The time is now
18 October 2023
The window for occupiers to get the best deal on new space is closing, argues Liza Helps.
THIS IS the time for occupiers to secure space in the Midlands, but the window is closing rapidly.
So says Colliers’ head of industrial Len Rosso. “This year has been the biggest for development since the boom time and from that perspective there has been a lot of accommodation built nationally and across the Midlands.”
Colleague and head of industrial research Andrea Ferranti notes: “It has been the strongest year on record in terms of speculative deliveries with the East Midlands supply going from 2.1 million sq ft in the last quarter of 2021 to 8.5 million sq ft as of the second quarter of 2023.”
Andrea Ferranti, head of industrial research, Colliers
Indeed, the latest research from Avison Young indicates that there are 53 speculatively built Grade A units over 100,000 sq ft totalling some 11.7 million sq ft currently available across both the East and West Midlands. In addition to that there are a further 35 existing units with a total floorspace of 7.88 million sq ft.
“In one or two locations occupiers will likely have a choice because there is more supply,’ says Rosso.
The sweet spot for many of these speculative and existing Grade A buildings size wise seems to be in the sub 200,000 sq ft range with 34 speculative warehouses totalling 4.7 million sq ft and 21 existing buildings totalling 2.7 million sq ft.
That being said, as ever, everything is nuanced. “There is a lot of supply in the 100-200,000 sq ft range in the East Midlands but it is more variable in the West Midlands,” says St Modwen development manager Ben Silcock.
According to the latest research by Savills there are 26 units within the 100-200,000 sq ft range in the East Midlands and 17 in the West Midlands – that is still a lot of warehouses.
“Any sort of grey space is typically fitted out - plug and play - with flexible short term leases on offer, and they tend to be snapped up quicker than conventional available warehouses.”
Savills’ director Charles Spicer notes: “If an occupier is looking for around 200,000 sq ft and can be flexible on the exact size and location, they have options for the first time in quite a while.”
The supply level of warehouses over 100,000 sq ft in the West Midlands has risen 123% from this time last year, which is startling enough, but is dwarfed by the 418% rise seen in the East Midlands over the same time period.
“Availability has increased this year,’ agrees Knight Frank’s partner in the Birmingham logistics and industrial agency team James Clements: “but around 25% of existing buildings are assignments/sub-lettings from occupiers trying to mitigate costs on buildings they no longer need.”
Colin Lawrence-Waterhouse, Birmingham partner, Cushman & Wakefield
This ‘grey’ space, as it is known, has been on the rise for quite some time now, according to CoStar’s director of market analytics Grant Lonsdale: “As a specific sector, sub-let warehousing is definitely on the rise, of the total number of buildings available to let in the Midlands, 37% are via assignment or sub-letting, accounting for 45% of the available floorspace.”
For occupiers it is extremely popular, DTRE’s partner Jamie Catherall says: “Any sort of grey space is typically fitted out - plug and play - with flexible short term leases on offer, and they tend to be snapped up quicker than conventional available warehouses.”
DTRE is currently looking to sub-let part or all of the space at Techdata’s warehouse Magna 81 on Harrier Parkway at Magna Park Lutterworth on a short term lease between 12-24 months. The property is fitted out with racking and lighting, has six dock levellers and parking for 26 HGVs.
As well as tending to let quickly, those occupiers looking to sub-let the surplus space right now can secure other unexpected benefits; Cushman & Wakefield’s Birmingham partner Colin Lawrence-Waterhouse explains: “In some cases the original occupier has managed to secure a sub-let at a higher rent level than originally negotiated due to the huge gap between passing rent and the ERV (estimated rental value) at present. In some cases, this can be as big as £1-2 per sq ft.”
As well as the plethora of space available there has also been a noted downturn in take up in the first half of the year. Lawrence-Waterhouse says: “The market has cooled off a bit which is hardly surprising given the current economic conditions.”
CBRE’s head of industrial and logistics in Birmingham Peter Monks says: “There is a definite lack of speculative pipeline supply in the sub 100,000 sq ft bracket.”
According to Mid box specialist investor developer Potter Space managing director Jason Rockett: “It’s a little bit more than that.”
In certain locations in the Midlands the demand is double what is already being supplied. “There is huge pent up demand for sub 100,000 sq ft space in the UK and in particular around Birmingham and Leicestershire where suppressed demand is 65% and 100% respectively.”
Last year Potter Space and Savills conducted research in to the sub 100,000 sq ft market – largely mid-box. It notes that ‘the sub-100,000 sq ft properties represent 95% of the whole industrial and logistics property market in England – and account for more than half (56%) of the sector’s entire floorspace’.
It also noted that availability of floorspace has been tracking downwards over the last decade and is now at just 5% - the lowest on record and that rental growth is almost two times higher than the rate of inflation. Clearing demonstrating that supply has not kept up with demand.
A recent deal saw Prologis secure a £10 per sq ft rent on DC1 Bromford Gate, a 60,000 sq ft refurbished property. Some smaller sub 10,000 sq ft properties are reaching £14 per sq ft – and these are not even new let alone Grade A space.
Rockett says: “We see a lot of opportunity in the Midlands and in particular the wider Birmingham conurbation.”
Cushman & Wakefield’s Birmingham partner Colin Lawrence-Waterhouse says: “The north Birmingham area has a real absence of Grade A mid box space. The sites come on the market and go under offer but because of difficult market conditions they fall out of bed and nothing new gets built - this has a knock on effect and now the best an occupier can get is good Grade B stock.”
However, that is not to say that there is not new stock coming to the market but says Rockett: “It is not nearly enough.”
Potter Space is speculatively developing two BREEAM Excellent rated warehouses of 30,00 sq ft and 20,000 sq ft at its 38-acre Droitwich Business Park in the West Midlands. And is just about to start on site with a further 50,000 sq ft. In addition, the mid-box specialist has an option on adjoining land for a further 100,000 sq ft of space bringing the total amount of space to 500,000 sq ft.
Aviva Investors is bringing forward four BREEAM Excellent rated units between 22,500 – 64,250 sq ft at Tornado Industrial Park on the former LDV manufacturing site on Washwood Heath Road in Birmingham.
Savills research notes that take-up in the West Midlands is 25% below the long term average in the first half of the year while in the East Midland it is broadly in line. Savills’ director Ranjit Gill adds: “Occupiers in the region have undoubtedly faced pressure given rising interest rates, inflation and other macro economic factors.”
Because of this, says CBRE’s head of industrial and logistics in Birmingham, Peter Monks, ‘decision making is taking longer’.
This coupled with rising supply levels means that vacancy rates are rising as well. Savills sees an uptick to 6.99% in the East Midlands and 6.1% in the West.
But, and the is always a but, for occupiers, while demand has slowed and it is taking longer for deals to cross the line, they are still taking place. Logistics Capital Partner’s managing director James Markby says: “It has got wobbly for many of our big enquiries and that has slowed the process immeasurably but that does not mean they have gone away - just that there is more interrogation prior to signing off.”
Charles Spicer, director, Savills
Spicer agrees: “Deal velocity has slowed down in the up and built stock, but we are aware of multiple conversations on multiple buildings where we should see actual take-up by the end of the year.”
According to Savills latest research 16% of the current supply in the East Midlands is under offer while that rises to 20% on the West Midlands.
“Occupiers in the region have undoubtedly faced pressure given rising interest rates, inflation and other macro economic factors.”
It also must be noted that even with this seeming surge in supply levels when using the long-term annual take-up there is still less than a year’s worth of supply in the region.
There is also the looming spectre that while speculative space that is under construction continues to come through, the tap has been effectively turned off since the beginning of the year with few developers and investors willing to commit to starting on site.
According to Co Star commercial property analyst Giles Tebbitts: “This is because given the market dynamics where occupiers are taking longer to take deals over the line and in some cases pausing requirements coupled with an increase in vacancies, developers are more cautious. While some may push the button if well funded, others are starting to ask questions whether demand will come back.”
In addition, developers and investors face an array of issues including the rising cost of debt, the yield shift and build costs.
Ferranti says: “From a development point of view from the third quarter of this year going forward there are only 10 units under construction totalling 1.8 million sq ft and of those only three are above 200,000 sq ft. We are going to be in a situation where occupiers will struggle to find space next year.”
In general, where developers have started it tends to be securing the site to ‘oven readiness’ i.e., everything in place bar the vertical build which means there will be a time lag of some 9-12 months depending on build complexity before the space is ready to accommodate.
To add further to the supply shortage issues going forward, there is also the fact that there is a growing pent up demand for space already. Colliers industrial and logistics director Tom Arnold says: “There is a growing interest in any available property in the region and there are a lot of enquiries for space.”
“It has got wobbly for many of our big enquiries and that has slowed the process immeasurably but that does not mean they have gone away - just that there is more interrogation prior to signing off.”
Tritax Symmetry development director Tom Leeming agrees: “There are a whole range of occupiers looking for space across the region and while it may have dropped off a bit, there is always a 6-9 month lag between requirement being put forward and an actual letting. Looking ahead in terms of the 10 year take-up levels there is promising activity.”
DTRE is tracking some 9 million sq ft of occupier requirements looking to secure facilities in the Midlands over the next six months. These include supermarket retailer Tesco looking for a further 600,000 sq ft and Nike looking to acquire 900,000 sq ft.
Ferranti says: “The market is steadily working its way through the available supply which will peak at the end of this year but from the first quarter 2024, there are few speculative development completions in the pipeline, and it is going to get really challenging for occupiers.”
Andrew Pilsworth, managing director industrial and logistics, SEGRO
Recent deals have seen Spanish retail giant Zara take Prologis’ DC62 property at its Prologis RFI DIRFT III scheme in Daventry, Sainsbury’s snap up Rugby 661, fashion retailer Gap's former European distribution centre in the Midlands, and modular house builder ModPods has acquired the 320,000 sq ft former Sainsbury’s warehouse in Coventry.
There are a number of schemes coming forward but not until later in 2024/25 and many of these will be looking initially for build-to-suit. GLP development director James Atkinson says: “We are looking at getting Ashby as an oven ready site, plateauing the whole thing and securing all the enabling works so we are close to providing 750,000 sq ft ready to go rather than an occupier facing months of earth works etc.”
The 48-acre site has planning for 736,787 sq ft of space in one or two units which will be built to BREEAM Excellent and an EPC A rating.
“From a development point of view from the third quarter of this year going forward there are only 10 units under construction totalling 1.8 million sq ft and of those only three are above 200,000 sq ft. We are going to be in a situation where occupiers will struggle to find space next year.”
SEGRO is bringing forward its SEGRO Logistics Park Northampton which has 275-acres net developable to provide up to 5 million sq ft. SEGRO managing director industrial and logistics Andrew Pilsworth says: “We were pretty much through the infrastructure on that six months ago and all the plateaus are ready to build buildings on a design and build basis.”
It is thought that Selfridges has been looking for a unit on the site as part of a build to suit package. A detailed planning application was lodged earlier this summer which included a large area within the centre of the building for automated racking.
Units are available from 50,000 sq ft to 1.2 million sq ft and will be built targeting BREEAM ‘Excellent’ and EPC ‘A’ ratings.
Another site to watch which is being launched in October 2023 is Oxford Developments and Logistics Capital Partners’ 8 million sq ft West Midlands Interchange development near Wolverhampton. The strategic rail freight scheme totals some 734 acres and Logistics Capital Partners’ UK head John Pagdin says: “Contractor Winvic is already on site with enabling and pre-infrastructure works with some £250 million earmarked for this and further enabling works alone.
“This is the largest logistics scheme to be brought forward all at once in the UK and while it has been considered off pitch in the past that is not the case now, especially given the number of enquiries we have from all the usual suspects.”
The developers have not said specifically that the scheme will be build-to-suit only but given the size of the buildings – from 200,000-1.2 million sq ft - it is more than likely that they will be of interest on a build-to-suit/pre-let basis by occupiers.
This has been the case for the majority of space on schemes such as the 700 acre SEGRO Logistics Park East Midlands Gateway. Most of the building have either pre-let such is the demand for the highly sustainable large scale buildings they can accommodate.
“Cheap finance has gone and therefore so has cheap property. Once [speculative and under construction space] has gone there isn’t much of anything to replace it, meaning rents will rise yet again and occupiers will have to get used to the fact that real estate will cost more.”
Pilsworth says: “We did not think it was going to go as quickly as it did, we thought it would be good if it completed in 10 years when we stared in 2018. A few months in and we were putting in the footings on the first building and five years later all the buildings are now built, and we only have two plots left one of which is already under offer for container storage.”
Danish shipping and logistics company Maersk was the latest company to secure space, taking a 685,000 sq ft pre-let in April. The building completed in June this year.
Interestingly, developers that are starting to build speculatively are focusing on XL buildings.
Avison Young director Rob Rae says: “There is a lot of demand for these buildings and a lack of sites to provide them so any that are brought forward are sought after.”
For Leeming this is one the main drivers for the decision to speculatively build its 500,000 sq ft facility at Symmetry Park Kettering. “We saw a gap in the market, and we already have interested parties.” Groundworks started in July this year.
Over at West Midlands Interchange Markby notes: “The enquiries we have had are nearly all for 500,000 sq ft plus and we are in the advanced stages of a deal for a very large 1 million sq ft plus facility and have four or five looking at building between 500,000 and 600,000 sq ft.”
The demand for these mega sheds says Pilsworth is driven by the digitisation of shopping, supply chain security and ESG. Atkinson agrees: “These are strategic multiple contract facilities being run by the big 3PLs and ecommerce companies many probably working out of multiple units, but they need newer ones to secure economies of scale and to control the quality of the building from which to trade. The whole ESG issue has rocketed up everyone’s agenda.”
Looking at the whole picture, the consensus of opinion seems to be that for occupiers that can, it is wise to secure space now. Spicer explains: “Because the cost of debt has risen, and yields have pushed out it makes it harder for investors and developers to fund developments. And it looks like yields will push out further. We need interest rates to stabilise and come down to give confidence and more competitive rates of funding to get development started again.
“Without this occupiers will be forced down the build-to-suit route and only those occupiers with the very best covenants will secure a lease in this market. Those with average covenants will find it more challenging to stack up their appraisals.
“There will be a home for them, but it may not be the one they really want. Is this the new normal? It certainly feels like it is at least for the short to medium term. Cheap finance has gone and therefore so has cheap property. There is a moment in time, right now, if an occupier can be footloose and flexible to secure speculative and under construction space but once that has gone there isn’t much of anything to replace it, meaning rents will rise yet again and occupiers will have to get used to the fact that real estate will cost more.”