Under the surface

ACROSS THE region there is no denying that take up is down, deals are slow to come forward and there is, on the surface, a lot of space available yet rents are still creeping up and developers seem unfazed.

The latest figures from Knight Frank show that vacancy rates have increased sharply in both the Northeast and Yorkshire with supply levels in units over 50,000 ft2 in South Yorkshire alone hitting 6.6 million ft2 at the end of the first quarter of 2024 reflecting a 10% vacancy rate up from 7.7% at the end of 2023.

A similar story in West Yorkshire and the Humber where supply levels stood at 5.1 million ft2 at the end of Q1 2024, an increase of 20% on the previous quarter showing a vacancy rate of some 7.6% up from 6.3%.

Supply was up again in the Northeast with availability of units over 50,000 ft2 increased by 21% in the first quarter to stand at 3.8 million ft2 taking vacancy up from 6.8% to 8.2%.

But dig a little deeper and the picture suddenly changes.

In the Northeast, second hand stock accounts for 81% of all the immediately available stock. Colliers director Simon Hill says: “Much of the built industrial stock that is available in the Northeast is secondary in nature and in need of modernisation. The North East of England has some of the UK’s oldest warehouse stock with around 75% of industrial buildings being constructed in the 20^th century.”

It is these older buildings that Government wishes to see upgraded in order to reduce the UK’s carbon output. To that end it is implementing legislation to encourage landlords and commercial property owners to modernise their stock.

From 2030 the government Minimum Energy Efficiency Standards (MEES) legislation will make it unlawful for a landlord to grant a new tenancy or to extend or renew an existing tenancy if the property in question has an Energy Performance Certificate (EPC) rating of C or less.

The Government estimates that the proportion of rented commercial property covered by MEES will increase to around 85% (approximately 1,000,000 buildings across England and Wales).

Developer investor Harworth’s customer development and leasing director Stuart Murray notes: “A lot of space is simply not worth it with 66% of properties below EPC C grade.”

Occupiers need to be aware of this concludes Murray, which will mean that there will be pressure from occupiers to secure modern Grade A space.

Be that as it may, according to Knight Frank’s partner Mark Proudlock: “With limited new development coming to the market and schemes close to completion largely under offer, occupiers have had to rely on second hand stock returning to the market. As a result, despite year-on-year decline in overall take-up, the volume of second hand [take-up] has increased  accounting for 78% of the yearly total to Q1, up from 18% recorded in the year to Q1 2023.”

This has included LV Shipping taking 70,000 ft2 at Unit 70 Teesside Industrial Estate in Thornaby – a second hand unit – at £2.75 per ft2 and Direct Line Supplies buying a 107,869 ft2 warehouse at Opus Park in Stockton-on-Tees for £2.85 million.

“Right now,” says CBRE’s director Dave Cato, “there really is not a lot of up and built Grade A stock and occupiers are sat in dated premises.”

This is one of the reasons why developer investor Tritax is seeking inroads into the Northeast. Development director Simon Dixon says: “There are a lot of very good business in fairly average buildings. Looking at the economic and demographic indicators the greater Northeast has a population of some 9 million – not dissimilar to the Northwest – and it is not without its wealth there is a big case for more investment in the area.”

In fact, according to data from property analyst CoStar, the Northeast has lower availability for modern Grade A space than either the Midlands or the Southeast largely due to a lack of new construction.

CoStar Group’s senior director of market analytics Grant Lonsdale says: “Although stock levels were recently boosted by the completion of Connect at Integra 61 which at 640,000 ft2 is the region’s biggest speculative project in over a decade, new starts have waned in recent months, reflecting high capital costs.”

The Connect scheme at Citrus Group’s 205-acre Integra 61 site reached practical completion in October 2023. The scheme consists of five units ranging in size from 43,000 ft2 to 298,000 ft2.

Sunrise Real Estate agreed a forward funding deal with Citrus in 2022 for the delivery of the units and GMI Construction was appointed as contractor. Joint agents are Avison Young, CBRE and Colliers.

Avison Young director Danny Cramman agrees with Lonsdale’s comments: “A lack of speculative development over recent years means there is a shortage of Grade A stock across pretty much all size ranges in the Northeast.”

It is possibly against this background and with the belief that economic headwinds are set to ease with a resultant uptick in consumer spending driving take-up that one of the few speculative developments in the region has commenced. Greenbox, logistics developer Citivale and Swiss-based global private equity form Partner’s Group joint venture, has started on site with its 402,150 ft2 scheme Greenbox Darlington.

Contractor Winvic is building out three units of 84,000 ft2, 105,000 ft2 and 213,00 ft2 targeting BREEAM Excellent and an EPC A rating. The units will utilise air source heat pumps, will be rooftop PV-ready and have 10% EV car parking spaces. They will have 15m eaves as well as 50kn/m2 floor loadings as standard. 

Joint letting agents on the site are Savills and HTA Real Estate.

The move to build speculatively is being considered by some as brave, however with the news all but confirmed that supply chain company Martin Brower, which services MacDonalds, is to set up a new 140,000 ft2 distribution centre in Darlington at a new rent high for the town, may also have played a part in the decision.

Regarding the warehouse supply situation in West Yorkshire – it’s a similar story to that in the Northeast. The uplift, according to Knight Frank’s latest regional LOGIC report, ‘is entirely driven by the return of second hand buildings to the market – 62% of all available space comprises second hand Grade B and C units’. Knight Frank partner Iain McPhail says: “We have seen a glut of Grade B and C space return to the market during the last year.”

And similar to the Northeast, occupiers have little option but to take the space in the face of a dearth of modern Grade A availability.

Avison Young director Rob Oliver notes: “To put it bluntly the topography of the area works against you, there is not that much clear flat land for development in the first place. Be that as it may, the reasons why sites that could come forward but are not, is down to the adverse economic conditions.”

Knight Frank reports that this time last year there were 14 speculative buildings totalling 1.5 million ft2 under construction, this year just two with new development being hindered by the absence of institutional funding.

McPhail adds: “Despite 1.4 million ft2 of new space being delivered in the last six months a good proportion of prime developments are being let or going under offer [meaning] we are still starved of Grade A space over 100,000 ft2 in West Yorkshire.”

The only speculative scheme to be going forward right now is Baytree Development’s Baytree Leeds scheme which is being developed in two phases: the first comprising two units of 76,285 ft2 and 145,476 ft2 targeting a BREEAM Outstanding, EPC A and WELL Ready standard ratings.

The scheme is fully funded through investor AXA IM.

With so little space available in the West Yorkshire market pushing the ESG specification to this level could seem excessive, surely any space whatever specification will be snapped up. But Baytree development director Amit Babbar explains: “It’s a twofold decision for us to set the bar [institutionally] to target BREEAM Outstanding wherever possible and for some of our schemes and site that will be difficult to achieve; BREEAM Excellent is our minimum and that is our policy going forward, the second is why not? There are BREEAM Outstanding developments in the South and East why are they not being done in the North? Why not plant a flag and be the first to do it anyway?”

It certainly seems to be the direction of travel from an investment/institutional point of view future proofing assets that are to be held long term. Ergo asset manager Leigh Burnett notes: “Everyone is looking at their ESG agenda, it is imperative for occupiers, for their shareholders and investors and indeed for future proofing.”

CBRE’s head of industrial & logistics, north Mike Baugh says: “Developers are enhancing building specification, Verdion did it at iPort and went ahead of the curve, PLP did the same at Bessemer Park and now Baytree. Developers will continue to upgrade building specification to meet the modern day demand.”

The buildings are being built net zero carbon and will have PV arrays allowing roof generated electricity for the use of tenants through a Power Purchase Agreement (PPA).

Baytree is also pushing the boundaries in terms of smart technology use with technology enabled features and innovations from Building Information Modelling (BIM) - hold digital reproductions (digital twinning) of building data that help with the operation and maintenance of a building - even remotely - to sensor suites to monitor lighting use, noise, air quality, temperature, and humidity etc.

Unit 2, which is being marketed as build to suit, will total 329,583 ft2 and will make up the second phase of the development. Units 1 and 3 are under construction currently and are due to be completed by the Q3 2024. Joint letting agents are JLL, DTRE and Knight Frank.

Another scheme pushing its ESG credentials is Henderson Park and Colewaterhouse’s Konect 62 scheme on the site of Kellingley Colliery near Knottingley in West Yorkshire. The development is targeting BREEAM Excellent and EPC A ratings with measures including roof lights, LED lighting, mechanical heat recovery, solar PV ready. David Nutall notes its not just about the buildings in themselves but also about the environment surrounding that building and its amenities. “Staffing is still a big cost and as attracting and retaining staff becomes critical it’s the whole ambience of the development that counts. Occupiers like amenities both inside and outside the buildings, be they trim trails and cycle tracks, landscaped areas to sit in, places to go and get food.”

Plans for the 48-acre second phase of the scheme envisage 802,000 ft2 of industrial and warehouse space in terrace and single units ranging between 4,000 ft2 and 375,000 ft2. It will also expand the walking and cycling route around the estate and from Weeland Road to the Canal towpath.

The second phase facilities similar to the first, will target BREEAM Excellent and EPC A rating and will also include an EV charging station open to the public.

DTRE, Sixteen Real Estate and Savills are joint letting agents for Konect 62.

Trammel Crow Company’s Core Sheffield scheme looks set to future proof through the provision of power which is seen as a key factor alongside staffing for occupiers. Development director James Hargreaves says: “We have secured 8MvA of power on site and having a 2.5 acre slither of land alongside the building have been looking at ways to for potential occupiers to use it other than just open storage. With a view to 2035 and beyond to 2040 when the sale of new vehicles with internal combustion engines of car and HGV are set to stop, where will occupiers charge their commercial fleet? Having a dedicated onsite charging area is forward thinking. We have designed an EV charging plant with 88 EV charging bays for vans or it could accommodate 14 eHGVs.”

The supply situation in South Yorkshire looks more occupier friendly – in that there is a lot available. Indeed, Avison Young director Rob Oliver, would go as far as to say that it is ‘a bit out of balance’ with ‘a lot of standing stock’.

To illustrate that Savills research recorded a 172% increase in supply across both Yorkshire and the Northeast at the beginning of the year - with Yorkshire accounting for the majority of space. The data noted there was 6.54 million ft2 available across 31 units with 26 units available in Yorkshire, totalling 5.35 million ft2 and just five units in the North East, totalling 1.19 million ft2.

But this comes off a base of virtually no development at all. Colliers director Robert Whatmuff explains: “There is a strong supply pipeline that has now come through to practical completion after a period in 2022/23 when there was almost zero supply.

“During 2023 schemes got signed off for speculative development and it is this tranche of buildings that are now coming through just as occupier sentiment softens due to economic uncertainty.” 

However, in a similar vein to both the Northeast and West Yorkshire, there is little to no speculative space coming forward.

Oliver says: “Speculative development has all but dried up in Yorkshire.” According to research by Savills the development pipeline for the region at the beginning of the year saw 2.24 million ft2 of space being brought forward some 67% down on the same period last year.

Ergo’s Burnett notes: “Recent inflationary pressures coupled with an increase in build costs means the development pipeline is now not there. It is not the planners nor the availability of land that is the issue - it is the cost of development versus rent levels. Build costs have gone ahead of rents and appraisals just do not stack up at present.”

Ergo has recently completed the development of a 191,000 ft2 speculative shed at the 800-ace mixed use Unity development in Doncaster. The property known as Doncaster 191 is being marketed by JLL and Knight Frank.

Developer Verdion’s executive director John Clements agrees: “Development activity is slowing rapidly, but once the economy picks up that space will go quickly and then, there will be pressure on developers to build again.”

Drilling down into the availability Avison Young’s latest data points to approximately 25 units big box units (over 100,000 ft2) available with about a half of that space in units over 250,000 ft2. Unlike the Northeast and West Yorkshire, the majority of available space is new modern Grade A. It seems like there is a lot of buildings but says Trammel Crow Company development director James Hargraves: “Once occupier sentiment turns it will only take a few deals before these buildings are gone and occupiers have very few options up and ready.”

Across the board there does seem to be a growing weight of demand. Knight Frank partner Rebecca Schofield says: “The south Yorkshire region witnessed improved levels of enquiries across all size ranges, and we have seen a good number of new enquiries come forward early in 2024. The requirements that are in the market appear serious about taking space.”

Occupiers in the market include Primark which is believed to be seeking up to 1 million ft2 – though most feel that this will be satisfied through a pre-let build-to-suit agreement, Howdens looking for up to 840,000 ft2, Ball Packaging looking for between 350 – 400,00 ft2 with another similar sized requirement looking in the Goole area.

Across the board, Naylor Gavin Black partner Keith Stewart says: “With the economy as it is, a lot of occupiers are taking a ‘wait and see’ approach with the larger corporate requirements moving at a much slower pace – something the property market has not witnessed in a considerable while.”

Oliver agrees: “The decision making on all these requirements are taking time and being considered very closely.” 

In general, says Burnett: “Occupiers are delaying decisions and if thy don’t have to move due to a lease event for example, then they are sitting on their hands.

“Basically, it starts with the consumer, if people are not buying then logistics will not distribute and does not need more space – the consumer drives demand as we saw in lockdown.”

Should the economy pick up and market/occupier sentiment change then these requirements will need to be satisfied but at the same time there is no appetite institutionally to fund speculative development right now. What is happening though is that developers and investors are getting sites ‘oven ready’. 

Jason Stowe managing director at Wilton Developments says: “We have secured reserved matters planning for the largest single building in the Leeds postcode and have pre-ordered the power supply. Right now, we are putting in drainage and sorting out a surface water pond – a building could be up in 12 months.”

The Leeds 500 development on Junction 47 of the M1 north of Garforth will comprise a 465,000 sq ft warehouse with 23,000 sq ft of office accommodation over two floors and a 5,000 sq ft warehouse hub office.

It will be BREEAM Excellent and boasts many ESG specifications including a multi-use games area (MUGA); showers/changing and locker facilities; outdoor segregated breakout spaces; sustainable urban drainage (including 2 filtration ponds); rainwater harvesting, 40 secured cycle spaces, 28 electric vehicle charging spaces with a further 50 enabled for future charging. The building has the ability to generate 2.7 million KWh per annum of energy from the installation of solar panels to the roof. It is being marketed by CBRE.

In a similar vein, the company has reserved matters planning on its Milli+ plot at its 180-acre Doncaster North scheme in South Yorkshire which, at 1.15 million ft2 is thought to be the largest single consented logistics building in the UK. Stowe says: “We are busy discharging the planning conditions so that we are able to deliver buildings onsite within a 12 month period, with units available to let or for sale on completion.”

Joint letting agents at Doncaster North are CBRE and Knight Frank.

Developer Verdion also has ‘oven ready’ plots at its iPort scheme in Doncaster one of which can accommodate a building of 850,000 ft2. Clements says if there are no detailed changes construction for that could be within a year.

So, while there is a reasonable amount of stock on the surface, occupiers need to be aware that digging a little deeper reveals that it may not be around for that long.