The UK industrial and logistics sector is set to see record demand and the return of meaningful speculative development for the first time since 2008, according to new research from national property consultancy Lambert Smith Hampton (LSH).
The Birmingham and West Midlands region has the greatest imbalance between demand and supply of all UK regions, which could lead to significant increases in prime rents over the next two years, says the report.
The latest edition of the LSH annual Industrial & Logistics Market report reveals that take-up nationally increased by 24% to 94.2m sq ft in 2013. This came in response to the economic recovery, an improving manufacturing sector, the ongoing drive by retailers to streamline their supply chains and growing appetite from logistics businesses serving the burgeoning e-commerce industry.
With these factors set to grow in importance in the short term, the authors predict that there is sufficient demand for take-up in 2014 to exceed the record 101m sq ft achieved in 2010.
The Industrial & Logistics Market report also finds that improving occupier appetite, combined with a lack of development activity that stretches back to before the global financial crisis, has led to a shortage of top quality (grade A) space in much of the country. Grade A now represents just 9% of total available supply, down from a peak of 29% in 2008.
As a result, LSH forecasts that over 2m sq ft of space could be built speculatively during 2014 – the first meaningful volume of activity since 2007/8. Although this represents a significant increase over recent activity, it accounts for only 7% of current grade A availability and is unlikely to stem the upward press on rents.
By analysing current demand and availability – the first time this has been done on a national basis – the report identifies the Midlands and South East and the mid box (50,000 – 99,999 sq ft) and large building (100,000 sq ft +) size bands as most likely to see rental growth over the coming year.
Alex Carr, industrial and logistics director at LSH in Birmingham, said the report contains encouraging news for developers, investors and landlords, but potentially bad news for occupiers as shortages of suitable properties drives up rents.
He said “The West Midlands recorded the highest level of take-up across all of the regions in 2013, with 14.3 million sq ft of industrial floor space either let or sold, up 33% on 2012. The small and medium sized business unit sector accounted for 52% of overall take-up, with the logistics sector accounting for a further 33%.
“Our region has one of the most acute shortages of grade A stock in the UK, with total grade A floor space representing only 1.7 months’ supply. The most severe shortages of stock are in the mid box and logistics sectors where only four buildings were on the market at the end of 2013.
“Both prime and secondary rents increased during 2013. Prime rents rose by 3.2% and secondary rents grew by 4.2%. All of the key locations in the region saw rents appreciate with the exception of Stoke on Trent, where values remained stable. The West Midlands has traditionally had one of the highest availability rates but there has been a significant tightening of supply, with the availability rate falling to 16.5% from a peak of 22% in 2011.”
During 2013 LSH completed the letting of the 383,036 sq ft Blue Planet to JCB on a 20-year lease – the largest new build transaction in the West Midlands. Radial Point (184,910 sq ft) is the largest existing building remaining available in the region. Developers Gazeley and Prologis can deliver build to suit units at G Park Stoke (21 acres) and Sideway (40.6 acres) respectively.
Goodman’s Citadel in Darlaston, extending to 322,954 sq ft, is the only new building left on the market at over 100,000 sq ft. Opus Land’s Blueprint site at Wednesbury (22 acres) and First Industrial’s Prime Point in Wolverhampton (17.9 acres) provide opportunities for build to suit requirements in 2014.
Alex added that LSH acquired 336,488 sq ft for Hermes Parcelnet within Prologis’s Tamworth 594 building. Later in the year Euro car Parts acquired the residue of the building, comprising 257,956 sq ft. In July, IM Properties began speculative development of two units at Birch Coppice (165,600 sq ft and 168,900 sq ft) – the first speculative development in excess of 100,000 sq ft in the West Midlands region since 2008.
The units have since been let to Bunzl and Dau Draexlmaier. Plot three, comprising 35.23 acres, can accommodate a building of up to 700,000 sq ft. Meanwhile, in August Prologis began speculative development of the 225,380 sq ft DC3 at Ryton (due to achieve practical completion next month) and also agreed a five year build to suit agreement with LG Electronics (165,200 sq ft).
“The market has recently staged a strong recovery and the outlook for the industrial and logistics sector over the next 12 months is more encouraging than at any time since 2008.
“Improving confidence is driving demand to the extent that 2014 take-up could set a new record, exceeding the record 101m sq ft achieved in 2010.
“The continued growth of internet shopping will remain an important driver over the coming year as logistics operators work out how best to respond to evolving consumer habits. Traditional retailers are also looking to streamline their supply chains in order to improve speed to market and boost margins at a time when price rises are proving difficult to implement.
“We will see the return of meaningful speculative development for the first time since 2007/8 on the back of growing demand, an acute shortage of grade A space in many regional markets, and the renewed availability of funding. Although this represents a significant increase over recent activity, it accounts for only 7% of current grade A availability and will not be enough to stop rents continuing their upward march.
“The Midlands and South East are most likely to see rental growth over the coming year. We also expect to see strong demand for larger units. There was only a handful of buildings above 100,000 sq ft as recently as ten years ago, whereas we’re now seeing considerable interest in units of 500,000 sq ft and above.”
Alex added: “The lack of development, which now stretches back to 2007/8, has left the market starved of grade A space. The quantity of newly-built premises across the market as a whole now represents less than four months’ supply and the situation is even worse in the West Midlands.
“The return of speculative development is welcome but we question whether this will be enough to ease the sector’s supply shortages in certain size ranges. However, it is pleasing to report that there really is light at the end of the tunnel. After a number of challenging years since the start of the global financial crisis, the industrial and logistics sector is set to be a major beneficiary of the economic recovery.”
