50 Sheds of Grey – it’s the international best-seller that many an industrial agent wished they had written. Of course, the plot would deviate somewhat from the infamous EL James novel of a similar name.
As the title suggests, it would be set in a world where developers have been busy building dozens of shiny new industrial and distribution units to satisfy the ever-increasing demands of occupiers and agents.
But as Alex Carr, Associate Director in our Birmingham Industrial & Logistics team explains, that really is the stuff of fantasy.
Severe supply shortage in the region
In reality, there is a severe supply shortage in the West Midlands industrial and distribution market across the spectrum - size, location, quality and sector.
Size matters. The big box market (sheds in excess of 100,000 sq ft) has seen no speculative development in recent years. With none under way or evidently apparent in the pipeline, the supply of distribution warehouse units ready for immediate occupation has declined significantly since availability levels peaked in 2009.
Big sheds essential to Birmingham market
Big sheds are a key part of the Birmingham industrial market and, over the last five years, have accounted for approximately 48% of take-up.
The fairly robust demand for logistics units over 100,000 sq ft experienced in 2011 has continued into this year, albeit at a marginally slower pace. Interest and activity in this sector has picked up though, especially in the 100,000-200,000 sq ft size band and we envisage a reasonably strong level of take up during the second half of 2012.
The largest regional transaction this year is Smyth’s Toys’ acquisition of Alto 415 (414,876 sq ft) in Newcastle Under Lyme. The largest transaction in Birmingham to date this year is Jaguar Land Rover’s’ acquisition of DC3 at the Fort, Castle Bromwich, comprising 165,752 sq ft.
Lack of new build distribution facilities on the market
There are now only four new build distribution facilities available on the market in the West Midlands region in excess of 200,000 sq ft, extending to 1,221,923 sq ft of accommodation: G Park Blue Planet, Newcastle Under Lyme (383,036 sq ft), Citadel, Darlaston (322,954 sq ft), the Duke, Burton on Trent (302,693 sq ft) and First Point, Burton on Trent (213,240 sq ft).
In the 100,000 – 200,000 sq ft range, there are also only four new build distribution facilities left on the market extending to 538,965 sq ft of accommodation: Altitude (148,915 sq ft), Measham 142 (142,358 sq ft), Kingswood 127, Cannock (127,542 sq ft) and the Hub, Birmingham (120,150 sq ft). However, Altitude, Measham and the Hub are all under offer.
Limited opportunities for occupiers will intensify competition
With only 1,349,465 sq ft of new build accommodation available in excess of 100,000 sq ft, occupiers have limited opportunities. We expect increased competition for the remaining accommodation and an upward pressure on rents, with occupiers likely to be paying almost the full asking rent with hardened incentive packages for this accommodation.
The days of significant discounts on headline rents are dwindling as more landlords are holding out for improved terms. These are also being achieved as evidenced with LEAR’s recent acquisition of Rivet in Coventry (222,598 sq ft) on a 15 year lease with an 11 year break at £5.50 sq ft. DHL also acquired Stirling 150 (149,845 sq ft) in Solihull at a rent of £5.75 sq ft.
There is an even more acute shortage in the 50,000 – 100,000 sq ft band, with only one new build warehouse left on the market - Unit 11 at Lymedale Cross in Newcastle Under Lyme, comprising 52,261 sq ft.
However, there are modern units available in this size range, including DC22 ProLogis Park, Coventry (86,250 sq ft), Summit, Witton (84,014 sq ft), Unit 2 Hurricane Park (58,221 sq ft) and Unit 5 Bromford Gate (52,937 sq ft) to name a few. With only one new build warehouse available (and it’s not in Birmingham!), and a small handful of modern accommodation remaining, occupiers have very limited opportunities in this particular sector of the market as well.
Automotive industry fuelling strong activity for SME sector
We have continued to see strong activity in the small and medium sized units (SME) sector and the multi-let industrial market with contracts linked to the automotive sector. Following good quality refurbishments, we have seen strong take up on the majority of our multi-let industrial estates, particularly along the M42 Corridor, A38/north Birmingham and in Coventry. These areas are heavily linked to the automotive sector, and spin off requirements, and contracts are driving most of the enquiries in the market.
Location remains dominant factor
It is apparent that occupiers will commit to higher headline rents and concede on rent-free periods if the product is of a good quality and, most importantly, in the right location. With no speculative development planned in the multi-let sector of the market either, occupiers will have very restricted opportunities - welcome news to the majority of institutional landlords who have experienced little, if any rental growth over recent years.
The M6/M42 Corridors stand out as locations with a distinct lack of supply and, more specifically, central and east side of Birmingham and Coventry. Aside from the Coventry DC on Torrington Avenue (40,000 sq ft - 603,098 sq ft), which provides secondary space, there are no buildings in excess of 100,000 sq ft available, albeit a 305,463 sq ft will shortly be coming back to the market. There is also a very limited supply in the 20,000 – 100,000 sq ft size band with one of the remaining buildings, Sprint Point (49,650 sq ft) also being under offer.
Other hot spots include north east Birmingham (M6/M42, Midpoint, Hams Hall, Tamworth); A38 Corridor; M40 (proximity to Coventry and Oxford); i54 and surrounds (Jaguar Land Rover factor); multi-let market (Birmingham, Redditch, Solihull, Minworth and Coventry).
Market desperate for return of speculative development
The supply of new stock continues to reduce and the market is desperate for the return of speculative development. However, we don’t envisage any speculative development in the Midlands in 2012 or early in 2013 due to the lack of support from financial institutions and the economic uncertainty both at home and in Europe.
'Oven ready' design and build sites which can accommodate pre-let requirements are likely to dominate large scale take up going into the final quarter of the year and into 2013. It is important to note that there hasn’t been a pre-let of note secured thus far this year albeit several from 2011 have achieved practical completion this year. This is not to say that pre-lets are not coming as they are and build to suit is certainly the way for occupiers given the shortage of quality stock.
Occupiers will need to adjust to change in market conditions
Occupiers will have to adjust to a change in market conditions and the basic fundamentals of a pre-let transaction. If a company decides to have purpose built premises they will need to sign a 15 year term certain lease commitment (i.e. with no break option). They will also have to pay a market rent and there will be little, if any, incentives on offer. They will also need to represent a favourable covenant to provide the developer with a tradable investment or a secure hold. No investor or developer will enter into a build-to-suit transaction unless there is a profit and this of course dictates the length of lease and rent.
Shortage of accommodation will mean lower take-up for 2012
This year is likely to see a lower level of overall take-up compared to 2011 (13.1 million sq ft). This is partly due to the uncertain economic outlook, but also a distinct shortage of good quality accommodation in strategic locations. The West Midlands industrial market in 2013 will be challenging for all concerned, occupiers, landlords, developers and agents. The ability to structure and complete transactions will require intuitive thinking on many an occasion. However, the prospects look promising and hopefully those involved won’t have to operate with quite so much formal, stylised corporal punishment as Mr Grey!