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The devil in the detail

18 August 2023

With less competition for warehousing space and a marked increase in supply levels, Liza Helps asks - are we in an occupiers’ market?

NOT SINCE just after the Great Financial Crash in the late noughties have conditions been so favourable towards occupiers in the logistics property market.

According to Savills’ head of industrial and logistics research, Kevin Mofid: “It’s a really interesting market situation at the minute. You have take-up [of all grades of warehouse space over 100,000 sq ft] for first half of the year at 12.5 million sq ft – you’d have to go back a decade for a lower first half of the year – and supply is at 40 million sq ft with 9 million sq ft of speculative development in the second quarter of the year alone.

“You have this pincer movement of a little less demand and a little more supply so clearly that is going to take tension out of the market. Arguably these are the most favoured conditions for an occupier that I can recall.”

It certainly seems that way by all statistical metrics published so far but says JLL head of research Jon Sleeman: “What we are seeing is more nuanced than that.”

Mofid agrees: “The market dynamics have shifted at a national level but if you scratch the surface, the data varies by region and by size band, so, as always, the devil is in the detail.”

What cannot be denied is that take-up is down. JLL’s research notes take-up for just Grade A space over 100,000 sq ft in the second quarter of the year totalled just over 4 million sq ft in 21 transactions compared to 5 million sq ft in the first quarter of the year (in 22 transactions) – half the amount transacted over the same time period last year.

More alarmingly net absorption rates – the net change in occupied space over a given time period calculated by summing up all the positive changes in occupancy (move ins) and subtracting  the negative changes in occupancy (move outs) - is negative this quarter by 1.5 million sq ft according to commercial real estate data company CoStar’s latest research.

Co Star director of market analytics Grant Lonsdale says: “This is the first time in 11 years that the industrial sector is reporting negative demand (more companies vacating space than occupying it).”

This negative figure was down from positive 2.9 million sq ft in Q1 2023 and positive 9.2 million sq ft in Q2 2022 – indicating a direction of travel across all grades and sizes of warehouse space.

“You have this pincer movement of a little less demand and a little more supply so clearly that is going to take tension out of the market. Arguably these are the most favoured conditions for an occupier that I can recall.”

Property consultancy SHW director Tim Hardwicke says: “At the moment a lot of occupiers are taking stock and looking more closely at what they need especially those occupiers looking at 100,000 sq ft plus while those looking for sub 50,000 sq ft, it seems to be business as usual.”

Take-up is lower in the larger the size range – research by DTRE notes that take up of space over 300,000 sq ft is down 42% compared to last year. Colliers’ head of industrial and logistics research Andrea Ferranti explains: “What we are seeing in the markets is counter intuitive usually when economies slow down it is the SMEs that are the first to suffer with cash flow issues while the bigger companies can weather the storm. However, with stubbornly high inflation and increasing interest rates, that does not seem to be happening. It is the bigger end of the logistics property market that is slowing as larger companies struggle to make long term capital investment due to decreasing sales and increasing cost of debt whereas for the SME, real estate requirements are seen as business critical because of fundamental changes in the way we shop and how that is affecting the way supply chains are structured.”

Knight Frank’s head of logistics and industrial Charles Binks says: “Where we had seen 3PLs looking at establishing large and campus-style strategic and multi user hubs enquiries have reverted to being more contract led. The 3PLs are reigning in capex plans on the basis that while strategic is nice to have it is not essential.”

So, is demand slowing or indeed stopping? Developer Cole Waterhouse managing director of industrial & logistics David Nuttall says: “The results in terms of take up levels will not be as stellar as the record breaking mid-covid years but comparable to a good pre-covid year. So, on the face of it demand is down. But it is a case of perception vs empirical evidence.”

“There is still healthy demand,” says property agency Avison Young’s managing director Robert Rae: “It is just taking longer to secure a deal.”

Robert Taylor, research partner, DTRE

And that is hardly surprising according to developer investor Trammel Crow Company’s head of European logistics capital markets Richard Fell: “Occupiers are concerned that central bank policy, specifically tightening monetary policy, will reduce consumer spending, that earnings are failing to match inflation reducing consumers disposable income, that corporate expansion is being curtailed by the lack of optimism because of the drop in consumer spending coupled with the end of free or nearly free money; and an increase in total occupational costs, due to energy inflation, rising rents and business rates revaluations.”

Colleague director and head of UK Logistics Mike Forster, adds: “Businesses are not saying they will not take space, just that in this current economic situation, market decisions - with the additional capex requirements that requires = are being thoroughly interrogated.”

For Knight Frank partner and head of UK and European industrial research Claire Williams: “It’s like occupiers have taken their foot off the accelerator, they are still moving forward but not so fast.”

Developer investor GLP’s senior director Bruce Topley adds: “In any market, deals always take longer than you’d want them to, and when there is economic and geopolitical uncertainty it is easy for there to be a longer decision making process.”

This prolonged deal making is evidenced by the amount of space currently under offer and remaining under offer for more than three months. DTRE research partner Robert Taylor notes: “Space under offer in the first quarter of the year is still under offer at the end of the second quarter – there seems to be no immediate rush now the covid ‘race for space’ has ended.” DTRE is currently aware of 9.44 million sq ft under offer across 37 separate transactions.

Sleeman says: “Decision making maybe protracted but there is still a reasonable level of demand. Look through the press and you will see that there are still big requirements in the market. Take up may be down but there is better demand than evidenced.”

Indeed, the latest data from Savills occupational requirement index shows enquiry levels have risen 64% in the first half of the year. Mofid says: “While this does not necessarily all get transacted into deals and space taken up, there is a correlation between level of requirements and level of take up nine months later.”

Jonathan Wallis, development director, Tritax

Right now however, there is a large amount of space on the market and expected to come to the market before the end of the year. Savills has seen supply rise to 41.9 million sq ft, an increase of 120% on this time last year reflecting a vacancy rate across all grades of warehousing of 6.25%, which, is in line with the pre-Covid average of 6.3%. 

JLL research has a headline supply figure (excluding space available by way of assignment or subleases) totalling 34.8 million sq ft of Grade A space over 100,000 sq ft, consisting of 19.5 million sq ft immediately available and 15.2 million sq ft under construction speculatively or being refurbished. In addition, there was another 5.7 million sq ft available by way of assignment or subleases.  

For comparison, headline supply at the end of March totalled 29.8 million sq ft (13.9 million immediately available and 15.9 million sq ft under construction) with an additional 4.1 million sq ft available via assignment or subleases. Therefore, headline supply increased by c 5 million sq ft in just three months, a rise of 16.8%.  

According to CoStar research there are 70 warehouses larger than 250,000 sq ft either available for lease or under construction and for those looking at 300,000 sq ft plus Taylor says: “There are 42 units available, under construction or reaching practical completion in the next three months and of those 19 are between 300,000 and 350,000 sq ft, roughly two years’ worth of supply – so an occupier may get a better deal on those than they would have otherwise.”

Again, that depends, Forster says: “The tipping point for landlord tenant negotiation comes at around 7-8% vacancy – a normal market when neither side has the advantage. However, at the moment despite an increase in available space vacancy remains below that level.”

Indeed, a low vacancy rate is one of the reasons that rents are still growing even though there is more space on the market – there just isn’t enough space in the market to significantly change the dynamics.

David Nuttall, managing director of industrial & logistics, Cole Waterhouse

Sleeman notes: “Prime rents increased 1.8% in the second quarter of the year and are up 9.5% compared with the same quarter a year ago. What traditionally happens when supply increases is that many landlords and developers will protect headline rents and giveaway more on lease terms initially, but that does not seem to be happening at present.”

What is happening on the other hand is that the speculative development pipeline is dropping off significantly. CBRE’s head of industrial and logistics North, Mike Baugh says: “The speculative market is grinding to a halt with very limited announcements for the year ahead.”

Savills research counts 22 speculative development announcements this year compared with 39 over the same period in 2022. At present there is just 4.8 million sq ft of new units due to complete from the end of the year onwards. 

Williams notes: “Less than 25% of consented sites since the start of last year have commenced construction, developers are reluctant to push the button. Between 2019 – 2021 71%  of consented sites were started within a year.”

Sleeman says: “This is what we saw in the last cycle following the Great Financial Crash, the speculative development tap turned off. We will see more developers getting sites ‘oven ready’ with infrastructure in place and plateaus ready to build rather than actually staring a vertical build. In the brochure it may say these sites and plots are under construction, but they won’t have started the vertical build with steels in the ground.”

For Collier’s head of industrial Len Rosso: “This is going to create a pinch point in supply for occupiers in 18 to 36 months’ time just when the economy is set to get going again.”

Canny well capitalised investors and developers are anticipating this and bringing forward some very big warehouses on a speculative basis anticipating significant demand for ones over 500,000 sq ft.

Indeed, Nuttall notes Big K, totalling 735,896 sq ft at the 1.1 million sq ft first phase of Cole Waterhouse’s 136-acre Konect 62 scheme in Yorkshire, has already had several serious enquiries and the building has yet to start construction.

GLP’s Topley says: “Our view on speculative development is to do it in the right places where there is room for it.” Basically, where there is a gap in the market that can be clearly seen and leveraged.

GLP is speculatively developing a 586,000 sq ft building at its Magna Park Corby scheme in the East Midlands – rumour has it that this could be under offer already such is the dearth of Grade A + properties of this scale in the UK going forward.

Tritax development director Jonathan Wallis is also pushing forward with a 500,000 sq ft plus speculative development at its Symmetry Park Kettering scheme also in the East Midlands.

“There is definitely an undersupply in the big box market so when we took decision to speculatively develop we had planning for a 123,0000 sq ft building and a 500,000 sq ft one, we thought that the supply demand imbalance, looking forward, was greater in the larger size range, so went with that instead.

“The decision to speculatively develop is not taken lightly. You go into granular detail on location and size bracket and weigh up the supply demand situation for each locality. You cannot take a general view across locations and across size ranges - there are still areas in the northwest for example that are hugely undersupplied and there other areas where it is looking quite busy - each of our decisions depends on the individual location.”

Developer GLi investment director Will Ikin agrees, adding: “In Greater London (where we invest exclusively) there is still a serious lack of supply. Where national vacancy may be at 4% it is more like 2% here and in certain sub markets actually at zero. Fundamentally the supply demand dynamic makes it worthwhile to develop.”

GLi is bringing forward a 76,911 sq ft warehouse in Park Royal after securing planning in June. 

Despite the seeming spike in availability, the actual number of buildings in each size range will vary across each region and locality. Right now there may be a reasonable choice for occupiers depending on how footloose they are but as Nutall says: “In terms of structural void it only take a couple of lettings to have a huge impact.”