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Midlands sheds: a market on the boil

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Is the super-strong Midlands shed scene getting just a little bit too hot? David Thame talks to developers and agents about a market on the boil.

The lid is rattling, there’s steam everywhere, at any moment a scalding eruption will cascade down the sides.

Quick! Whip the lid off, turn down the gas. What was a roiling cauldron will quickly turn into a placid millpond.

An everyday kitchen scene, but also a neat description of the Midland shed scene, and perhaps a prediction for the future?

In the boiling world of Midlands sheds, the lid on the supply of new warehouse floorspace is still firmly in place and the heat, in the form of escalating demand from ecommerce, is stubbornly set on high.

To explain, first let’s take a look at the numbers. Everything about them says super-hot.

According to data from Cushman & Wakefield the first quarter of 2021 saw more shed deals agreed than any quarter since the economy imploded in 2008 (bar one). If you count all big-box and mid-box warehouse transactions – that means anything over 50,000 sq ft – the Q1 saw total UK take-up of around 12.5 million sq ft. This is 55% above the long-term average for the January to March quarter, and double the deal volume recorded in the same period last year (before the pandemic). Most of that deal-making was in the English Midlands.

“We wondered if the market would pick up in 2021 where it left off in 2020, and it has,” says a pleased and maybe surprised Simon Lloyd, partner at Cushman & Wakefield. “The pattern is clear: occupiers are flying to quality. The result is a shortage of buildings in many locations, and a low proportion of available buildings under five years old.”

The lid on the Midlands market, according to Lloyd, is the relative shortage of land to build new Grade A warehouses.

“There’s a shortage of land, and where there is land to build on, it is going quickly, particularly in the West Midlands. Look, for instance, at the Pedimore site near Birmingham. Land is being taken very fast,” says Lloyd.

Something similar is visible at sites like Magna Park Lutterworth, where a 1.3 million sq ft unit is under offer, and at Panattoni’s site at Northampton, close to junction 16 of the M1.  New units will be developed over two phases, 250,000 sq ft and 480,000 sq ft. Work on site started last December. Another 380,000 sq ft will follow.

Occupiers wanting good second-hand warehouse floorspace have limited choice: former Arcadia and Debenhams units might serve a turn, but anything decent attracts enormous interest and most of the good prospects are already spoken for.

This is an impatient market, Lloyd suggests, in which occupiers want their new warehouses delivered super-quick, and developers are working their way through their land-banks at double speed.

Meanwhile, investors are adding fuel to the fire. Figures supplied by property consultancy Colliers suggest that the first quarter of 2021 saw deals totalling £3.4 billion. That’s a lot of money, although not as much as the £5.6 billion invested in buying or funding sheds in the final three months of 2020. It nonetheless adds up to a powerful incentive for developers to create the kind of products that investors want to buy: top-grade warehouses with solid-as-a-rock tenants.

And this is where it gets a bit complicated, because the easiest, least risky way to produce what the investors want is to agree build-to-suit deals with the big e-tailers and distributors. These occupiers know what they want and can afford to pay for it. Land devoted to build-to-suit comes off the tally of potential locations for speculative warehouse development.

Occupiers who are not able or willing to afford or manage a build-to-suit warehouse, and rely on speculative schemes, have even less options. There are relatively large numbers of occupiers like this in the Midlands, east and west. This pushes the lid down even tighter on the region’s bubbling shed scene.

Bob Tattrie is managing partner at Trebor Developments and a veteran of the region’s shed development scene. He explains: “For many Midlands occupiers this is a question of affordability, and it is a real frustration for the market. We keep trying to show them that they cannot get the quality of floorspace they want at the price they want to pay. But the fact is their business model, which is often based on being based in older cheaper warehousing, just can’t support higher rents. They would have to change their business model.”

The result, all too often, is that nothing happens except mounting frustration.

“This is a big problem and it could stifle the Midlands’ ability to grow, because the region has a lot of older crappy historic warehousing, much of it well over 20 years old, and to move into newer efficient sustainable warehousing would maybe mean a doubling of the rent from £3.50 to £7.00 a sq ft. And for some occupiers the model business just cannot stands the shock of rental increases. And yet they don’t really have any alternatives,” Tattrie says.

The effect on rents is slightly unpredictable. Simon Norton, Birmingham-based director at Colliers, explains that the outcome ought to be surging Midlands rents. On the whole, it isn’t.

“Midlands rents should be stronger, for 100,000 sq ft plus units. But have we so far breached £7.00 per sq ft? I can’t think of one, although it will this year, because guide rents of £7.25 per sq ft are now being quoted on new Midlands warehousing,” says Norton. Like Tattrie, he blames the region’s large legacy of older, cheaper warehouses for supressing rental expectations.

Slightly sluggish rental growth is disappointing news for developers. But it is a minor problem, and nobody is losing sleep over it.

Developers have played a canny game. Many of them remember the surge in speculative shed building 2006-2008, and some of them remember a similar ballooning of supply at the turn of the century. Some local markets have seen repeat performances in the years since 2012. The consequence is that developers have grown wary of speculative development. For so long as they can sign agreeable build-to-suit deals, why take the risk?

Cynics would add that they have a positive incentive to keep a lid on supply: improved warehouse supply with slow rental growth, and developers don’t want it moving slowly. So keep a tight lid on supply and they get rising rents, plenty of nice build-to-suit deals, and plenty of investors crowding round out-bidding each other to buy the finished (occupied) warehouse. What could be finer!

Needless to say, developers insist they are doing nothing of the kind.

Andrew Pillsworth is Managing Director for national logistics at Segro, and is presiding over a raft of Midlands schemes. These include the 6 million sq ft East Midlands Gateway, as well as developments at Northampton (5 million sq ft) and Coventry (3.7 million sq ft).

“I wouldn’t say developers are being cautious,” says Pillsworth. “I would say they are being balance, because yes the demand is strong, and yes the structural drivers for change in the warehouse property market were there before the pandemic. Supply chains were already changing. And I think developers are responding, not being over-cautious.”

Progress at the East Midlands Gateway proves his point, says Pillsworth. “We’ve got four units under construction, including a speculative scheme, and we’ve got more to go,” he says.

If there is a villain here, it is not developers but the planning process (slow, inefficient) and securing an adequate electricity supply (also slow, also inefficient). Rising power needs – up from 0.5 MVA on older units, to as much as 3-4MVA today – make this an acute issue.

Richard Phillips, portfolio director at Logicor, confesses that some developers are being a little more cautious, but not out of a desire to limited supply and thus boost rents. He says that if developers are playing a waiting game it is simply because so much about the current market feels unstable and uncertain.

“The pandemic, and Brexit, combine to mean some developers just don’t know how the market will re-act,” he says. “They are waiting to see what the long-term consumer reaction is.”

The Midlands shed scene is the focus of the national supply chain and when the heat gets turned up in the UK consumer markets, the regional market quick reaches a rolling boil.

But if the lid does not come off soon, somebody, somewhere, risks getting a nasty scalding.

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Too hot to handle

How can you tell when a market gets too hot to handle? The answer is, keep an eye on bellwether locations, those apparently marginal spots which attract developers and occupiers when all the more centrally-placed and popular locations are full to capacity or overpriced.

In the Midlands, that has traditionally meant Telford in the west and Corby in the east. So, do those markets suggest a Midlands shed scene about to boil over? The answer seems to be no, not imminently.

“Telford has been incredibly good,” says Colliers’ Simon Norton. “In the past it has had the kind of A minus sites that were never top of the list, but genuinely did have attractions. The same is true of Corby. It has good connections to the A14, it’s been a bit secondary to Northampton, but the weight of occupier demand is now starting to push up rents.”

Norton reckons a good Corby warehouse of 100,000 sq ft might now expect to rent at between £5.75 per sq ft and £5.95 per sq ft, a modest but real increase on the £5.50-5.75 rents of 2018/19.

Trebor’s Bob Tattrie tells a similar tale of Telford. “We’ve just completed a 70,000 sq ft speculative unit in Telford, and it is now under offer just weeks after completion. I’d say that was a strong local market. The mistakes in Telford come when you tell yourself you are going to appeal to tenants looking for warehouses in Birmingham,” says Tattrie. It is a local market, with local appeal, he says.

 

 

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