Tight fit

September 01, 2014 by Kirsty Adams
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You want a warehouse, nothing fancy, just a nice useable yard, cross-docking maybe, parking for the staff, and you expect to have a choice of locations and properties? Forget it – the supply of decent warehouse space has rarely been tighter, reports David Thame.

After five years in which there seemed to be a never-ending supply of warehouses ready to occupy – and landlords eager to do deals – today couldn’t be more different. Most occupiers in most of the popular locations have a choice of one or two units - sometimes not even that. Research from BNP Paribas Real Estate shows the extent of the problem. Whilst demand for warehouses has held steady – grown in some accounts – the supply of warehouse space has fallen by 20%.

 

After five years in which there seemed to be a never-ending supply of warehouses ready to occupy – and landlords eager to do deals – today couldn’t be more different. Most occupiers in most of the popular locations have a choice of one or two units - sometimes not even that. Research from BNP Paribas Real Estate shows the extent of the problem.

Whilst demand for warehouses has held steady – grown in some accounts – the supply of warehouse space has fallen by 20%. And you can bet that that the 20% fall has not meant a reduction in the supply of the useless, older warehouses that nobody wants. No – it means a sharp fall in the supply of the modern warehouses everyone is after. Yet some warehouse occupiers still don’t believe there is a problem.

They think there is bound to be a property waiting for them. Andy Ridler, our head of logistics agency with Bristol consultancy Alder King, says: “There are so few buildings on the market, or likely to be, that we can pretty much say in advance what will happen to each – and if occupiers want something quickly it’s a problem. Yet some of logistics occupiers think the property market is still on its knees, and there are hundreds of buildings out there waiting for them. And it makes me chuckle, because they think people like me are winding them up, but that couldn’t be further from the truth.”

FEELING THE SQUEEZE
SHD Logistics spoke to warehouse property experts around the country to find how tight the fit was in their region – and to suggest some ways to squeeze into a new warehouse this autumn. The bad news is that nobody expects supply to ease any time soon. A handful of speculative units are being built, but they are too small – and too few in number – to make much difference. The good news is that the tight supply is encouraging investors to spend money buying warehouses because scarcity means they ought to rise in value. That in turn means that developers find it easier to get money from investors – which in turn means they could build the warehouse you want... if you give them enough time to sort it out.

Finding the right warehouse has never been easy. If it’s the right size and specification, it’ll be in the wrong place. If it’s in the right place, the yard will be too small, or the height to eaves too low. Simon Lloyd, Head of DTZ’s Industrial and Logistics team, advises a cool head and lots of time: “Occupiers have to be clever, and to expect their property requirement to take 12 months or more to resolve.”

But with some homework – and some time – it can work. Even in the tightest of markets.So, how do you squeeze into a new warehouse?

Option 1: Make friends with a developer
Design-and-build deals have never been more popular. Property developers control most of the good sites, and they know how to handle tricky planning problems. These days the flood of money trying to find a home in the logistics property sector -– £2.1bn so far this year, says BNP Paribas Real Estate – means developers can tap into this to fund the building of your new warehouse.
 
Nick Waddington, head of logistics property at BNP Paribas Real Estates, says: “Developers continue to ready their land banks, and the relatively short lead-in time of six to nine months from planning approval through to completion means that most developers that are unwilling to take on the risk of speculative development don’t have to, especially for the largest sheds, where D&B is the occupiers’ preferred choice.”

But beware, not all developers are the same. Paul Weston, senior vice president at Prologis, warns that occupiers must be careful: “Thisisn’t just about owning a piece of land – some sites are more deliverable than others. And it takes years to sort out planning issues, infrastructure issues and so on. Occupiers tend to think of developers as a necessary evil, but the fact is developers are the useful person who is prepared to take the risks with land and planning that others are not prepared to take.”

Option 2: Build it yourself
The “Grand Designs” option won’t appeal to everyone, but it could be the answer for some. “If you’re a bit organised you could buy the land and build yourself,” says Alder King’s Andy Ridler. By developing the site in phases, and by signing a sale-and-leaseback deal with an investor if you need to take some capital out of the property, it could be a good financial deal, he says.
 
If you go down this route you will need to hire a project manager to co-ordinate what will be a complex project. You may also need a surveyor and a planning consultant – all of which could be expensive. And you will need to be relaxed about the risks which range from not getting planning permission, to a sudden rise in construction costs. 

Option 3: Compromise
Does it have to be so big? And does it really need to be next to a motorway junction? Compromising on size and location could make a tight property market a lot more comfortable. Lambert Smith Hampton’s Ed Forrester says: “It’s all about occupiers

being a bit more creative. If you can’t find the new building you want, maybe look at an older building in the right place than you could refurbish. Or think about partnerships with developers. There are all kinds of options, especially if your requirement is for more than 100,000 sq ft, at which point there is a chance there will be a developer who wants to do it for you because the finance works for them.”

In particular, says Forrester, think about your needs. What do you really require – and what can you ditch? “It is going to be expensive to rent a cross-docked 200,000 sq ft warehouse – it’ll be £6 a sq ft rent, which is £1.8m a year. So do you need to be in the best location, could you move to an off-pitch address? And does it need to be fully cross-docked, because that can add 40-50% to the amount of land you need, which will make it much more expensive,” he says. However, Prologis’ Paul Weston says that – with care – getting what you want need not cost the earth.

“We are pioneering a new model which involves longer, thinner buildings – on the 3-to-1 ratio that Amazon like – which gives you many of the advantages of cross-docked warehouses but without adding lots more land –it only adds a quarter of an acre to the yard -– and provides deep yards and the right doors. If you agree a design-and-build deal with a developer, this kind of thing can be factored in from the start,” he says.   

How tight is tight?

Midlands: very tight
Ed Forrester, associate director with surveyor Lambert Smith Hampton in Birmingham, says: “We saw 14.3m sq ft of warehousing taken off the market last year, and supply is constraining. We’re advising one firm in the Coventry area who have a shortlist of six sites but know that only one of them is a real contender. And that lack of choice is now quite normal.”

South East: very tight
Even worse than the Midlands. Prologis’ Paul Weston looks after its portfolio in the region. He says: “Land is obviously incredibly expensive, and that is pushing up rents. The market is very tight.”

North West: very tight

Occupier demand for industrial and logistics space over 100,000 sq ft – ‘Big Box’ space – is still growing in the region, with another 1.2m sq ft taken by occupiers in the first six months. And it getting tighter, says Dan Burn, director at JLL Manchester.

Yorkshire: tight
Mike Baugh, director at CBRE in Leeds, says: “It’s getting tighter, depending where you want to be, and what size you want. There’s nothing over 300,000 sq ft on the M62 corridor, and nothing at all in the region over 500,000 sq ft.” Baugh says third-party distributors are having to sign longer leases – and prepare to wait longer for new property.

South West: tight
“We’ve got just one speculative development, it’s small – only 15,000 sq ft – and four-fifths of that is already subject to contracts in lawyers’ hands. And it’s like that for logistics property, across the board and across size ranges,” says Alder King’s Andy Ridler.

 


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