by John Organ
1992 is just a state of mind. With or without political unification, the business world is already integrating Europe. It is a matter of survival, not politics.
During the 1980s new investment was heavily concentrated in financial services and retail distribution, which expanded demand for B1 units and warehouses. Manufacturing capacity was substantially reduced, resulting in peak unemployment levels of 3.16m in July 1986. However, throughout the last 10 years industrialists have reinvested in new plant and equipment so that manufacturing growth averaged 4.5% pa. Although services now employ 68% of our total workforce and manufacturing industries employ only 21%, the 1990s will see a revival of industrial space demand because of this substantial capital reinvestment.
The next decade will also see a continuing rationalisation of European industries: many more mergers and takeovers will take place in the fight to reduce fixed overheads and pool research and development costs. A recent example is Thorn EMI, who sold their lighting business to GE of America for £69m. This signals the end of British-owned large-scale manufacture of light bulbs: GE now become the second largest lampmaker, competing with Phillips of Holland and Siemens of Germany.
At the other end of the spectrum, STC sold their interest in ICL Computers to Fujitsu of Japan because of enormous R&D costs. Now the parent company itself has agreed to takeover by Northern Telecom of Canada. In the paper business Wiggins Teape have agreed a merger with Arjomari-Piroux, the French papermaking business, to become the third largest in Europe with a turnover of £2.5bn. These examples of three different industries underline the tremendous capital spending required by industry in the immediate future.
Modern international companies seek to subcontract any work to which they cannot “add value”, a policy which has given rise to a new breed of young hi-tech companies and parts suppliers. Those enterprises employing less than 100 people has jumped by 50% during the past 10 years: 1990 will be the first test of whether they have the management depth to cope with the current recession. The major banks expect that a large share of corporate casualties of the recession will be among the smaller companies.
Once the recession recedes, however, growth of small companies will continue, fuelling the demand for attractive modern industrial or trade parks across the country.
Industrial restructuring will mean a polarisation of demand. It will range from centralised European production – such as the famous Proctor & Gamble factory near Frankfurt which fills all its European toothpaste tubes — to provision of satellite factories serving local markets. A good example was the £800m merger of the former Metal Box packaging division with Carnaud of France. This enabled the combined group to deal from strength with global customers like Coca-Cola and to accelerate cross-border transfer of new products and technology by sharing costs. They will not centralise production but will develop local canning plants near customers’ factories.
Industrial demand
As companies adopt new manufacturing techniques like computer aided design, “just in time” stock management and total quality control they will demand better buildings to reflect their image and retain skilled staff. Some 60% of our existing stock of factories and warehouses in England totalling 3,800m sq ft was built more than 40 years ago, and is undoubtedly substandard. Demand in areas of industrial growth will accordingly be remarkably stronger in the 1990s. With an eye to the map, the routes to Europe, the North East, Midlands and East Anglia will see faster growth in demand.
The 1990s factory must be an adaptable “chassis”, with the structure able to support rapidly relocated production services. Fast growth means that expansion land becomes a priority and that the cladding must be able to accept relocated loading doors. Size demand will remain in the 5,000-sq ft to 25,000-sq ft range for speculative units, but there will be increased business for “design and build” contractors to provide larger factories on freehold sites.
A bottle of Optrex gives a clue to the future! Boots bought the parent company in 1983 but were told by the Department of Health that the lotion had to be made in a strictly sterile plant. Boots therefore built a new plant alongside their existing tablet factory in Nottingham at a cost of £6m. It employs only 35 people, but can make 12m bottles of eye lotion a year in an atmosphere that is 99.997% free of dust. Staff have to pass through air-locks and dress like surgeons in hospital. The cost of bottling, capping, labelling and packing the product is more expensive than mixing the ingredients!
Capital investment is also helping to reduce the number of workers needed. In Manchester the computer company ICL can now make mini computers to order in 10 days, as they have adopted Flexible Manufacturing Systems. They estimate that labour costs have fallen from 20% of total product costs in 1970 to only 3% in 1990.
Lucas Industries went through a bad patch in the 1980s when they suffered from overseas competition. They have now transformed themselves into producers of vehicle and aerospace systems with new manufacturing techniques. Lucas now make products in “natural groups” with office and manufacturing workers teamed into “cells” and organised around the flow of materials and information. A big complaint of many companies is that they do not want all the offices situated at the front of the factory, but want the ability to place offices closer to the factory floor. Think twice before you build that 50,000-sq ft speculative factory with a 30% office content! Industrialists also want their highly skilled staff to have external views of landscaped grounds around the factory, a policy which results in a lower density and higher building cost.
The good news is that the new breed of tenant is happy to pay much higher rents for top-class buildings as these provide quality reassurance for customers and help to retain expensive staff.
Warehouses
Despite the downturn in demand for commercial property there is still strong demand for warehouse accommodation: 50% of current inquiries are for units of 50,000 sq ft upwards, where automatic racking systems become cost effective. Eaves heights are rising for the same reason to 10.5m (34 ft) and any supporting columns should be at 15m by 20m grids which are ideal for narrow-aisle racking. The East Midlands has undoubtedly become the storage centre of the UK, both for contract distributors and national organisations. A good example of the new-style distribution park is Magna Park near Lutterworth, by junction 20 of the M1. It was developed by Gazeley Properties around Asda’s own requirements for a regional warehouse.
Speculative warehouses of 200,000-sq ft-plus are a high-risk business, as each company has a different logistics problem. BOC run two distribution centres for Marks & Spencer’s textile division. They have built a 260,000-sq ft warehouse at Cumbernauld and a 200,000-sq ft warehouse in Swindon. The Swindon unit has a 40 ft eaves height and is fitted with a mezzanine floor to increase apron space. Each unit serves 18 to 20 retail stores and operates around the clock with 350 staff on a three-shift system. The buildings carry around 90,000 different clothing lines and promise same day delivery by use of automatic picking cranes which collect garments from over 50 miles of storage aisles.
Eaves heights continue to rise, and a growing body of industrial surveyors try to negotiate rent reviews for these monsters based on cubic capacity. A good example is Howard Smith Papers in Northampton, who have one of the larger rack-supported warehouses in the country.
It is only 31,000 sq ft in floor area, but with an eaves height of 95 ft(!) has a capacity for 15,300 pallet locations serviced by five floor-guided stacker cranes. If the eaves height were only 24 ft they would need a building of 123,000 sq ft which would increase land costs by 350%. These rack-supported buildings can be classified as plant and machinery, and so could be eligible for 25% “writing down” tax allowance compared with the 4% allowance for warehouse buildings.
Hi-tech
First-generation two-storey mixed-use buildings with 50% ancillary office content are disappearing as local authorities are more willing to grant unrestricted B1 consent. This has resulted in an oversupply of out-of-town offices in some parts of the country, and developers have met resistance to the high rents proposed.
Stockley Park is still the classic success story of the ideal 100-acre-plus business park. However, tenants on the park are now fearful that the next round of rent reviews will push rents towards £30 per sq ft, and are already seeking to relocate their “back office” function away to cheaper mixed-use buildings at half the cost. Is this the ultimate sign of a successful business park?
One of the larger hi-tech buildings in the UK is the 1m-sq ft IBM disk file plant at Havant, on the south coast. It is mainly single-storey, but with a three-storey office block and a central atrium. It has its own bank, car rental and travel agency. The plant is a show piece for JIT and they also aim for “zero” production defects. Output has increased by 30% over the past three years, stockholding reduced by 50% and a 13% reduction has been achieved in staff.
They have also integrated their main suppliers. During the past decade 450 suppliers have been reduced to 140. They spend £1.2bn in the UK and collect subcontractors’ work with daily pick-ups at 6pm on 24 different “milk rounds” so that lorries can travel at night to avoid traffic jams. Like many other “global” companies they would prefer their subcontractors to be “on the grass verge outside”. This is a pointer to developers, indicating that they should seek to acquire land adjacent to major new hi-tech complexes.
Great concern has been expressed about the future shortage of skilled staff. Many firms could take a tip from IBM at Havant, who have only a 1% turnover of permanent staff. Apart from paying top salaries, they motivate their staff, provide multi-skills training, allow staff to run their own production line and provide “fit to compete” programmes. IBM also run community partnership schems where local teachers and school children visit the plant — a lesson, perhaps, for the property profession.
Footloose industry
The Channel Tunnel is planned to open in June 1993, providing a fixed link for the road and rail networks of both the UK and Europe. Although Euro-Tunnel expect to attract less than 20% of the total freight traffic across the Channel the tunnerl will have a dramatic impact on the way in which industrialists react to Europe.
It is likely that mega-distribution complexes of up to 1m sq ft will be established on mainland Europe, where motorway links will be superior to those in the UK. Some distribution contractors already reckon they can service Croydon from a depot in Calais rather than from a depot in the North.
Transport of bulk and unitised freight across the Channel is expected to double between 1988 and 2003 and there could be a further 40% increase in traffic by 2013.
The consequence of centralised warehousing is that both stockholding and distribution costs will rise. Given the average cost of £1 per mile per vehicle the movement of goods from France or Germany into the UK becomes a significant on-cost. During the next 10 years, accordingly, the UK is likely to benefit from inward investment by major international companies who will set up local manufacturing plants. Our labour costs are lower than many parts of Europe and we have a relatively stable financial climate. As Britain imports more than it exports, it is possible to negotiate cross-Channel export rates as low as 50% of the inbound rates, so that the cost of distribution into Europe is minimised.
Much of this international demand will be handled by the “Invest in Britain Bureau” and will not be of immediate interest to developers. However, the spin-off for back-up industries and offices will be of interest. A recent example is the potential that has already begun to emerge around the new plants for Nissan in the North East and Toyota at Derby.
The message for the next decade is clear. Demand for greenfield sites for new high-quality industrial and distribution units will grow, particularly close to our motorway network. The speed of redevelopment of worn-out industrial units will increase, particularly in the South East and the Midlands once the current recession recedes. Rents remain a relatively small element in total production costs and industrialists will be prepared to pay for top-quality low-density buildings.
The trick remains in identifying the likely future growth areas around the UK or in deciding which industrial areas are likely to see substantial renewal. One thing is certain — it is going to be an exciting roller-coaster ride over the next decade for developers, investors and industrialists.
