The Brexit drama is beginning to pall and decisions are taking longer for occupiers and developers alike – but is it all bad news? Liza Helps reports.
As a result of Brexit uncertainty, industrial take-up across the UK for the first quarter in 2019 has measured as the lowest first quarter of the year reading since 2013 according to research by Colliers.
The Spring 2019 Industrial & Logistics Barometer, published by Colliers International, shows that national ‘Big Box’ take-up (100,000+ sq ft) slowed to 4.9 million sq ft in the first quarter of 2019.
Further, anecdotal evidence suggests there has been a marked slowdown in the decision making process for taking on new warehouse space by occupiers and whether to build new space by developers and the blame has been put squarely on the shoulders of parliament and the seemingly never ending on/off Brexit saga.
Mountpark’s Philip O’Callaghan says: “We are lucky in that couple of decent deals are going through at the moment, but generally there has been a marked slow down – a reflection of political uncertainty where businesses are concerned about not knowing what is happening and thus postponing decisions.”
It is the indecision about exactly when and in what form Brexit will take that is causing the issue, Chris Hartnell of Carter Jonas says: “Obviously businesses prefer a degree of certainty to trade and Brexit is a bit of an unknown – albeit one that everyone has to deal with.”
With the recent set of Brexit deadlines reached and then extended not once, but twice and Theresa May’s Brexit deal thrown out by the House of Commons three times and with no consensus of agreement yet forming – it is hardly surprising businesses are pausing.
Paul Hobbs of Avison Young says: “Enquiries and demand in the South West is patchy at present and we are quieter than we hoped or expected right now but of course once we do know what is happening with Brexit that could change in an instant.”
Certainly the fundamentals of the logistics market have not changed there is still a shortage of supply across all size brackets and equally there is still demand driven most strongly by the e-commerce market.
Indeed Andrea Ferranti of Colliers says: “Once occupier confidence returns and investment decisions are implemented by those retailers executing their online strategy, pent-up demand will produce a bumper year for take-up in 2020.”
Colliers’ Len Rosso, agrees: “Looking ahead, requirements by occupiers to bolster operational efficiency and reap the benefits of growing e-commerce demand will support the market this year. We fully expect this to translate into steady take-up in 2019, in line with the 10-year average, and a stand-out year in 2020.”
That is not to say that there have been no big sheds deals. In the last few weeks two huge lettings have been announced – and it is interesting to note that both lettings are internet retail driven. Firstly fashion retailer H&M has finally signed up for its first omni-channel distribution centre in the UK with the announcement that it has secured a 785,765 sq ft warehouse at Gazeley’s Magna Park Milton Keynes in Bedfordshire.
It will service H&M stores in the UK and Ireland as well processing online orders from hm.com. The retailer had been linked to the site since late 2017 and it is thought that it has secured a 20-year lease.
A second letting sees an un-named online retailer securing a 731,000 sq ft deal at logistics specialist Verdion’s iPort scheme in Yorkshire.
The facility, which will be built on the 300-acre second phase of the iPort logistics hub in Doncaster, is set to complete in the Spring of 2020.
Letting agents for iPort are Gent Visick, Colliers International and CBRE. The Healthcare of Ontario Pension Plan (HOOPP) is Verdion’s funding partner.
Equally, it would be wrong to surmise that developers and investors were not continuing to speculative develop at present. They are. However, unless the scheme has been fully pre-funded or already in construction there is anecdotal evidence that there has been a pause in actually pressing the button to go on site especially for the larger warehouses over 250,000 sq ft.
Thus, we are seeing developers announce the launch of schemes right now. These include Panattoni’s two-unit development in Luton; one of 345,000 sq ft and one of 69,000 sq ft.
The units, Luton 345 and Luton 69, are being developed at Panattoni Park Luton, which is adjacent to the junction 11A of the M1 motorway, which provides access to the A5 north of Dunstable.
Panattoni Park Luton will be ready for occupation in the fourth quarter of 2019. Agents for the scheme are Savills and M1 Agency.
In the Midlands, St Modwen has started work on a 318,500 sq ft warehouse at its St Modwen Park Tamworth scheme after North Warwickshire Council gave planning permission for 480,000 sq ft of space. The speculative warehouse is due for completion in December 2019.
While not necessarily very large, the one area where both developers and occupiers seem to be most active despite Brexit, is with warehouses between 50,000 to 150,000 sq ft – Mid Box as it is known. For some developers this Mid Box range can go from as small as 25,000 sq ft to as large as 200,000 sq ft depending on the region and locality.
Simon Lloyd of Cushman & Wakefield says: “There has been and under-supply of new product for the last 10 – 15 years and this has led to a marked shortage of space in these size ranges.”
O’Callaghan adds: “There has been a perception in the past that the build cost did not justify the differential in rent and hence they were sadly neglected.
“In general there is a higher build cost on smaller units around £55 – 60 per sq ft while bigger units may have been £35 – 40 per sq ft. For a long time rent levels just did not make spending that much a viable way forward.”
However, over time the demand grew exponentially nationwide and with supply so short, rent levels shifted enough for developers to look at limited speculative development. It was a case of build it and they will come.
Mountpark speculatively developed a mid box scheme of seven units from 40 – 110,000 sq ft in Southampton and pre-let five of those prior to practical completion.
“When Phase 1 was started we were estimating a rent of £8 something now we are at £9.50 per sq ft. If you get on and build these [mid box developments]where there is pent up demand you get to push rents on to make the schemes viable.”
It is the ability to actively asset manage these types of scheme that is attracting both funds and developers to speculatively develop.
Jeff Penman of Tungsten Properties says: “Fundamentally, the big box market is fairly binary: either there will be an tenant to suit a speculative building shortly after it PC’d, or it might stand empty for amount of considerable time – timing, supply/demand dynamics, and luck, are all required in this higher risk market.”
Ian Ball of Harworth notes: “The letting of a big box tends to be a one off event and you either trade them or hold them – with mid box warehousing you can asset manage in terms of rental growth especially if you have a group of three or four in a variety of sizes where you can have both longer and shorter leases and in effect move tenants around.”
Underpinning it all of course is demand and the reason there is so much of it is because there is a greater depth of demand.
Jonathan Holland of Legal & General Investment Management says: “Over the last three years we have seen a marked increase in occupiers wanting mid box warehousing.”
Penman agrees: “There might be 20+ companies looking for [mid-box] space in any particular town, as opposed to one or two logistics operators in the big-box market.”
“A healthy level of business growth in the SME sector, lease expiries on old and tired stock, and a requirement for better quality buildings for their business, employees, and customers, are the primary reasons fuelling this demand, with only limited supply available.”
Jake Huntley of DTRE says: “We have definitely noticed the depth of demand for mid box is greater [than for the bigger warehouses]you have local and regional occupiers, SMEs, manufacturers, 3PLs, e-commerce and last mile providers.”
Bob Tattrie of Trebor Developments says: “There is also increasing demand for JIT accommodation up to 100,000 sq ft both manufacturing and for internet retailers. Enquiries are very much spread between manufacturing and logistics.”
And this variety of potential tenants says Ball, “have a wide range of space requirements as well which only adds to the asset management opportunities”.
“Large warehouses by default require a certain amount of acreage, specification and configuration generic for the marketplace but mid box can offer a different product the ability to be a little bit more flexible in product type and configurations.
“Tenants will ultimately be locationally very sensitive and you still have to create the right environment – the world’s best building is nothing if you put it in a bad location.”
As part of its Logistics North offering Harworth brought forward the Multiply scheme in a joint venture with Lancashire County Pension Fund, which once built out will comprise ten units from 20,000 – 150,000 sq ft.
Within six months of practical completion four units have been let. The latest unit has been taken by kitchen and bathroom wholesaler PJH. The company took just under 63,000 sq ft at Unit F1/A at the site. B8 Real Estate, JLL, and Knight Frank are the retained agents for Multiply.
Holland notes: “From and investor perspective this sector will see considerable rental growth – a reflection of supply and demand.”
The demand and supply dynamics was noted by developer Barberry. Jon Robinson of Barberry says: ‘Three and half years ago Barberry deliberately decided to target the Mid Box market looking for those sub 100,000 sq ft units and we now have 2.4 million sq ft of space consented or currently seeking planning consent. But it is not all rosy. “It is difficult to acquire land in some locations particularly brownfield we are competing with higher land uses such as residential – it can be a battle to acquire these type of sites in some locations.”
One of the company’s current flag ship sites is More+ Central Park in Bristol where it has planning for 550,000 sq ft of space in 11 units. The first phase of the development – five mid-box warehouse units totalling 174,500 sq ft – is expected to reach practical completion in May.
The scheme is being developed in conjunction with Richardson Property. Letting agents are Cushman & Wakefield, Knight Frank and Russell property consultants.
Certainly there is competition for the sites but at least says James Keeton of JLL, “you do not need as much land as you would for a stand alone larger unit’ and on that basis there are certainly more opportunities available”. For occupiers though he notes: “Any scheme brought forward though by virtue of build cost and land pricing will dictate higher rent by that can be offset by operational efficiencies of a newer higher quality building.”
With the depth of demand coupled with lack of supply it is not surprising that space goes quickly. Katie Aichison of Savills says in the Midlands: “You will find 20-30 per cent of space is going before practical completion unless there is something similar down the road. Voids are coming in.”
This article first appeared in Logistics Manager, May 2019.