Good in parts…

21 March 2024

The industrial and logistics warehouse market in the South East and London is a bit like that old adage a Curate’s egg - good in parts… Analysis from Liza Helps.

HURTLING INTO to 2024, and the market for industrial and logistics space in the South east and London looks, on the face of it, quite good for occupiers, with talk of choice due to increased supply and the rate of rent rises slowing.

Colliers recorded take-up of 100,000 ft2 plus warehouses in the wider London and South east was down 38% at 3.6 million ft2 in 20 transactions compared to 2022 when there was 5.6 million ft2 of space in 35 deals transacted.

“Take up [during the past 12 months] has been below trend,” according to Glenny’s managing partner John Bell in the company’s latest industrial research report – the main culprit - he says, is: “a slow down in the big box lettings putting a brake on overall take up figures.”

Savills’ head of industrial and logistics research Kevin Mofid agrees: “Take-up in 2023 has fallen due to the lack of larger (400,000 ft2+) transactions.”

While there was a huge letting of 650,000 ft2 to Tesco at Panattoni Park Aylesford in Kent, it was a singular deal. The average unit size taken up for in the last 12 months is 191,228 ft2. Other big shed deals saw Transmec take 165,000 ft2 and Cosco Shipping take 119,350 ft2 at DP World’s London Gateway scheme, with DP World Logistics taking 270,00 ft2 at Symmetry Park Bicester and just recently Sysco, the American owner of Brakes Catering Equipment taking the 465,000 ft2 ex-Amazon warehouse at Hemel Hempstead on a 25 year lease. It is investing £79 million to open what will be its largest foodservice depot in Europe. DTRE advised Sysco/Brakes while CBRE acted for the landlord.

Avison Young’s Industrial principal sales and leasing director John Allan says: “It would be wrong to say that there was not the demand per se just that the wider economic outlook meant that everyone was being extremely cautious and transactional sales got elongated.”

“It would be wrong to say that there was not the demand per se just that the wider economic outlook meant that everyone was being extremely cautious and transactional sales got elongated.”

While big box transactions have been somewhat sparse, small and midbox take up has been comparatively active according to Glenny with occupiers focussing on new Grade A units with Clarins pre-letting 89,000 ft2 at the second phase of Midas in Harlow and Fixfast taking 64,450 ft2 at Click, Aylesford. Recently Chinese ecommerce logistics solutions provider WanB Express took the last unit at SEGRO’s Heathrow International Trading Estate.

According to letting agent DTRE it was the last remaining unit on the 185,000 ft2 estate, and follows a string of deals on units 11, 6 and 12.

The demand for small to midbox units in Heathrow and out along the M4 corridor has been growing. Recently SEGRO announced that it was demolishing a single building on its Slough Trading Estate and replacing it with a scheme of nine Grade A units totalling 107,000 ft2 with units ranging from 2,000 to 45,000 ft2. 

What has been noticeable with both big box and midbox take up is that the number of deal transactions picked up towards the end of the year and continued into 2024. Bell says: “Most sectors of the market saw an upturn [toward the end of the year] indicating a perceived improvement in occupier confidence.”

Indeed, looking at demand for industrial floorspace Glenny notes that this edged up to 22.1 million in requirements for the region from 20.7 million in the six months to the end of Q3 2023.

At the time of the report in Q3 2023, the number of requirements registered had yet to convert into transactions, however, with occupier sentiment being judged more positive coming into 2024 take up/ the number of transactions is expected to increase.

According to Savills head of London and South east industrial and logistics director Toby Green: “Of the available space in the region 16% is already currently under offer.”

“Looking at the places where you might develop a big box, you need strong population demographics and great access to motorways and A roads to satisfy customer demand. Land that meets these criteria tend to come forward slowly in urban locations. There are less opportunities for us to source a site in the south east which is capable of holding a larger XL big box such as our Aylesford or Sittingbourne sites.”

Developers are seeing an upturn in enquiry level and report that they are in serious discussions with potential occupiers especially for newly completed or shortly to be completed stock. GLP senior development director Adrienne Howells says: “We have enquiries from a range of potential occupiers for our single unit scheme in Basingstoke and while nothing has been agreed as yet the unit will not reach practical completion until the end of April.”

G-Park Basingstoke totals 209,461 ft2 and is being forward funded by GLP via Bridges Fund Management and Wrenbridge. The developers are targeting an EPC A+ and BREEAM ‘excellent’ rating, together with a ‘net zero target build’. Glencore is carrying out the build. Joint letting agents are Savills, Cushman & Wakefield and CBRE.

Tritax Symmetry’s development director Tom Leeming tells of similar interest at the investor developer’s Biggleswade scheme where having just got planning permission for three units on the third phase of the development, the company is in serious talks with two occupiers before a spade has hit the ground.

Symmetry Park, Biggleswade extends to a total of 150 acres with the first two phases totalling 1.24m ft2 fully let. The third phase comprising units of 384,325 ft2; 287,200 ft2 and 255,700 ft2 will be built to net zero carbon in construction and will target a BREEAM ‘Excellent’ and EPC A rating. joint letting agents are Colliers and Bidwells.

For Colliers head of industrial and logistics Len Rosso the last year has been challenging: “On the larger side of things, occupiers tightened their belts but with positive sentiment ebbing through and the prospect of interest rate cuts with inflation under control consequently there will be a loosening of belts with more occupiers looking for more space.”

The big issue is going to be  - is there that space? On the face of it, there certainly seems to be. Glenny’s research reports that since the beginning of 2023 total availability has crept up. 

This increase in supply has been acknowledged across the board with Avison Young’s Allan noting: “Clearly the market is carrying a lot more stock than it was used to.”

“There is an absolute lack of supply from Southampton all the way to Banbury.”

Colliers head of industrial and logistics research Andrea Ferranti says: “Overall availability, for units of 100,000+ ft2, increased by 37% year on year to 6.5 million ft2. In London, there were seven units available larger than 100,000 ft2 totalling 920,346 ft2, while in the South East availability stood at 5.6 million ft2, 47% ahead year on year.”

This has to be good for occupiers, says Gerald Eve partner Josh Pater: “There is for the first time since the post-covid era a choice of buildings of 100,000 ft2 and over.”

He says: “Generally, the A13 corridor now has increased supply, following the completion of several refurbishments and development stock coming online.”

This includes the recently completed building at Prologis Park Brooklands, a speculatively developed 124,223 ft2 warehouse built to a best-in-class standard where there is strong interest.

Those occupiers seeking space are targeting best in class says Bell: “From an occupiers perspective this increase in Grade A availability provides improved choice of EPC compliant buildings and will assist them in the rationalisation of supply chains ahead of the proposed tightening of energy efficiency regulations.”

The Government has legislated that any building with an Energy Performance rating less than a ‘B’ will not be able to be leased from 2030 onwards as it pushes the UK toward net zero.

While there is a little room to manoeuvre, the idea that the increase in supply is a panacea should be taken with a pinch of salt. It, unfortunately, is anything but – to start, Ferranti notes that current total availability equates to just below one years’ worth of supply.

To make matters worse, that supply is unevenly spread across the region. While in the east  there are a number of units  available it is quite another story in the west - the Thames Valley and along the M3, M4 and M40 motorway corridors.

Haslams managing partner Neil Seager, says: “In the Thames Valley the supply of larger sheds remains limited. In fact, the supply of industrial and distribution warehousing space in the greater Reading area is at its lowest level for almost a decade and is hampering business growth and forcing occupiers to look elsewhere.”

The same sentiment is echoed by GLP’s Howells: “There is an absolute lack of supply from Southampton all the way to Banbury.”

Looking more closely at the quality of available stock and Savills research records that 38% is Grade A speculatively developed space, 33% is second-hand Grade A space, 13% is Grade B, and 16% is Grade C space.

But more worryingly, of the total stock in London 72% and 64% in the wider South East fail to meet the often requested EPC B standard. Panattoni development director South east David McGougan, says:A significant amount of the current occupied stock is already suffering from obsolescence. A higher percentage still by 2030 will be unfit for purpose, reaching a point of obsolescence and being uneconomic to maintain or refurbish to meet the ever increasing ESG standard demanded by occupiers.”

This means that there will be a growing number of occupiers looking to upgrade space in the next few years making competition stiffer for what space Grade A there is available. On a national scale Savills is tracking 26 million ft2 of lease events through 2024 alone irrespective of those companies looking to expand, near shore or enter the UK market.

In usual circumstances, this should not be an issue for occupiers as there would normally be an active pipeline of space coming forward through speculative development. “However, during 2023 from a national perspective at a more macro level,” says DP World Park development vice president Oliver Treneman,the increase in the cost of borrowing and increased cost of construction costs forced many developers to reconsider the risks associated with speculative development and placing a stronger emphasis on leasing existing vacant stock before putting more product into the market.”

The result has been that there has been a pause in the delivery of new speculative space. According to Ferranti: “As of 2024 just 1.8 million ft2 of space was under construction across London and the South east.” 

Again, under normal circumstances, the market could just switch the development tap back on, but for the fact that even if they wanted to, the land to build warehouse space is severely constrained in the region. McGougan explains: “The thing about big box is that occupiers either come forward and want space immediately, which is more reactionary, and in this case there are very few units available, or they go through planning, and planning in the south east can be difficult because land is so constrained. 

“Looking at the places where you might develop a big box, you need strong population demographics and great access to motorways and A roads to satisfy customer demand. Land that meets these criteria tend to come forward slowly in urban locations. There are less opportunities for us to source a site in the south east which is capable of holding a larger XL big box such as our Aylesford or Sittingbourne sites.

“It is much more commonplace that smaller sites under five acres are available for immediate delivery, where often you are hard pressed to deliver buildings much over 100,000 ft2 and more often it’s a range of midbox units to maximise site density.”

Gerald Eve partner Josh Pater

In terms of big box development, Panattoni is currently delivering 792,000 ft2 in two units of 350,000 ft2 and 450,000 ft2 in Milton Keynes and due to start speculatively developing 644,000 ft2 of space (439,228 ft2 and 205,320 ft2) at its newly acquired Sittingbourne site in Kent.

Tritax’s Leeming knows the frustration: “There is a lack of supply, not just of buildings, but also consented land. It is important for UK plc to have a healthy supply of deliverable land for commercial development and also speculative warehouse product, without that, opportunities are lost, and business cannot grow – companies will move elsewhere, even abroad.”

It is not just securing greenfield land that is the issue, there is also the fact that in London and in a growing number of  conurbations, there is the ever present pressure for the development of housing on brownfield land much of which was previously commercial. The British Property Federation’s industrial and logistics forum is carefully monitoring Secretary of State for Levelling Up, Housing & Communities Michael Gove’s brownfield initiative which in effect demands that councils “be less bureaucratic and more flexible in applying policies that halt housebuilding on brownfield land”.

The government identified 20 planning authorities that will be made to follow a ‘brownfield presumption’ should housebuilding drop below expected levels.

Gove is also looking at a review of the London Plan which protects industrial sites. In a report by the Industrial Land Commission in 2022, it was found that over the last 20 years, London lost a quarter (24%) of its industrial floorspace primarily from the need to build new homes.

At present with reference to London, there does not seem to be any change of policy to build homes on London’s protected strategic industrial sites, but the stakes have definitely got higher especially when a General Election is in the offing.

“Warehousing now stacks up financially against office values but it is important to note that blue collar and white collar jobs in these industrial and logistics developments are more blurred and the proportion of office space within warehouse developments is far greater these days.”

For those councils where industrial land is not protected, that is another matter - should they even be inclined to accept industrial and logistics development in the first place. Seager notes that the local authorities to the west of the region are the richest outside central London and have been historically against warehouse development usually citing poor quality job offerings, aesthetic issues etc with committee members frequently going against planning officer recommendations leading to costly appeals and public enquiries even on brownfield employment sites.

“Bureaucracy is preventing employment growth – it is pure politics,” he says. He adds that in the past whenever there has been a downturn which makes  the development of industrial and logistics space financially viable on sites in the area, these local authorities have in effect been bailed out by the return of demand for office space. “But how we work has changed,” says Seager, “and regardless of what the economy does three days a week in the office is never going back to five days a week 100%. The demand for office space which in previous cycles has been a get out clause for these local authorities will be greatly reduced.”

He adds that there is a very real fear that out of town offices, even those already built will become ghost parks.

“Warehousing now stacks up financially against office values but it is important to note that blue collar and white collar jobs in these industrial and logistics developments are more blurred and the proportion of office space within warehouse developments is far greater these days. Local authorities need to be more open minded - employment is employment…and that is before you bring in environmental concerns. It makes no sense for an Amazon or parcel firm to deliver goods from depots 30 – 40 miles away  - it’s crazy environmentally. Life sciences even, will need warehousing closer to them.”

That is not to say there are no schemes coming forward, just that there are less of them  to the west of London until you reach Swindon. Newlands Development continues its campaign to develop a 1 million ft2 scheme at Oak Farm  by Junction 7 of the M3 motorway in Basingstoke – re-applying for the third time. Prologis has secured the much vaunted 50-acre Triangle employment site in Maidenhead for around £88 million. It is thought that the site could accommodate up to 700,000 ft2 of space but it has yet to secure planning.

Big developments out in the east seem to be far more forthcoming St Modwen has been on a bit of a run securing planning permission for a 1.2 million ft2 industrial and logistics scheme in Brentwood and putting in an application for a 1.315  million ft2 scheme in Basildon.

The Brentwood Enterprise Park scheme is planned to be built beside Junction 29 of the M25 motorway and will comprise four large warehouse units from 140,000 — 750,000 ft2 with eaves heights up to 24m.

There is still up to 4.25 million ft2 of space immediately available for development at DP World’s multi-modal London Gateway scheme where Treneman says there is one new speculative unit under construction and one unit ready for occupation.

The scheme benefits from a site wide Local Development Order – a fast track planning instrument that enables a consent to be granted within 28 days of submitting an application and there is a plot known as The Volume that has been prepared to cater for build-to-suit projects between 750,000 – 1,000,000 ft2 with eves height as high as 42m with the penitential for direct rial access.

To add to the buzz, the whole development sits within the Thames Freeport which gives businesses located there financial incentives such as SDLT exemptions, business rates exemption in the first five years of occupancy, accelerated capital allowances and a significant reduction in National Insurance.

DP World Park development vice president Oliver Treneman

Treneman says: “Interestingly, industry and manufacturing enquiries have increased significantly since London Gateway achieved Freeport status.”

Looking a bit more mid to long term SEGRO has its Radlett rail freight scheme and while there are still legal wrangles by the tenacious Stop The Freight campaign group  to secure a judicial review on Hertfordshire Councils decision to sell its 300-acre portion of the site to the developer, all being well the scheme will see the construction of a much needed  strategic rail freight interchange supported by up to 3.6 million ft2 of modern, sustainable logistics warehousing space, including ancillary office, light industrial, general industrial and research and development space on the 1,035-acre former aerodrome in the Upper Colne Valley, Hertfordshire.

All the buildings will target BREEAM Excellent or above and be constructed carbon net zero.

The scheme will also see the creation of a 600-acre country park with footpaths, bridleways, nature trails and multiuse routes along with improvements to existing rights of way, totalling more than 10 miles. There will be new areas of woodland, hedgerows, and managed countryside.

It is anticipated that construction of the first warehouses will start in 2026 but will only be available on a pre-let/build-to-suit basis. No warehouses can be occupied until the Strategic Rail Freight Interchange is capable of operation which will not be until late 2026.