000 sq ft band – three of which are second hand.
Overall, there are 79 Grade A buildings available totalling 15.698 million sq ft and 54 second hand buildings of 12.657 million sq ft.
This article first appeared in Logistics Manager, February 2019