The good times are rolling in the distribution market. Demand is up, rents are stable and developers are building.
Figures from King Sturge show that, in the first three months of 2004, almost 3.5m sq ft of space has already been let. “That was just the first quarter. If it keeps going like that, it will outstrip the past couple of years,” says Tim Johnson, a partner at King Sturge’s industrial team in London.
Mike Haigh, partner and head of industrial at Knight Frank, agrees. “There was certainly a good start to this year compared with last year, because there is more confidence in the market than the previous year.”
“Six to nine months ago there was a lot of space hanging over the market, but now we are getting three or four enquiries for one building,” says Bob Parker, head of industrial at Matthews & Goodman.
This is a turnaround on the past couple of years, when the large distribution companies scaled down their development plans. It was something Andrew Gulliford, head of industrial agency at Jones Lang LaSalle, thinks was “the right thing to do”.
“It would have been foolhardy to develop at the time,” he adds. It’s not that 2003 was bad. King Sturge’s take-up figures (see table, p33) show that, apart from 2001’s freakishly high take-up, it wasn’t much different from the previous few years. “Look at last year. At 10.48m sq ft, it was only just below the average of the past nine years,” says Johnson.
But what is making the agents and developers very happy is how the market has kicked off in 2004, and they put the reasons behind such a good start down to the economy holding steady.
A major factor is the need for companies to get space quickly – something that happens when the market picks up again. “The majority of distribution companies get a contract awarded and they have a two-month lead-in time so they have to find the best building and adapt it as best they can. They tend to commit themselves for no more than five years,” says Parker.
A sure sign of recovery is large-scale speculative building. King Sturge’s figures show that there are six 125,000 sq ft-plus developments being built throughout the country. There are also 24 schemes immediately available to let.
Gazeley is planning to build more than 1.84m sq ft of new units at Marsh Leys in Bedford, Mill Park in Thatcham, at new sites in Dagenham and Purfleet in Essex, and at Magna Park in Lutterworth.
Cheshire-based developer Gladman is up and running with three huge schemes of 500,000 sq ft-plus, and it has two more planned. What makes these schemes different is that there are few schemes this size in that area of the country.
The developments are in Skelmersdale, Lymedale Park in Newcastle under Lyme, and at junction 30 of the M1 near Sheffield. The two future developments will be in Liverpool and Stoke-on-Trent.
“If somebody is looking for a big building, there’s not too much choice, so they will look across the whole of the North East,” says Haigh. “Gladman has taken the initiative to go ahead and build. No one has constructed units of 500,000 sq ft in the North East before.”
Kevin Edwards, a director with Gladman’s says the decision to start building speculatively was made because the company saw a trend in the market towards the larger RDCs (Regional Distribution Centres). And the North West was chosen for its lower land prices and for its local workforce, which is used to traditionally shift working patterns associated with industry.
Parker predicts that speculative building will continue well into 2005. “There’s enough confidence in the market to persuade developers that it’s worth their while.”
What the market will also be studying is the impact made by rail freight terminals. “It’s going to be desperately important. When we have the proper railway lines, freight could be moved from Trafford Park and onto mainland Europe within 14-15 hours,” says Haigh.
With all the development and subsequent occupier demand, agents believe rents will be on the increase. During 2003, they held steady at around £4.50 per sq ft.
“We have already seen headline rents in Bradford of £5.25 per sq ft. Leeds hasn’t really produced the same performance. However, in Huddersfield, we relocated Poundstretchers to a 380,000 sq ft unit at £4.75 per sq ft – a record rent. It was also the area’s largest inward investment last year,” says Haigh. He adds that this year rents will be more stable.
Sandra Martyn, senior negotiator with JLL, predicts that rents will grow at an average of 2% pa over the next three to five years. She maintains that £5.25 per sq ft will be the standard rent across the UK this time next year. Given the healthy state of the market, big incentives in deals, which had already begun to dry up during 2003, will be rarer.
“There were some big rent-free periods available over the last few months, but you won’t get them now because demand has strengthened. The availability of cheaper finance will continue to fuel the freehold market,” says Parker.
The search for new distribution locations will also hot up during 2004-05. Developers are still keen to get the key sites that will guarantee them income. But, as JLL’s Gulliford says, developers don’t want to be in an area of the market where there are four other developers “doing the same thing”.
Gladman has made inroads into the North West, while other areas to watch for future distribution developments will be along the M18 in Doncaster, where rents are cheaper than the East Midlands. P&O’s London Gateway development at Shell Haven is also tipped to see good levels of activity, as are areas along the A13 corridor, where RWE Energy is already developing Abbacus Park on 2.75 acres at Dagenham.
John Burbage, chief executive, Burbage Realty, is tipping mid-Northamptonshire as a growth area, especially sites in Corby and Wellingborough, which are all along the A14.
“During this year, we will see a lot of people talking about the focus of the distribution market having moved north, but you now need to go a huge distance east or west of the M1 to find areas where you can be very competitive in terms of costs.”
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As good as it is to have a new building to market, some agents are pondering what will happen to older stock and smaller sites. “It would be fair to say that the market will be reasonable for the next two to three years, but it could be at the expense of older, smaller buildings. Occupiers leave smaller buildings behind when they consolidate,” says Bob Parker, head of industrial at Matthews & Goodman. But Parker predicts that, in the coming 12 months, smaller units could also be snapped up as the market continues to grow, and that not everyone will be looking for a large new building. “The levels will rise in the secondhand market, but not dramatically. The smaller end of the market will not disappear because of larger developments. According to Mike Haigh, partner and head of industrial at Knight Frank, developers are still looking for units of 20,000 sq ft-50,000 sq ft, and that sometimes they opt for buildings as small as 10,000 sq ft. John Burbage, chief executive of Burbage Realtylikes the newer buildings, but he agrees with Haigh and Parker. “There is a market for the older stuff.” For example, he points to the 30-year-old, 600,000 sq ft Argos unit at Daventry, Northampton. Five parties are now bidding for the site that Argos is currently moving out of. |
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● Demand will outstrip supply |
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●Rents will grow over 2% pa over the next three to five years |
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● More speculative buildings are going up |
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● New areas that will become popular for developments include: the M18 in Doncaster; Shell Haven; the A13 corridor at Dagenham; and the A14 in Northampton |
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● Sites will be stockpiled by the large companies, especially in the South East |
