There is more available space than ever before standing at 230,457,680 sq ft as of December 2007, according to the latest statistics from King Sturge’s Industrial Floorspace Today survey.
This is an increase of 0.8 per cent since June 2007 and represents the fifth consecutive six-month period of upward movement in floor space. The highest percentage increases were recorded in Wales (4.1 per cent), the North West (2.9 per cent) and Yorkshire & Humberside (2.3 per cent). Availability in the West Midlands rose by two per cent, Scotland by 1.9 per cent and the South West, 1.4 per cent.
Of this the availability in new buildings also continues to rise with a 7.4 per cent increase since June resulting in 30,095,720 sq ft being available at December 2007. The rise of 2,076,680 sq ft since June 2007 means new floor space accounted for 13.1 per cent of total availability at December 2007. The availability of floorspace in buildings over 100,000 sq ft also showed an increase, a rise of 6.5 per cent or 4,078,040 sq ft since June, making the total floor space available in these buildings rise to 67,045,560 sq ft or 29.1 per cent of the overall available floor space.
However, speculative development under construction across Great Britain decreased some 14.1 per cent since the company’s previous survey, falling to 13,361,025 sq ft across 113 schemes.
The reasons behind the fall are in essence twofold. Firstly, it is the result of the credit crunch. Tony O’Keefe of DTZ says: “The credit crunch has had far reaching effects on the industrial market. This has been most notable in capital markets where some property funds and developers have effectively halted any further market activity for the short term.
“They are now re-grouping after the halcyon days of yield compression, which saw increasing confidence in the industrial sector being reflected in rising values and a correction was at some point inevitable.”
With less money to fund development there will naturally be a reduction in the amount of space built speculatively. If that were not enough the government’s decision to abolish Empty Rates Relief has put a seal on speculative development except for those already too far down the line to halt.
Lambert Smith Hampton’s National Industrial and Distribution Report 2008 says that there is already evidence of this, with Evans Easyspace announcing it would postpone two new developments proposed for Merseyside and Staffordshire. While at XL in Skelmersdale, Gazeley is now offering design and build options [where once it had thought it would develop speculatively].
Since 1st April all industrial premises have been eligible for empty rates relief for the first six months after which full business rates are now charged. The government has said that it believes that this will increase competitiveness. However, many in the business and property communities say that the length of relief is not time enough to allow redevelopment or regeneration of a property. As a result it could act as a brake on growth as owners demolish less attractive second hand properties.
Property advisor Jones Lang LaSalle, in its Western Corridor Industrial Market report notes: “Since there has been no empty rates liability on industrial property until now, this adds substantially to the cost of vacant property and will inevitably influence development and management decisions.
“The additional cost of holding empty property will discourage speculative development. The short construction period for warehouses means that speculative development only generally makes sense in a market with distinct supply constraints, or for a particular niche product.”
Double trouble
O’Keefe warns: “A further consequence of this ‘double trouble’ will see a reduction in developer confidence. In the long term, we would expect this to have a negative effect on land values in secondary locations, fewer speculative schemes, demolition of older accommodation and an increasing number of design and build transactions.
“This is an important trend to consider as traditionally businesses expect a range of built product immediately available to occupy. However, with a dearth of speculatively built schemes, to obtain best value businesses will have to consider relocation planning much earlier or else be left with limited options and an associated cost implication.”
Dr Arezou Said of Lambert Smith Hampton, in the company’s National Industrial and Distribution Report, agrees: “The market needs a good supply of new space to drive growth both of the property market and the local economy in terms of attracting new business and creating employment.
“Speculative development provides the new space that is necessary to prevent property shortages as it emerges from a downturn. It is the prospect of development profit, which motivates the speculative developer. This profit represents a return on risk. The prospect of having to pay empty property rates at 100 per cent six months after the building is complete increases the risk and could make many developments unviable.”
Emma Jackson of King Sturge says: “Although there seems to be a high supply of speculative development available, going forward we expect new speculative development to moderate as the effects of empty rate and economic uncertainty over demand start to show – however this may take a year to show in the figures.”
Difficult situation
David Newton of Yorkshire-based St Paul’s Developments, says: “There was a strong market in 2006 and the first quarter 2007. And at that time developers and funds [in Yorkshire] all came together at the one time [to develop speculatively]. That was the starting point and now there are a tremendous number of buildings available. Then the market took a dip which was quite significant and that in combination with empty rates and the difficult situation [in Yorkshire] with over supply makes the market unsure.
“The empty rates problem brings a whole new dimension to the development appraisal. A lot [of the buildings already built] will have been calculated without it. If you have a 500,000 sq ft unit then you are probably looking at a £1m empty rates bill and that has a big impact.”
With some 20 units over 150,000 sq ft in the Yorkshire region alone, Newton adds that he is grateful that he secured a deal with Maplin Electronics in April last year. He says that at the time there were two or three other potential occupiers and that Maplin had wanted some changes to the building before signing. He says at the time they were in two minds whether to go ahead.
The electrical retailer took the 196,000 sq ft warehouse at St Paul’s Developments’ Brookfields Park in Rotherham, South Yorkshire to house its new UK head office and distribution centre.
The retailer took a 15-year lease at a rent in the region of £4.50 per sq ft. The distribution unit initially comprised 176,000 sq ft of 12m high warehouse space, including 8,000 sq ft of separate offices but to meet Maplin’s requirements St Paul’s secured planning permission from Rotherham Metropolitan Borough Council to build a further 20,000 sq ft of office accommodation for the head office operations. The building was constructed speculatively with a low site density and incorporates 19 loading docks/ doors. Letting agents were Knight Frank and Lambert Smith Hampton.
There is, however, another consequence to the Empty Rates debacle. Occupiers will, for a short time, be able to benefit from reduced rents and incentives as developers and landlords look to off-load warehouses that have been on the market for a while. O’Keefe agrees: “The implications for owners of vacant property in the short term are that we would expect to see a stronger focus on asset management and a greater degree of pragmatism from landlords to reflect a shift in negotiating position of the occupier.”
Emma Jackson adds: “Lease lengths and rents in the big shed sector vary, although in general it is unsurprising that new space attracts higher rents than second-hand space and generally longer leases. “However, the market for new space is itself a two-tier one divided between units that have been/are being developed speculatively and the build to suit market.
With existing speculative buildings, we think market concessions are increasing and in some locations where supply is relatively plentiful rents are under downward pressure, particularly where schemes are struggling to attract occupiers and landlord are faced with the new empty rates liability. However, rents are broadly firm in the build to suit market. Indeed in this market, incentives could narrow and rents edge up in certain markets where supply is relatively tight.”
Taking an overview of the market Len Rosso of Colliers CRE says: “Although rental growth has slowed slightly over the past few months, there is still very good demand from occupiers, for the right property of the right size in the right location.
“This is borne out by the very encouraging figures for new properties, where higher rents are offset by the benefits of more modern construction, good strategic locations and the option to specify custom layouts, if the occupier’s warehouse processes required that.
“There are also some excellent quality second-hand properties on the market, which offer many occupiers all the modern facilities they need at a lower cost. Some companies at the moment are particularly price sensitive, because of the economic climate, and are considering second hand properties when previously they hadn’t.”
One such second hand building is The Big Tel in Telford. Wincanton formerly occupied the 242,715 sq ft building. It is owned by Blackrock (Merrill Lynch) and is being offered through joint letting agents M3 and Knight Frank at a rent in the region of £4.25 per sq ft.
The building boasts heating, lighting and racking as well as offices totalling 7,992 sq ft and 15 dock and eight level access doors.
It is not just second hand buildings which can offer discounts but also refurbished buildings. Opus Land has just reached practical completion on its Opus Axis scheme at Burton-on-Trent. This will provide one of the largest distribution units available in the Midlands.
The 300,000 sq ft former Littlewoods Distribution Centre at Centrum 100 Business Park on the A38, close to its intersection with the A50, was acquired for £22.6 million at the end of 2006.
Highly attractive
Opus has extended the existing space by a further 160,000 sq ft featuring a ‘cross docked’ facility – a highly attractive prospect for large retailers or third party logistics operators seeking a national or regional distribution centre at the heart of the country and its motorway network.
The resulting 460,000 sq ft facility will be offered at a guideline rental of £5.25 per sq ft. It will have a 15m eaves height, 41 dock and six grade level doors as well as three service yards of 62m, 56m and 35m depth.
Says David Gallagher of Opus: “Opus Axis boasts an unrivalled specification when compared with other speculatively built units of its size; as such, it will have broad appeal to prospective occupiers in all sectors and will reduce their set up costs considerably.”
North Rae Sanders, GVA Grimley and Jones Lang LaSalle are marketing the facility jointly. Not all developers are holding back, indeed Henry Boot Developments says it is planning to commence development of its 585,500 sq ft “Green Giant” distribution warehouse this summer.
Green credentials
The facility at the developer’s 200-acre Markham Vale scheme in North Derbyshire has a host of green credentials and will include photovoltaic generated energy, along with rainwater harvesting. It has also been awarded an Excellent BREEAM rating, and boasts significant reduction in carbon emissions. To enhance the green credentials further, the developer has selected the majority of the materials from Category A of the Green Guide and increased the insulation, which will benefit an occupier directly by significantly reducing the running costs. All this is provided with no premium to the occupier.
Vivienne Clements, of Henry Boot Developments comments: “We believe this to be one of the greenest sheds in the country, and we have worked hard with our consultants to achieve outstanding green accreditations that will make it highly economical to operate. These credentials, combined with Markham Vale’s ideal location in the heart of the county and now easily accessed via the new motorway junction make it a very desirable proposition for a variety of industries and requirements.”
King Sturge is advising.
