M&G Real Estate pounced in September, the latest to pile into the North West speculative industrial development free-for-all.
Its decision to fund a 400,000 sq ft scheme at Harworth Estates’ Logistics North makes the firm part of a market that boasts 13 or 14 or 16 speculative starts (everyone has a different list) of between 90,000-350,000 sq ft. More than 3m sq ft of floorspace is in the pipeline.
There’s a lot of bad karma around the word “boom”, so everyone is choosing their language carefully. “A very positive story,” says Cushman & Wakefield director Tony O’Keefe. In a normal year, whatever that is, the North West could expect to see 4m-5m sq ft of bigger-box take-up. This year take-up is already believed to be around 3.5m sq ft and will end appreciably higher, thanks to monster deals like the 543,620 sq ft Exertis distribution centre at Burnley Bridge Business Park, agreed with developer Eshton in March.
If about 3.2m sq ft is in the pipeline, and if we assume a few hundred thousand sq ft of new space splutters out every month, the market looks nicely balanced, perhaps tending to undersupply. And what’s not to like about that?
It gets better, because there are already encouraging signs that demand is stepping up to meet the tide of speculative supply.
New Capital Knowsley’s 110,000 sq ft Venus 110 is said to be close to a deal at a respectable rent north of £5 per sq ft.
“It will be good to see the first speculative unit of the new cycle getting what is effectively a prelet. It’s an endorsement,” says O’Keefe. Stoford and partners Mountpark/ESAA Realco are also said to be close to a prelet on their 271,000 sq ft unit at Airport City, Manchester, ahead of a January 2016 completion date. DB Symmetry/Legal & General are believed to be on the brink of a deal at their 110,000 sq ft M6Epic site, as is Harbert at its 61,000 sq ft North Point scheme, Trafford Park.
Unstoppable rumours abound of more imminent speculative schemes. Omega Warrington denies it is smoothing the way for a 350,000 sq ft spec start, yet the story is widely credited among agents. “It is, but it is playing it very quiet,” one told EG, undeterred by a seemingly crystal-clear Omega statement saying it was no dice.
Behind the hoopla of a thriving market, thoughtful agents and developers are wondering if rents are rising fast enough to keep pace with land and build costs.
Stoford’s joint managing director Dan Gallagher reckons that land prices have soared by between 15% to 20% in the best locations in the past 12-18 months. Most observers agree, and say that £400,000 an acre no longer seems pricey. Build costs have gone up almost as fast.
Gallagher says: “Rents are moving on. They will start at £6 per sq ft, perhaps moving up to £6.50 per sq ft during the year. We’re due some more rental growth, but if yields soften some developers could find themselves with issues. Developers mustn’t overdevelop sites, or fix appraisals to get speculative funding. We mustn’t overcook the market.”
Stoford is cooking up plenty more development: a 25-acre site at Halton acquired from Ainscough Strategic Land is being prepared for a 450,000 sq ft development, but Gallagher says he – and everyone else – must be careful where they tread.
“Industrial is hot, and you need caution about where you spec. In the last development cycle we saw too much speculative development in secondary locations,” he warns.
Harworth Estates take a similar view. M&G will fund two units of 225,000 sq ft and 175,000 sq ft at its Logistics North site in Bolton, in partnership with Harworth. A second 18.3 acre site has been sold to Exeter Property Group working with Fire Industrial to develop a 357,000 sq ft unit.
Phil Wilson, executive director of Harworth Estates, says: “Demand is still good. We have live enquiries that could take all the remaining plots, if they all landed on us. Obviously they are talking to other sites, too.”
Wilson would prefer not to sell sites. Development is more his game. That is the plan for the eastern side of the site: a scheme of up to 150 acres, capable of taking 2m sq ft, and, as of last month, now provided with infrastructure.
“Land costs are up by 20%, building costs up by 10%, and while we’re seeing rental growth this isn’t massive rental growth,” Wilson says.
Those plotting the next phase of development may find it hard to get the kind of star-quality sites the funders want to see. Jon Atherton, director at Savills, says: “The year 2016 will probably be quieter than 2015 for spec starts, and the issue will be finding good sites. How much more spec we see will depend on what happens to the schemes already in the pipeline.”
Paul Cook, senior director at CBRE, says: “We are seeing quoting rents at £6.50 per sq ft for the first time, and we could see £7 per sq ft in 2016 on smaller units of less than 20,000 sq ft.”
The first indisputable evidence that rents are motoring up to and beyond £6.50 per sq ft could come in 2016. Investors and developers have their fingers firmly, and optimistically, crossed.
