With the big sheds deal market lying dormant, David Wilmer, Industrial Director at GVA Grimley in Birmingham, says that landlords must be willing to think outside the box to attract tenants
These are strange times for those of us who make a living from letting or selling big sheds.
On the surface, the situation appears fairly bleak with no new lettings of in excess of 150,000 sq ft, being done in the Midlands in the last nine months.
In the better times we would anticipate one or two deals of this size to be completed every month.
In large part this was due to the established position of the Midlands at the hub of the national distribution and the fact that the market in the Midlands has never really suffered from over-supply which meant that it would never take that long for existing stock to be taken up.
As a result, landlords were speculatively developing at a rate of one new big shed per month, confident in the fact that there would always be a good market.
In recent times however, brand new buildings have remained on the market unoccupied competing alongside good quality second-hand space released by existing occupiers with surplus capacity and also the recession-induced demise of companies such as Woolworths. This has released considerable space onto the market with the 334,000 sq ft former Woolworths site in Rugby being a prime example.
The result is that we now have two distinct markets, namely new build alongside high quality second hand space marketed through agents.
The brand new building is normally built by a developer to minimum fit out standards.
For commercial use, tenants will be looking at a fit out cost of up to £10 per sq ft to rack out, light and install sprinklers.
In comparison, the fully fitted second hand unit will come with most of this equipment already installed.
The inevitable result is that the used market is now impacting upon the new build market by acting as a genuine enticement to potential tenants.
These new market dynamics have had a significant effect on owners of speculative buildings who are now being forced to fit out their big sheds as the only way of competing with the used property on the market.
In effect, shouldering the capital cost themselves.
Occupiers are acutely aware of their strength and are increasingly looking beyond location and suitability and taking into account fit out packages and in some cases their potential landlord’s financial situation.
Unquestionably, the personal distress of the landlord, in particular any hint of pressure from the banks, is playing a part in negotiations which means some landlords have to be much more flexible about their lease terms.
The result is that much greater rental incentives – including rent free periods of around two months per year of lease term – are becoming the norm, either paid as a lump sum inducement to sign on the dotted line or as rent free.
Similarly, lease lengths offered by landlords are now getting shorter and shorter as they look beyond a long term solution and look to manage a short term problem.
Many landlords are now prepared to commit to one to three-year leases and not the five to ten years they were asking for previously.
Many are prepared to do shorter deals which have the attraction of being almost immediately rent producing.
The added attraction of this sort of arrangement is that a short term rental can mitigate the rates liability, which often accounts for half the rent, holding costs and business insurance.
The short time frame also gives landlords the opportunity to look for longer term investment deals once the market picks up.
Of course, all of this depends on demand picking up in the marketplace. We are seeing more expressions of interest and viewings but the market desperately needs a deal to bring the feel-good factor back.
There are three particularly attractive areas where landlords can look for tenants.
Firstly, waste recycling, which appears to be coming through the downturn relatively unscathed.
Secondly, discount clothing retailers, such as Primark, Matalan, Peacocks alongside the discount food retailers such as Netto and Lidl.
Again, both areas are bucking the trend and remain in the market for quality big sheds.
Finally, internet retailers such as ASOS continue to do very well and are well worth targeting.
We are seeing landlords increasingly rising to the challenge, with a willingness to do a deal on fit out and flexible leases, grabbing what they can get, including partial occupation to cover costs, to tide them over.
If there is a key to surviving in this market, this is it.