In 2008 speculative development dominated the market at 70 per cent: 2018 has seen the complete reversal, and design and build dominates. The question is why and the answers are not quite as straightforward as expected. Liza Helps reports.
In 2008 speculative development dominated the market at 70 per cent, while 2018 has seen the complete reversal, where design and build dominates. The year so far has been extraordinary with the highest occupational take-up on record at just shy of 30 million sq ft (depending on whose statistics you follow). According to Gerald Eve’s latest Prime Logistics research, take up is 16 per cent higher than on the same period a year earlier. “Such an increase has been helped not just by the letting of several large second hand buildings such as Sheffield 615 [to Clipper Logistics for a contract with PrettyLittleThings.com]but also by a sharp uptick in the number of large pre-lets and occupier land sales which have been agreed.” This is in contrast to 2017, which saw a significant reduction in build-to-suit development from the record take-up levels of 2016, dropping from 18 million sq ft to 11 million sq ft in 2017. According to property consultant Savills this year’s significant uptick is down to continued activity by online retailers. Research by Cushman & Wakefield concurs – take up by pure play e-commerce occupiers accounted for nearly 50 per cent of take-up in the second quarter of 2018 alone ‘highlighting once again the contribution of e-commerce to the sector’. The report goes on to state: “The geographical distribution of take-up by this occupier group, extending to regions such as the North East, which has seen little activity so far by e-commerce, is evidence of an increasingly broad-based trend.” And these occupiers are taking very big sheds. As a result, says Savills, requirements for units of 500,000 sq ft plus has skyrocketed and there has been a notable increase in design and build units, which made up 71 per cent of transactions compared with just six per cent of new build stock. One of the biggest e-commerce related deals saw online retailer Amazon secure 1.5 million sq ft at dbSymmetry’s 90-acre Symmetry Park, Darlington in the North East. The internet giant will occupy 40 acres of land for the fulfilment centre with the remaining 37 acres available for further development. The developer is seeking planning permission for a further 550,000 sq ft of space. Colliers International is jointly advising dbSymmetry with Gent Visick and Carter Jonas. Amazon has also taken a further unit at SEGRO and Roxhill’s 6 million sq ft East Midlands Gateway near Castle Donington in the East Midlands. It is building a unit with a footprint of 500,000 sq ft, which it will fit out with mezzanines creating a facility of 1.2 million sq ft in total. In another e-commerce-related design and build deal at East Midlands Gateway, Shop Direct, which owns on-line retailer Very.com, is investing £200 million in a 500,000 sq ft automated distribution centre. Shop Direct, which is a sister company of Yodel, has been transforming its business model from its origins as a catalogue retailer to pure-play digital retailer. Development at East Midlands Gateway is due to start in May 2018, and the group plans to begin exiting its existing fulfilment sites in Greater Manchester from mid-2020. The new site is expected to be fully operational by peak 2021. Notwithstanding the activities of online retailers, property pundits have seen an increase in design and build units across all sectors. For example, Lidl’s announcement to build a 1 million sq ft distribution centre in Houghton Regis in Dunstable and B&M’s announcement that it is building a 1 million sq ft regional distribution hub facility in Wixams, Bedford worth £39 million. The warehouse is to be 21.5m high and comprise of warehousing and distribution facilities, including temperature-controlled zones for chilled and frozen goods, offices, recycling and ancillary areas. There will be also be a refuelling area, maintenance area for vehicles and gatehouse. The distribution centre is due to be completed in 2019 and will be built by Kier Construction Central. There is also the news that engineering manufacturer BSH Home Appliances – which is behind brands such as Bosch and Siemens – has secured a 1.1 million sq ft build-to-suit at Mulberry Developments and Frogmore Properties’ 5 million sq ft Midlands Logistics Park (MLP) in Corby. MLP is one of only a very few sites in the country that can provide fully serviced platforms for units in excess of 750,000 sq ft right now. Richard Moffitt of M1 Agency, which is jointly marketing the site, says: “There is a shortage of available sites of this calibre.” Infrastructure works to date are in excess of £25 million and there are three fully serviced plateaus ready for development. This is one of the few options to take advantage of a possible eaves height of up to 30m. Letting agency on the scheme are M1 Agency, Burbage Realty and CBRE. Earlier in the year Eddie Stobart pre-let 844,000 sq ft at MLP. Kevin Mofid of Savills, adds: “The resurgence of occupiers taking build-to-suit units is a good indicator of demand and highlights the lack of supply we currently have in the market, especially for units of 500,000 sq ft plus. What’s more, it also points to a shortage of modern good quality stock available, which is essential especially when it comes to the ever evolving nature of retailers supply chains.” Indeed James Clements of Knight Franks says: “If there isn’t the supply then occupiers have to consider design and build routes or increase their search area to fond something suitable.” As a general rule of thumb Alan Sarjant of Prologis notes: “In our experience, an occupier will generally favour a speculative build over a build to suit [design and build]as the former generally represents less risk and a much quicker timescale for the occupier. “Indeed, many will adapt their business operations to suit the space available. The only exceptions to this are where an occupier is looking for a large building, say 500,000 sq ft, or where there the occupier has a specific requirement, for example in the case of a parcel hub where there is a requirement for a low-density cross-dock.” Len Rosso of Colliers agrees: “Some buildings can be very bespoke such as parcel hubs which tend to be very long and thin with spurs coming off.” It’s not just the external look of the building or the site density required for operations that determines design and build. Simon Lloyd of Cushman & Wakefield says: “Increased automation and increased use of mezzanines also makes it more likely those will be design and build as well.” Rosso points out “A lot of design and build solutions incorporate mezzanines.” He cites Ocado in both Birch Coppice and Erith, as well as numerous Amazon deals from Tilbury to East Midlands Gateway. One of the biggest changes making design and build more predominant is that the market itself matured. Paul Chatterjee of dbSymmetry says: “Occupiers are more attuned to the process and frequently have good advisors and more often than not a good in-house property team.” Clements agrees: “Occupiers are more on top of their property strategy and are able to consider their positions well in advance of lease events giving them time to consider design and build options.” Faster build times and a developers willingness fund ground works and secure detailed planning approvals making sites oven ready and indeed less risky have also engaged occupiers to consider design and build options. The willingness of funds to enter into design and build has improved matters greatly. This may of course be more self-interest as the sector is going through a purple patch in investment terms and there just is not enough investment stock to satisfy the great weight of money looking to invest. According to Cushman & Wakefield’s latest Industrial & Logistics Outlook report while transactional activity in the first six months of the year, with £2.5 billion worth of logistics properties changing hands may be down on 2017, it has more to do with lack of stock than lack of appetite. There are several overseas investors in the market including Singapore state-backed investor Ascendas-Singbridge looking to secure a 12-property 1.6 million sq ft portfolio from Oxenwood Real Estate and Catalina. Then there are the UK institutions such as M&G, which has just secured a five-property portfolio from Mountpark to the tune of £94 million. Rosso says: “When a design and build is in a good location there is generally a huge appetite to buy from the funds due to the bigger lot size.” Then there is Tritax Big Box REIT, which actively enters into agreements for properties yet to be built enabling it to get in on the first rung of the ladder to secure elusive investment stock. It has recently backed the development of the Amazon building at dbSymmetry’s Symmetry Park Darlington to the value of £120.7 million, reflecting a net initial yield of 5 per cent as well as forward funding the Eddie Stobart deal at Midlands Logistics Park in Corby to the tune of £81.8 million. It is important for occupiers to note that while D&B has certainly got easier fund and developers look to secure much longer lease terms than if the property had already been built.
This feature first appeared in the October issue of Logistics Manager.