Welcome to the South West of England, where you’ll need to be ready for some tough talking if you want a new warehouse or regional distribution centre.
Construction costs have gone up as much as 30% for some items, land prices have doubled, and the supply of development land is lagging well behind demand.
The region’s problems are not unique – far from it – but they are given a keener edge by the South West’s geography and political colouring. There’s a lot of beautiful countryside, and lots of it isn’t flat or near a motorway junction. That restricts the supply of building sites. Meanwhile, local councils are not adapting as fast as they could (or should) to the changed post-pandemic reality of online retail and the resulting increased demand for warehousing. It all adds up to some unhappy situations.
“Today businesses looking for a new warehouse in the South West might have a couple of choices, perhaps not even that when they look more closely. A few years ago they might have had four or five viable options,” explains Trebor Developments director James Drew, whose patch extends to the South West.
“It’s got to the point when, after you talk to potential occupiers, you have to give them some time, five or six weeks, to talk to everybody else and begin to realise that there are few or perhaps no existing options that work for them.”
Drew suspects this fraught and disappointing encounter is likely to be repeated more often in the next 18 months.
“There is a problem of supply and in the near term it could get much worse. It will take that long for sites now in the pipeline to be developed and whilst we wait that means rents will go up,” he says.
There are three causes, none of them easy to remove, for the sluggish supply of new development. The first is that developers have learned to be cautious. Many got burned last decade when they let their ambitions get the better of them. They remember, and don’t plan to do it again. Anyway, why take risks with speculative development when occupiers with sign leases for, and investors will buy, pre-lets and build-to-suits? It’s a no-brainer.
The second reason is the land supply. Jonathan Wallis, development director at Tritax Symmetry, says the South West suffers from an acute case of a national problem.
“Local authorities are basing their allocations of employment land on historic data. We all know how completely the logistics sector has changed in the last five years, but local council’s understanding of demand hasn’t caught up with the change. Their land allocations are not adequate,” Wallis says.
Some peculiar mental arithmetic is also screwing up supply. Wallis explains: “For instance, if a local council concludes that their area need 200 acres of new employment land, then it is absolutely no use to the logistics sector to provide 200 1-acre parcels, or anything like that.” To build a warehouse you need sensible-sized chunks of flat, well-connected land. Securing consent for such sites is by no means as easy as it should be.
There’s another mathematical problem causing headaches: local councils are sticking to out-of-date views of how much warehousing you can get on an acre of land. Today’s warehouses are more land-hungry, with the result that local council’s under provide. Today an acre will accommodate around 18,000 sq ft – less than some local planners think. “We struggle to get those numbers across to planners,” says Wallis.
The upshot is rapidly rising land prices. “The kind of South West site you might have expected to sell for £600,000 an acre two years ago, might now go for twice as much,” says Drew.
Third problem is rocketing construction costs. Whilst sensible developers have probably signed fixed-cost agreements with their buildings, and will be insulated to some extent, others do not have that luxury. Even the most prudent developer can get caught out. If input construction costs are up 30% or more - and in some specialist areas they are – that places enormous pressure on the viability of new developments.
“The speed of change in construction pricing is a real challenge. Some of the increases are astronomical, like cladding for instance, up 64% on a building we started construction work in January,” explains Peter Davies, development director at St Modwen. “That kind of increase makes viability very difficult. Developers will have to push up rents if they find it possible to build at all. Everybody is going to have to get used to paying more.”
Call in at Trebor’s Central Approach development at Avonmouth to see how rents are already creeping up.
The 15-acre site between Junction 1 of the M48 and Junction 18 of the M5 is about to see the completion of a 113,000 sq ft speculative unit, with a quoting rent around £7.50 a sq ft. A pre-let before completion is possible, perhaps probable, and that quoting rent could end up looking historic.
“We’re working very hard on a pre-let,” says Trebor’s Drew. “There’s not a lot of supply in this size bracket.”
“We’re already seeing rents of £7.50-£8 a sq ft on smaller units in Avonmouth, and we’re pushing £8 on mid-box units. You can find £8.25 a sq ft quoted on some units,” Drew explains.
A steady flow of deals during 2021 suggests that the eye-wateringly high take-up figures of 2020 will be repeated in the second half of the year. As usual, Amazon leads the way. The online giant is understood to have signed a long-rumoured deal for the 316,000 sq ft Logicor unit at Avonmouth, Bristol. The site is located between Junction 1 of the M48 and Junction 18 of the M5, with frontage to the M49, WA316 offers direct access to the UK’s extensive motorway network. Savills, Knight Frank and JLL acted as joint letting agents for the WA316.
New developments are also pilling up, which will help ease supply problems. Construction work on a 384,000 sq ft Bristol mid-box logistics development will be completed in January 2022.
Main contractor ISG has been awarded a £21.8 million construction contract to deliver the six unit More+ scheme at Avonmouth near Bristol for joint venture developer Richardson Barberry. More+ Central Park is a motorway-connected mid-box industrial park with links to Avonmouth Docks and M49 providing access to the national motorway network.
Investors have also stepped forward to back a 457,000 sq ft mixed box logistics scheme at Avonmouth. The 25-acre site at Severn Road will see six new buildings, ranging from 16,000 sq ft to 240,000 sq ft. The development has been accelerated by funding from British Airways Pension Trustees, who funded the £11 million site acquisition for Tungsten Properties.
Trebor are pondering development on a couple of dozen new sites adding up to well over 100 acres. Tritax Symmetry also have big plans with a generous 67-acre Gloucester site about to make its way through the planning process with the aim of beginning 1 million sq ft of new floorspace towards the middle of 2022. St Modwen is brewing up a storm in Gloucester and Chippenham where another 250,000 sq ft and another 750,000 sq ft, respectively, are on their agenda.
The South West shed scene suffers the same supply hitches and demand surges as everywhere else. But the relatively limited pool of developers, and development opportunities, means resolving those problems could be slow. In the meantime, expect to have to wait longer and pay more for the warehouse of your dreams.
There may be enough standing warehouse stock to get the South West through to the end of the year. Or maybe there won’t be.
According to data from Savills, the market is finely balanced with turn of the year supply hovering around the mid 3 million sq ft mark in the South west, roughly enough for twelve months.
Savills say that the supply figures are skewed by a bias towards lower-quality units with just 12% of available space classed as Grade A, 56% is Grade B, and 32% Grade C. Additionally, by unit count, the supply continues to be dominated by smaller units with 71% being within the 100,000–200,000 sq ft size band. There are just a handful of units available above 300,000 sq ft, and when they do become available, they tend to be second-hand quality.
Of course the supply problem would be less acute if demand for South West warehouses fell. There doesn’t seem to be much chance of that. The sky-high level of South West take-up recorded in 2019 showed volumes up 433% on 2019. The largest deal in recent memory was Amazon committing to a 2.3m sq ft unit at Panattoni Park Swindon.
Blackstone, the giant US private equity house, acquired developer St Modwen in May when the Midlands-based firm accepted a £1.2 billion take-over bid.
St Modwen have long been a big name in South West shed development, and the expectation among some of their rivals is that with Blackstone behind them, St Modwen will be more active site-buyers in the region.
St Modwen say they have plenty of land already. Nationwide the firm has 7 million sq ft of warehouse planning consents, and another 6,000 acres to develop.
“In today’s market it would be prohibitive for anyone to buy oven-ready warehouse site, equipped with planning permission, because the land values are prohibitive. I can’t see Blackstone be ready to commit money if the numbers don’t add up,” says St Modwen’s Peter Davies.