Richard Meering, head of industrial agency at the Birmingham office of CB Richard Ellis, looks at a possible supply crisis after a higher than anticipated take-up in the sector
Given the current economic uncertainty, take-up of industrial and logistics stock across the Midlands has been surprisingly good. Take-up during the last three quarters is higher than the ten-year average, with eight million sq ft being snapped up in the course of this year so far.
Of course, that’s fantastic news for the sector. The bad news for occupiers is that the steady erosion of existing Grade A stock, plus the lack of new build coming through, means a supply crisis is looming.
According to research conducted by CBRE, at present there is just 2.3m sq ft of new industrial stock available in the West Midlands. Average annual take-up is 2.02m sq ft.
There are currently active requirements for more than 6.4m sq ft of modern warehouse space across the Midlands (both East and West). Whilst unlikely, it’s not inconceivable that the region’s entire stock could be taken up in just 12 – 18 months.
The crisis is exacerbated when you look at specific lot sizes. For example, we have just three new buildings in excess 400,000 sq ft and six over 250,000 sq ft across the entire East and West Midlands.
What’s more, the demand for space is far from receding. The appetite of food retailers, including Co-op, Marks & Spencer, Tesco, Waitrose and Asda, is particularly voracious, probably because these businesses have proved recession proof.
Discount retailers are also driving occupier demand.
Retailers have dominated take-up in the last year or so, and they are demanding bigger and bigger sheds. At the root of this is the drive to increase efficiency in supply chains. Marks & Spencer, for example, is looking to reduce its energy use by 35 per cent by 2015.
As part of its Plan A initiative it aims to have fewer, bigger distribution warehouses in order to reduce its energy use on buildings, fuel and refrigeration. Recent CBRE research recommends that property speculators could do a lot worse than start banking land and amalgamating sites, as occupiers are increasingly favouring new build space, which accounts for 60 per cent of all take-up, over second hand accommodation.
Furthermore, the largest deals recorded in recent times have been pre-lets.
As well as demanding bigger units, requirements are becoming increasingly bespoke.
This is leading to increased design and build activity – 45 per cent of take-up of new space has been for D&B since 2006.
This is good news for developers, as D&B is less capital intensive and less risky. What’s more, the negotiating position is often better compared to offering an existing speculatively built unit.
I can’t see these trends changing over the next few years.
However, getting hold of land is not easy. Land values are approximately 50 per cent of their 2007 peaks, so landowners are reluctant to sell at a loss and are sitting tight on their plots.
Investor sentiment in the prime warehouse market remains strong, particularly for new, well-let investments, with yields now firmly below seven per cent for fifteen year lease terms. Rents for prime industrial space across the region have stabilised, with headline rents regularly averaging £5.25 – £5.50 per sq ft.