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Quality versus quantity

18 August 2023

In this first In Depth Focus, Liza Helps takes a closer look at the secondhand logistics property market where quality over quantity has never been more apt.

THERE IS a plethora of secret second hand stock coming back to the market and so far this year the amount has been increasing quarter-on-quarter.

This is what the property market calls grey space - not surplus space within a warehouse but space where occupiers (rather than landlords) look to dispose of their existing lease obligation on a property, either through subletting or assignment of the lease.

According to DTRE research partner Robert Taylor: “This is not a new phenomenon, but it is a rising trend. There has always been sub-leases in the market – some more available than others and there is an underworld of space that is more ‘off-market’ than ‘on’ and never makes it to the open market. Typically, the space is more flexible - in occupation period, size and fit-out, which makes it more fluid. It also makes the data a lot more difficult to analyse.”

Is it being sub-let or assigned? Is it whole or only part of a building? Is it being let for a short medium or long term? At a discount, passing or profit rent?

For these very reasons says JLL head of research Jon Sleeman: “Most of the big agencies do not monitor assignment as part of headline supply. In many cases in the past, space that comes up for assignment and sub leasing gets absorbed by the in situ occupier or they invariably decide to remain in the building.”

But that does not seem to be the case now.

JLL research notes that on top of its headline supply of 34.8 million sq ft in the market at the end of this half year there was another 5.7 million sq ft in 24 Grade A buildings over 100,000 sq ft available by way of assignment or sublease - a 1.6 million sq ft uplift from the first quarter of the year figures of 4.1 million sq ft – a 40% increase quarter-on-quarter.

In addition, says CoStar director of market analytics Grant Lonsdale Grant, the space being sublet and assigned now is high quality: “In previous quarters, the sublease [of this type of space] would be somewhat negligible as it has only recently been offered to the market in the first place.”

His research shows that there is more than 1.5 million sq ft of space being sub-let or assigned in buildings which are less than two years old.

So, what is going on and which companies are assigning this new space?

Bruce Topley, senior director, GLP

Knight Frank head of logistics and industrial Charles Binks has a theory: “At the height of the pandemic the market was turbo charged and running flat out - a lot of space was taken up, and now, that the ‘race for space’ is over and there is an overall slowdown, some occupiers are finding they took a bit more than they needed.”

It seems that where ecommerce is concerned some of those pureplay companies involved levered off the surge in online shopping to secure market share as much as they did to actually acquire space for their supply chains.

This certainly seems to be the case for a number of the Chinese e-fulfilment providers who took a large amount of space the UK market during 2020 and 2021. Super Smart Services which had taken around 900,000 sq ft in a number of buildings in the Midlands, has now sublet four units in Worcester, Lichfield, Burton, and Cannock through joint agents Avison Young and Harris Lamb. 

China’s leading cross-border e-commerce solutions provider 4PX Express is also assigning warehouse space. It is looking to assign or sublease Unit 1 Panattoni Park Northampton, a 249,579 sq ft BREEAM Excellent property it acquired in 2021 from Panattoni on a 15 year lease. The building has 15m eaves as well as 24 dock and four level access doors, a 50m yard and a 1.5Mva power supply. Sole letting agent is Savills.

In addition, Chinese-owned multi-channel e-commerce company MH Star, which had been notable for its tactic of leasing whole schemes in 2021, is subleasing nearly all of it back.

In August 2021 MH Star took the whole of Firethorn Trust’s 37-acre 354,000sq ft Northampton Cross scheme in the East Midlands and a month later snapped up the entirety of GLP’s 530,000 sq ft G.Park Bedford Wixams logistics park while it was under construction.

It is seeking a sub-let for the entirety of the Northampton Cross scheme. And two of the buildings at G.Park Bedford Wixams are currently being marketed on a sublet to 2036. This suggests that the company will not be looking to re-occupy the space as they were originally let on 15 years lease.

Units 1 and 2 are 249,219 sq ft and 126,132 sq ft respectively. Both are fully racked and are BREEAM Excellent and EPC A rated. Unit 1 is available from the third quarter of 2023 while Unit 2 is available immediately. Letting agent is Knight Frank. 

Trammel Crow Company’s director and head of UK Logistics Mike Forster says: “Ecommerce/online shopping has dipped back a bit from its height during the pandemic but talking to occupiers in the ecommerce world they are actually very optimistic going forward – shopping online has certainly not gone away.”

Developer investor GLP’s senior director Bruce Topley agrees: “Long term consumer confidence is still there  and while online shopping has reduced to 25% [from a pandemic high of 37%] data from analyst Statista predicts online penetration will get to 35% by 2027.”

The rise in grey space is not just coming from a few occupiers that took a bit too much during the pandemic there is also space coming back to the market triggered, one suspects, by what is happening in the economy.

Lonsdale says: “With cost-of-living pressures weighing on consumers, many online and bricks-and-mortar retailers, as well as the third-party logistics providers that service them, are re-evaluating their storage and distribution space requirements.”

This may explain why Active Ants, which has only just opened its 252,000 sq ft BREEAM Outstanding automated fulfilment centre in Northampton, is looking to sub-let half and why Hotel Chocolat is seeking a similar sublet for its brand new distribution centre which has yet to go fully operational.

Active Ants is looking to secure a tenant for 100,000 sq ft of space based on an internal only repairing sub lease for a period of up to five years. They are looking to split the warehouse at Newlands Developments and M&G Reals Estate’s 800,000 sq ft Brackmills Gateway scheme. The space available has 18m eaves, 10 dock and one level access door, 55m yard depth a 50kN/m2 floor loading, LED warehouse lighting as well as a two storey hub office including toilets and a shared security gatehouse. Joint letting agents are Colliers and JLL.

Hotel Chocolat on the other hand is looking to hive off 205,026 sq ft of space at its 429,107 sq ft facility, which it secured on a 10 year lease from Panattoni at the 1.7 million sq ft Panattoni Park Northampton scheme in the East Midlands. Known as BETA and being marketed by Bidwells, the property has 15m eaves as well as 20 dock doors. The building has a BREEAM Excellent and EPC A rating.

The majority of what one may call ‘proper’ second hand space coming back to the market looks to be by way of consolidation and while many headlines may be given over to Amazon for its well-publicised overextension in the US [by the end of 2021, Amazon leased 370 million sq ft in its home market, twice as much as it had two years earlier] forcing it to consider sub-leasing up to 30 million sq ft that it had not already occupied/or only recently started fit out on; that does not seem to be the case in the UK.

The space that Amazon has so far brought to the market in the UK has all been on older properties where lease events have been triggered as it seeks to consolidate into newer more modern space.

In January it announced that it would be closing three fulfilment centres in the UK. All three properties are more than a decade old, and the work carried out in them will now be consolidated into its more modern fulfilment centres. 

A few weeks ago, it announced a further closure of its 1.4 million sq ft distribution centre in Rugeley. The building which was purpose built in 2009 was leased on a 15 year lease which expires next year. The online retailer and 3PL will be consolidating operations to its £500 million state of the art 2.325 million sq ft DC in Peddimore which is being developed by IM Properties targeting BREEAM Excellent and an EPC A rating. This is in addition to the opening of a 2.01 million ft² multi-storey warehouse in Stockton-on-Tees.

There are also a number of supermarkets consolidating Sainsburys, Co-op , Morrisons to name a few. All looking to take the opportunity to divest older stock and move into more modern space be that brand new or in the case of Sainsbury’s recently refurbished.

The supermarket has snapped up Rugby 661, fashion retailer Gap’s former European distribution centre in the Midlands. The 661,348 sq ft property has undergone an extensive refurbishment by Sunrise Real Estate following its off market acquisition. 

Chinese-owned multi-channel e-commerce company MH Star, which had been notable for its tactic of leasing whole schemes in 2021, is subleasing nearly all of it back.

Rugby 661 achieved a 99.6% recycling score from the demolition works and has been upgraded from EPC D to an EPC A rating. It achieved a BREEAM “Very Good” certification. The works included a 35,000-square-foot CAT A office refurbishment, mechanical and electric upgrades including air source heat pumps, installation of additional EV charging points and LED lighting, as well as new dock doors and roof, and new employee wellness areas. Agents for Sunrise are DTRE and Cushman & Wakefield. 

It boasts 46 loading doors, a 40-metre yard with parking for 55 HGVs, 369 parking spaces, 12-metre internal clear heights and up to 4 MVa of power.

While there is a flight to quality in general driven by the growing importance of ESG from all angles meaning that the majority of occupiers are seeking  modern Grade A space, there is also right now a growing take-up of second hand space.

Savills’ head of industrial and logistics research Kevin Mofid notes: “In terms of take up so far this year on a proportional basis, there has been a rise in demand for 2nd hand units accounting for 37% of the market, up from just 21% in 2022. While this remains lower than long-term averages, as the second-hand market typically accounts for 46% of transactions, it does suggest that occupiers are taking advantage of more flexible terms available through the space being marketed for sub-lease.”

Kevin Mofid, head of industrial and logistics research, Savills

CBRE’s head of industrial and logistics North, Mike Baugh says: “Some occupiers have indicated that they don’t want to commit to that long term brand new facility right now, as they are a little uncertain about the current conditions.

“The second hand flexible option may not tick all ESG boxes, but it might be a short term solution that could fulfil their requirement for the time being while things stabilise in the economy.”

Binks notes: “There are some pretty modern second hand units coming back to market; in some instances, fitted and racked and that goes straight to the top of the wish list allowing quick entry relatively cheaply. Some fit out may well be reflected in the rent being higher than otherwise would be the case but  for many occupiers that rent is easier to sanction and get approval for rather than going for a large capex on a brand new facility.”

In addition to that modern second hand space there is also a growing movement for high quality refurbishment of second hand units not merely swapping out old lighting systems and doing a deep clean but full on upgrades as evidenced by Sunrise Real Estate’s Rugby 661 and CBRE IM’s Solar 120  building in Warrington.  In each case  the buildings  upgraded EPC rating to an A rating, included wellness feature and secured even higher BREEAM  ratings than initially indicated. It is no wonder both buildings secured tenants within weeks of going to market.