Record take-up, record demand and no new buildings…Are we running out of space? Liza Helps reports.
It’s been reported that there needs to be 18 million sq ft of logistics space built annually to keep pace with the rise in online retail but development activity is falling well short with only 3.5 million sq ft set to be delivered so far during the year.
The report was produced at the end of 2016 by law firm Addleshaw Goddard with contributions from industrial agents, investors and developers including Savills, Colliers International, Tritax, L&G, P3 and Prologis. It makes for uneasy reading.
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.
Simon Lloyd of Cushman & Wakefield, says: “The UK is at the forefront of the growth in e-commerce which is accounting for an ever-increasing amount of sales. This has led to many companies re-organising their operations and setting up separate warehouses, often in multiple regional locations, specifically to deal with internet sales. Together with the rapid growth of a number of online-only retailers such as Amazon and Wiggle, this has ensured the robust market we are now seeing.”
According to research 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.
This fits with Savills’ data showing that take-up for online retailers for UK sheds space in 2016 is almost equivalent to take-up for the rest of the decade: 8.5 million sq ft of space has been provided in 2016 up to June 2016, compared with nine million sq ft of space between 2010 and 2015. Research by Colliers estimates that to keep pace with an e-commerce sector making up 20 per cent of UK retail, the UK/Ireland market will require 18 million sq ft of logistics space to be built annually – far ahead of the 3.5 million sq ft projected to be built over the next 12 months by Savills.
Jonathan Powling, of Addleshaw Goddard, says: “A lack of new development and an overhang of inactivity since the recession have caused growing supply-demand imbalance.
“E-commerce growth and an increased global flow of goods are big drivers of change, but if we fail to deliver new employment space, then the stark reality is that some retailers will not be able to expand their online operations and others will be forced to raise delivery charges to meet the increased costs of warehousing. This will ultimately affect consumer choice and value.”
Kevin Mofid of Savills, says: “In the long term, consumers could be set to see prices rise from online retailers. Record high levels of occupier take-up, record low levels of warehouse supply and a falling development pipeline are all creating a perfect storm in keeping vacancy rates low, which in turn will see rents rise.”
According to the report UK supply has fallen from its 2009 peak of 94 million sq ft to 27 million sq ft (mostly smaller poorer quality units) and vacancy rates for units over 100,000 sq ft are currently less than four per cent in all core distribution markets.
It was thought that the Brexit vote in June 2016 would have held back take-up across the UK, but the increase in on-line sales year-on-year seems to have overridden any doubts. According to Colliers, take-up for large industrial space in units over 100,000 sq ft reached 29.4 million sq ft across the UK in 2016, exceeding all of the 2015 take-up (25.9 million sq ft), putting the sector in a strong position to weather any Brexit-related storm.
In fact Savills says that take-up of properties over 50,000 sq ft totalled 32.5 million sq ft in 2016 – the second highest amount every recorded after 2014 where 34 million sq ft was taken-up.
Richard Evans of JLL adds: “Take-up of Grade A logistics floor space increased 38 per cent on the previous year; 19.9 million sq ft of this total was in new buildings, the highest annual level according to JLL’s records, which date back 21 years. The retail sector provided the most active source of demand in 2016 accounting for a 58 per cent share of total Grade A demand.”
In fact one online retailer accounted for some 30 per cent of all take-up in units over 100,000 sq ft – Amazon. Amazon’s recent lettings include a 100,282 sq ft warehouse on Cherry Blossom Way Washington, two speculatively built warehouses in the North West, a 271,350 sq ft warehouse at Airport City Manchester and a 176,080 sq ft facility at Trafford Park Union Square, as well the 1 million sq ft plus fulfilment centre at Verdion’s iPort scheme in Doncaster.
The on-line giant has also agreed to take 2.2 million sq ft at Roxhill and Port of Tilbury’s 70-acre London Distribution Park in Essex, which will trigger the UK’s biggest industrial investment deal. The shed will be the largest and tallest warehouse in the UK at more than 70ft, with four floors, each of just under 600,000 sq ft. It will also feature a mezzanine on the first floor.
While there are big deals it is important to note that in 2016 the number of deals concluded was record breaking as well, says Andrew Jackson of Avison Young. In the Midlands alone some 13.265 million sq ft was taken-up in units over 100,000 sq ft compared to a mere 7.81 million sq ft in 2015.
The total number of deals stood at 54 with only 35 deals concluded across the Midlands in 2015.
Mofid agrees: “What is interesting to note, is that it is not just big deals skewing the numbers high. We have also had way over 128 separate deals in 2016 and long term average is just 97 – what that says is that there is a real demand and there is a lot of churn; it is not just Amazon – there is a demand across all size ranges.”
As a result of the strong take-up levels and little new development, supply is low. According to Savills supply of warehouse space in units over 50,000 sq ft is at 28.4 million sq ft. The lowest ever year-end supply figure recorded.
JLL’s research also highlights that at the end of 2016 there was 12.4 million sq ft of Grade A floor space available nationally, 17 per cent lower than at the end of 2015. Approximately 7.7 million sq ft of this total comprised new floor space with 4.8 million sq ft of good quality second hand floor space. The new floor space available at the end of 2016 included approximately 2.5 million sq ft speculatively under construction.
Colliers research notes that areas such as London, the East Midlands and Eastern regions have seen current availability for 100,000 sq ft plus product fall to less than one year of supply.
It does not look as if demand is slowing up much. Jon Sleeman of JLL, notes: “We are tracking a large number of active requirements for big box space and, therefore, expect continuing robust demand this year, although at a somewhat lower level than 2016 due to a slowdown in the UK economy.”
Be that as it may, Andrew Smith of London Metric says: “Latest figures put demand 25 per cent ahead of long term levels.”
Bo Glowacz of Colliers says: “The mismatch between supply and demand is likely to remain for the next 12 months.”
Mofid says: “It is a kind of perfect storm: strong occupier demand that has not waned as a result of Brexit coupled with decreasing supply levels that are not being addressed by development at present.”
It is hardly surprising then that rent levels are predicted to continue to rise throughout 2017. Ed Cole of JLL says: “Rent levels will continue to rise but we do not see then rocketing away [as they have done in 2016].”
Jackson agrees: “Built space is at a premium but rent levels over the past year are now established. In Northampton rents are now at £6.50 per sq ft – at the start of 2016 they were £6 per sq ft. On the east side of Birmingham top prime rents are £6.50 per sq ft as well. Quoting rents are 25p per sq ft above. Dependent on the unit size for the smaller units less than 100,000 sq ft occupiers could very well see quoting rents of £7 per sq ft. Landlords are seeking to push rents on – it’s a function of the level of competition. Rent levels are going to move forward there is that pressure.”
Rent levels across the board rose considerably in 2016. Smith says that rent levels in the London Metric portfolio rose 17 per cent on rent review in its last mile facilities but does not expect to see that sort of growth in 2017.
That aside, rent level increases in double figures were recorded in hot spots across the country. According to Colliers research, prime average rents for big sheds increased by 3.3 per cent to the national average of £6.31 per sq ft, showing a return to the pre-recessionary levels. 44 per cent of centres saw prime rents rising year-on-year, with strongest annual growth seen in the South West (+6.9 per cent) and East of England (+6.6 per cent). The highest rent for distribution warehouses remains at Heathrow, which is now achieving rents of £15.50 per sq ft.
The shortage of good quality supply coupled with expansionary activity from occupiers meant that secondary rents continued to see upward movement in the last 12 months, albeit at the slower rate than in previous years. Average UK secondary rents grew by 3.5 per cent to reach the national average of £4.53 per sq ft.
However, some regions experienced double-digit increases: the East of England (+17.2 per cent) and South West (+12.3 per cent) regions. Tightening of supply for all Grades of distribution product in those regions has meant that second-hand accommodation in some core locations are now more attractive.
John Sambrooks of Cushman & Wakefield says: “Rent levels are only going to go one way. We have seen step changes in rent over the past two years and there is talk that in the Midlands the £7 per sq ft barrier could be broken – only a year ago people were talking about breaking the £6 per sq ft barrier. Occupiers have now realised that the times of suppressed rents have gone and to get the best quality they have to pay the best rent.”
Despite increasing rent levels, continued demand and lack of supply, developers and funds are not rushing in to fill the gaps. Gareth Osborn of SEGRO says: “Developers and funds have long memories and in 2006/7 there was some 100,000 sq ft of space – five years’ supply and when demand dropped it was more like 7 – 8 years supply – we are mindful of that and are rightly cautious about bringing stock forward especially on a speculative basis.”
“Occupiers requirements are becoming more bespoke and are still evolving – a developer would never go out and speculatively build a parcel hub – requirements might change in five years time with the evolution of the on-line solution. Developers and fund are looking long and hard at what they should speculatively develop.”
That is not to say that SEGRO is not ruling out speculative development in the near future. It has two speculatively developed units at its Rugby Gateway scheme in the West Midlands, which it developed with joint venture partner Roxhill. One unit is under offer while the other remains available for now. The two units are RG2 totalling 290,000 sq ft and RG3 totalling 180,000 sq ft. The larger unit is thought to be under offer. Joint letting agents are CBRE, Cushman & Wakefield and Gerald Eve.
The 125-acre scheme secured its first letting in May 2014, infrastructure works started only a few months prior to that, which means from infrastructure commencing in Autumn 2013 to completion of all the buildings it has taken a mere three years.
SEGRO is pushing forward on a speculative basis with smaller urban logistics schemes such as SEGRO Park Rainham, formerly known as Beam Reach 5, where it has planning to develop 330,000 sq ft of space.
Construction at SEGRO Park Rainham will be completed in two phases. Phase one, which is expected to complete in 2017 will provide 230,000 sq ft of modern speculative industrial space. The development will consist of an ‘Enterprise Quarter’ with 42 units ranging from 500 sq ft to 2,000 sq ft, designed to attract and grow start-up and small businesses. The plans also include another plot for three units of 15,000 to 22,000 sq ft and two detached units of 52,000 sq ft and 66,000 sq ft. Phase two, which will begin in September 2018, will be developed on a pre-let basis, and will see the construction of one detached industrial unit of 102,984 sq ft.
It is true to say that the majority of speculative schemes coming forward are being funded by the developer investors.
Robin Woodbridge of Prologis says: “We are actively looking at speculative development, though in a controlled way.”
The developer has committed to speculatively developing a 156,670 sq ft distribution centre at Prologis Park Kettering. Designed to achieve a minimum BREEAM ‘very good’ accreditation and the best possible EPC rating for its size, the building will include a rooftop solar installation that will generate 10 per cent of the building’s regulated energy. Completion is expected in the summer of 2017.
Providing around 1.7 million sq ft in total, Prologis Park Kettering is close to Junction 7 of the A14, which links directly to the M1, M6 and A1(M). Burbage Realty and Budworth Hardcastle are acting for Prologis. It has also announced that it will speculatively develop a 115,824 sq ft distribution centre at the entrance to the third phase of Prologis RFI DIRFT.
Designed to achieve a minimum BREEAM ‘very good’ accreditation and the best possible EPC rating for its size, the speculative building will include a rooftop solar installation that will generate 10 per cent of the building’s regulated energy. Completion is expected in the summer of 2017.
The next phase of Prologis RFI DIRFT has planning consent for 7.8 million sq ft of rail-served logistics space and a new rail terminal that will link to the existing Daventry International Rail Freight Terminal (DIRFT) infrastructure. Located close to the M1 and M6 motorways and to the A14 and A5 trunk roads, DIRFT is connected to the West Coast Mainline railway.
“This building is the logical next step in our speculative development programme,” said Andrew Griffiths, managing director, Prologis UK. “Our customers rely on us to provide the modern, high-quality facilities in prime locations and we work hard to anticipate their requirements.”
Burbage Realty, JLL and Savills are acting for Prologis.
In addition, it is developing speculative warehouses at Prologis Park Pineham as well as a 275,000 sq ft unit at Prologis Park Marston Gate in Milton Keynes. Lambert Smith Hampton and Burbage Realty are acting for Prologis at Marston Gate.
IDI Gazeley is bringing forward speculative space during the course of 2017. Alex Verbeek of IDI Gazeley says: “We are planning on further speculative development in 2017 – currently 700,000 sq ft. We would anticipate there will be more speculative development start in 2017 by other developers. There is still a favourable imbalance for developer with the amount of vacant space relative to take-up. I have not seen any final figures for 2016 but all of the predictions at Quarter 3 were that by the time final quarter of the year came that take up would be in excess of 2015 levels – which was in itself a record year for take up. We don’t see any signs of that abating yet and so forecast more speculative development in the UK. But at only 50 per cent of the peak…”
The sites are likely to be core locations in the Midlands and south east – with the developer building with as much flexibility as possible with potentially divisible facilities that could be leased in parts in the future creating optionality. They will be highly specified with loading and dock door provision with retrofitting additionally to increase office space and more loading provision to make the properties as flexible as possible.
Other speculative schemes include Verdion speculatively developing another 565,000 sq ft of logistics space at its £500 million iPort development in Doncaster.
The development of warehouse space by Verdion and its funding partner, the Healthcare of Ontario Pension Plan, is in response to “significant demand”.
A first new unit, part of phase one of the six million sq ft intermodal scheme, will comprise 190,000 sq ft and be available from the third quarter 2017.
iPort is a strategic rail freight interchange, which will link logistics warehousing to a rail freight intermodal container facility providing rail freight services with continental gauge clearance to all major UK ports and the Channel Tunnel.
Verdion is developing the scheme on a 337 acre site in Rossington, which is linked with junction 3 of the M18 via the Great Yorkshire Way. Gent Visick, CBRE and Cushman & Wakefield are letting agents for iPort.
In the Midlands, Exeter Property Group and Graftongate are speculatively developing a 372,000 sq ft cross-dock facility to be known as M6DC at Kingswood Business Park in Cannock. The facility will have a 15m clear internal height, 48 dock and eight level access doors as well as 51.5m yards, 74 HGV and 310 car parking spaces. Letting agents are DTRE and Bilfinger GVA.
M&G Real Estate, Rigby Group and Evander Properties are forging ahead with their speculative scheme known as Imperial Park in Coventry where three units of 350,000, 165,000 and 60,000 sq ft are being constructed.
M&G Real Estate acquired the 29-acre site in 2016 and has committed over £50 million to the development.
The majority of sites will be targeted for build-to-suit development, which made up 51 per cent of all new development in 2016. With that in mind developers are securing planning permissions and where possible ensuring sites are as oven ready as possible. SEGRO and joint venture partner Roxhill have started on site with infrastructure works at SEGRO Logistics Park East Midlands Gateway and SEGRO Logistics Park Kettering.
SLP Kettering can take up to 1.2 million sq ft and at present platforms are being constructed on site. Osborn says the scheme could deliver a building up to 300,000 sq ft within a year. SLP East Midlands Gateway has planning for up to 6.6 million sq ft and infrastructure works have just started on site.
Prologis is actively bringing forward its 65-acre Fradley Park scheme in the West Midlands. It has started infrastructure works worth £4.75 million to open up the site, which could accommodate up to 1 million sq ft. The largest single unit could be up to 700,000 sq ft. Letting agents are Savills, JLL and Harris Lamb.
It is also progressing with its 7.86 million sq ft DIRFT III scheme near Daventry.
IDI Gazeley is progressing two major schemes; a 4.5 million sq ft extension to Magna Park Lutterworth in Leicestershire and a 60-acre second phase at Magna Park Milton Keynes.
Hodgetts Estates is progressing a site along similar lines in the West Midlands. It has just secured detailed planning for a 345,400 sq ft warehouse to be known as Core 1 at its £70 million Core 42 distribution hub near Tamworth. Letting agents are Cushman & Wakefield and Avison Young.
Curtis Real Estate has its Midas 22 scheme in Leicestershire where it is creating development plateau that can accommodate up to 1 million sq ft. Cushman & Wakefield are sole agents.
Curtis Real Estate has its Midas 22 scheme in Leicestershire where it is creating development plateau that can accommodate up to 1 million sq ft. Cushman & Wakefield are sole agents.
In the north Citrus Durham is expected to start on site shortly with infrastructure works for its 200-acre site in County Durham known as Integra 61, which has planning for up to 2 million sq ft of employment space. Letting agents on the scheme are Naylor and Avison Young.