The UK industrial and logistics sector enjoyed a record-breaking year in 2014. In the West Midlands, some key deals saw the market enjoy stellar performance. Here Matthew Tilt, Industrial and Logistics Associate Director at Lambert Smith Hampton in Birmingham, takes a look at what made it a year to remember and what’s in store in 2015.
As UK Plc continues its long-awaited renaissance, the nation’s industrial and logistics sector is enjoying unprecedented levels of demand.
And the good news is that we expect the high level of investment activity to continue throughout 2015, with
developers increasingly committing to speculative development schemes across the country.
In 2014, take-up reached record levels, investment activity saw an all time high and speculative development returned in a meaningful way.
The latest edition of our annual Industrial and Logistics Market report reveals that take-up rose 8% to a record 103.3m sq ft. This progress has been underpinned by robust economic growth, the continued rise of internet retailing and multiple build to suit deals in the logistics sector.
Here in the West Midlands we saw 19m sq ft of take-up, primarily in design and build logistics units, which was the primary push beyond the previous record.
However, the strong recovery in demand has put existing supply under acute pressure. These pronounced shortages are influencing the nature of occupier activity and grade A take-up nationally was actually the lowest on record.
With economic growth forecast to strengthen and with availability tightening, it is our prediction that many markets’ prime and secondary rents will surpass their pre-recession highs in the next 12 months.
As a result of strong economic growth supported by the continued prominence of multi-channel retail, we believe around 4.4m sq ft of new space could commence construction throughout 2015, with 3.4m sq ft of that in the logistics sector.
In the investment market, a record £6.6bn of industrial and logistics assets changed hands in 2014, indicating strong sentiment and appetite in the investment community and the positive fundamentals of the industrial marketplace.
It seems clear that investors will also move further up the risk curve to secure higher returns and, with stock in short supply, will increasingly consider development to secure stock.
Record take-up for West Midlands
The West Midlands had a stellar year in 2014. Take-up was a record 19.0m sq ft, up 33% on 2013, largely underpinned by a surge in logistics activity. With existing stock in short supply, take-up was largely accounted for by design and build deals at some of the region’s major distribution parks.
Grade A accounts for just 5% of available supply
Total availability reduced by 38% from its 2011 peak to stand at 31.8m sq ft at the end of 2014. Moreover, the supply of grade A stock now accounts for only 5% of remaining supply, its lowest proportion in the past 10 years. While all sectors of the market have tightened, grade A availability in the logistics sector amounts to only two buildings.
Rents on the rise
All key locations in the West Midlands saw prime headline rental increases during 2014, with the largest rises posted in Coventry (8.7%) and Burton-on-Trent (6.1%). Secondary rents also increased on the back of the strong occupational market, rising by 8.1% on average.
Highest availability rates across the UK
At 13.8%, the West Midlands continues to exhibit one of the highest availability rates of all UK regions despite record take-up. However, all of the key markets possess availability rates below this regional average, which indicates the relative focus of demand within these core areas.
In Birmingham, Hydraforce Dynamics acquired a 6.7 acre site freehold within the Advanced Manufacturing Hub, reportedly for £250,000 per acre, for a new 120,000 sq ft European HQ. A key factor in the transaction was a £1.8m Regional Growth Fund grant.
There is a distinct shortage of available buildings and ‘oven ready’ development land, predominantly as a result of HS2 and the associated safeguarding programme.
Following a pre-let to John Lewis in 2013, IM Properties started construction of the first mid box speculative development in the West Midlands at Solihull Business Park. The building, which extends to 53,599 sq ft, achieved practical completion in Q1 2015 and is rumoured to be under offer, demonstrating the strength of demand for this product along the M42 Corridor.
The quoting rent was £6.50 per sq ft. IAC also expanded its operation at Elmdon Business Park, taking a 165,000 sq ft pre-let from Standard Life on a 15-year lease, reportedly at a rent of £6.45 per sq ft.
Prologis Park Ryton, in Coventry, was subject to significant activity. Speculative development returned in the form of DC3, extending to 226,540 sq ft. This was let to Jaguar Land Rover on a 15-year lease with five-year break at £5.95 per sq ft.
UK Mail also completed its land purchase and development agreement for a 231,050 sq ft new sorting facility on plot DC6. Occupiers took advantage of the remaining secondary stock with Beko/Profile logistics acquiring 216,494 sq ft at Central Six Industrial Estate and Neovia Logistics taking a sublease from Sainsbury’s on the 279,748 sq ft Triangle building.
In Q4, Goodman and LaSalle announced they would be speculatively developing five units totaling 214,000 sq ft at Lyons Park, capitalising on the lack of supply in the mid box sector.
In Minworth, Prologis announced further speculative development at Midpoint Park in Q4. DC1 will be developed in 2015, totaling 127,500 sq ft with a quoting rent of £6.50 per sq ft.
At Park Lane, we completed a 14 acre land sale to Bericote in Q4 on behalf of Severn Trent. We will also be marketing a speculative development here titled ‘Chrome 102’, extending to 102,750 sq ft. Funded by Rockspring, it demonstrates the return of institutional funding for speculative development at strategically located sites.
At Hams Hall, activity was relatively subdued due to a distinct lack of stock. Speculative development returned in Q3 14 with Canmoor starting on site at Hams Hill with its 142,758 sq ft Silver Bullet development. This will be ready for occupation in Q2. Canmoor also submitted planning in early 2015 for further development on an adjacent plot totalling 172,215 sq ft.
Demand set to continue
The market in the West Midlands is seeing unprecedented levels of demand and we expect this to continue for the remainder of the year, with speculative development satisfying only part of the pent-up demand for grade A space.
This continued restriction of supply is of course good news for landlords and we will see rents drive on to heights not seen since 2007/08.