There is a lot of demand for big warehouse space but there is a shocking dearth of supply. Liza Helps investigates.
Take-up of warehouses over 100,000 sq ft in the UK is set to reach 13.1 million sq ft in the first quarter of 2018, the highest on record and 115 per cent above the long term average of 6.1 million sq ft – it is absolutely unprecedented. But the biggest question has to be why?
According to property consultant Savills, this significant uptick is down to continued activity by online retailers, accounting for 42 per cent and the grocery sector with 15 per cent. And these occupiers are taking very big sheds.
As a result, requirements for units of 500,000 sq ft plus has skyrocketed and there has been a notable increase in build-to-suit units, which made up 71 per cent of transactions compared with just six per cent of new build stock.
Typical deals include 3PL Eddie Stobart pre-letting 844,000 sq ft at property investment company Frogmore and developer Mulberry’s 2.6 million sq ft Midlands Logistics Park (MLP) in Corby, Northamptonshire.
The facility has secured forward funding to the tune of £81.8 million from Tritax Big Box REIT.
Eddie Stobart is the first tenant to commit to a new facility at MLP, which has a 500-metre rail siding and yard, allowing potential future connection to the rail network. The property will be purpose-built, with an eaves height of 18 metres, together with extensive parking. Upon practical completion, targeted for winter 2018, the property will be leased to Eddie Stobart on a new 20-year lease, subject to five yearly upward only rent reviews indexed to the Retail Price Index, with a cap and collar. The first rent review is due in 2023.
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 marketing the site, says: “There is a shortage of available sites of this calibre we are talking seriously to five potential occupiers for the two remaining plots.”
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 in the region to take advantage of a possible eaves height of up to 30m.
Letting agents on the scheme are M1 Agency, Burbage Realty and CBRE.
Other deals include Nestlé, Amazon and Shop Direct securing a pre-lets at SEGRO and Roxhill’s 6 million sq ft East Midlands Gateway near Castle Donington to the tune of some 1.7 million sq ft.
Amazon is looking to secure 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; Nestlé through 3PL XPO is thought to be after some 700,000 sq ft and Shop Direct, which owns on-line retailer Very.com, is close to securing 500,000 sq ft.
Richard Sullivan, national head of industrial & logistics at Savills, says: “We have seen a phenomenal amount of take up in the first quarter of this year, as occupiers resume activity following a slow final quarter in 2017.
“Amazon aside, both ASOS and Pretty Little Thing are rumoured to be taking space, while Internet Fusion, a sustainable e-commerce platform, has already confirmed a deal at Prologis Park in Kettering.”
Internet Fusion took Prologis’ 156,936 sq ft DC6 unit at its Prologis Park Kettering scheme in the East Midlands in January, while PrettyLittleThing.com is thought to have secured Logicor’s recently refurbished Sheffield 615 unit, built originally by Gazeley.
The 614,497 sq ft warehouse benefits from 15m clear eaves height, 33 dock and 15 level access loading doors, 360 degree circulation, a new additional yard, 229 car parking spaces and a 3MVA power supply. CBRE, CPP and DTRE were joint letting agents.
Notwithstanding the activities of online retailers for whom speed to market is key, Savills has seen an increase in build-to-suit units across all sectors. For example, Lidl’s recent announcement that it is to build a 1 million sq ft distribution centre in Houghton Regis in Dunstable – where it paid £90 million for the site taking land prices up in the region from 1.1 million an acre to 1.4 million an acre.
Engineering manufacturer Robert Bosch is thought to have secured a 700,000 sq ft build-to-suit in the Midlands.
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. However, with take-up of built-to-suit in the first quarter of 2018 already at 9.3 million sq ft, Savills predicts strong on-going activity in the industrial and logistics market moving forward.
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.”
According to Len Rosso of Colliers out of the 14 or so warehouses of 350,000 sq ft plus across the UK four are already taken and it is assumed at least three more are under offer.
Of those, there are only six buildings of more than 400,000 sq ft currently available, two of which are already under offer (includes Sheffield 615).
“What’s more all are second hand supply, with the notable exception of Gazeley’s Altitude unit in Magna Park Milton Keynes.
The largest facility on the market is the former Toys “R” Us warehouse in Coventry, which is located at Cross Point, the unit comprises 685,892 sq ft and benefits from 16.2m eaves, 120 doors on three elevations, fully fitted to include heating, lighting, sprinklers, high bay racking/mezzanine and office accommodation. Sole letting agent is Avison Young.
Not surprisingly Robert Rae of Avison Young notes there has been a lot of interest for the property due to its sheer size and the fact that it can be extended by a further 120,000 sq ft.
The facility sits on a 40-acre site and is available at a rent of £5.95 per sq ft.
There is also the Quantum unit at Magna Park, Lutterworth; SEGRO’s 418,000 sq ft ex-Primark facility, which is being marketed by Avison Young and JLL with a quoting rent of £6.25 per sq ft.
The fully refurbished unit has 26 dock and three level access doors as well as a 67m yard depth. It has FM2 50kn/sqm floor loading as well as a 15m eaves height. There are 231 car parking spaces and 74 HGV spaces and it benefits from a Berliner Luft heating system with high level duct work, lighting and sprinklers. It has 10,400 sq ft of two-storey offices as well as a gatehouse and its located on its own secure yard.
“It is for this reason,” says Mofid, “that occupiers are having to build their own stock to fulfil their supply chain needs and remain competitive in an increasingly crowded market.”
Daniel Burn of dbSymmetry says he has seen a marked increase for ‘enquiries for space over 300,000 sq ft’. Indeed many enquiries and requirements seem to be sticking. Chinese owned internet giant Alibaba is still looking for some 600,000 sq ft of space in the Midlands from which it intends to strike out in the UK against the likes of Amazon as the leading e-commerce player in Western Europe. The company already has logistics space in the UK through its logistics platform 4PX Express.
The huge demand for big box facilities is a reflection of changing supply chain dynamics driven by the seemingly never-ending boom in internet retailing.
James Hill of Lambert Smith Hampton says: “What we are noticing is a big boost in confidence levels. In 2016 there were a lot of build-to-suit deals agreed in units of 100,000 sq ft plus, then last year that tailed off it and it looked like the bigger ones tailed off too; in the meantime there has been an improvement in occupier confidence – online is driving this at the expense of key high street retailers. In addition a lot of the requirements are from occupiers who are further consolidating into larger warehousing having improved their online platform.
“There are also new entrants to the market from Europe and US who see that there is still a lot of growth.
“Last years’ biggest surge was in the 50 – 100,000 sq ft mid box range in percentage terms; this year it is the turn of the big box.”
Joe Garwood of Gazeley adds: “Over the past ten years the market dynamics have changed considerably due to e-commerce and the ready adoption of hand held technology and internet banking. As a result warehouses are fundamentally different from 10 – 15 years ago.
“The litmus test is Magna Park Lutterworth where the average size of a warehouse is 167,000 sq ft while at Magna Park Milton Keynes the is average size is 400,000 sq ft. Magna Park Lutterworth is 31 years old while Milton Keynes is 12 years old.
“It is not just the size of the building, distribution centres have evolved in terms of purpose and we see that in terms of technology and types of jobs available within them very different to traditional model. We are nowadays asking more of building and its design has to flex and change with adoption of new technologies which is leading to increasing demand on power and height and therefore floor loading to accommodate mezzanines.’
Recent research notes that there is national bias for the larger building with a 44 per cent take-up for units over 300,000 sq ft and 28 per cent for units over 500,000 sq ft. There has not been the corresponding development on a speculative basis for the larger warehouse.
Rosso says: “Generally over the last five years there has been very few speculative large sheds built consequently there is now a bit of a void.”
On that basis with consistent demand and an almost complete void of immediately available large sheds, it was no wonder that Gazeley sought to speculatively develop the 574,000 sq ft mega shed, Altitude, at its Magna Park Milton Keynes development. The new development has been touted as the largest speculatively built shed since the financial crisis in 2008.
The building, on a 26.26 acre plot, has 532,560 sq ft of warehousing space, 26,802 sq ft of offices, as well as two office pods to the north and south of the building each totalling 7,233 sq ft. In addition it has 100 HGV and 381 car parking spaces as well as a 21m haunch height, 117 dock and eight level access doors. Letting agents are JLL and Savills.
Despite this being considered an exceptionally risky move, Bruce Topley of Gazeley says: “We have looked at all the 500,000 sq ft plus buildings built in the UK in the last four years: loading, position of doors, yard depth, height, configuration and we have looked at what has been delivered in each of those measures and have come up with Altitude. We consider this an informed build – building speculatively but in an informed way.”
The building has just completed and the developer now has six months to secure a tenant before it has to start paying empty rates. Garwood says: “Empty rates are not significant, there is more risk in buying the land and building the building.”
Christian Matthews of dbSymmetry is somewhat more cautious, noting that rates are not insignificant: “This is something to be borne in mind, but perhaps more importantly speculative warehouses have to appeal to the widest possible audience – there is demand for mezzanines so building height is crucial, floor loading has to be able to support it, there must be an adequate power supply.”
All occupiers will be looking at the same factors: distance to catchment, power availability, labour supply and employment costs and of course planning.
For a number of developers speculatively developing a big warehouse over 350,000 sq ft is probably a step too far. John Clements of Verdion says: “A lot of developers and funds are more cautious; building one unit on a site is like putting all your eggs into one basket – in a good location, in the current market there is a good chance it would be successful but considerably more risky. Occupiers looking for larger units tend to want them more bespoke.”
John Bell of Glenny agrees: “When you get into the 300,000 sq ft bracket from a speculative development point of view that is a big risk – if you do not find that occupier you cannot sub divide these type of buildings easily.”
This is the line that Sam Pringle of LondonMetric is following. “In our experience we prefer to pursue the build-to-suit route and work in partnership with an occupier. If we can help them design the best optimal solution this will equate to a longer lease and better rental terms. It is a lot better than to try and second guess the market.
“For any fund a 350,000 sq ft plus unit is a large lot size to digest, rates are a material consideration and then there is the opportunity cost of having capital tied up without a the guarantee of return for up to 18 months. Earlier engagement of occupiers and landlords will facilitate the best commercial terms for both.”
London Metric is currently promoting its 40-acre Bedford Link scheme close to junction 13 of the M1 motorway, which has planning permission for up 670,000 sq ft of space. Graftongate has been appointed as development manager with enabling works due to commence shortly, and construction anticipated to start in summer 2018. Letting agent is DTRE.
That being said, Gazeley and indeed other developers most notably First Panattoni, who are committed to developing 3 million sq ft of warehousing in units over 350,000 sq ft in 2018 alone, do have the ‘first to market’ advantage in that supply is extremely scarce and demand is strong.
Rosso is clear: “Fortune favours the bold and by building speculatively you get in there first.
“Not every company that sets out to build-to-suit lands up having the time to do so,” he says.
Little adds: “I always thought that if one or two developers actually bit the bullet and built it [big 350,000 sq ft plus warehouses] then they [occupiers] will come.”
This article first appeared in Logistics Manager, May 2018