Topics up for discussion in this autumn’s Industrial Talks were how the industrial logistics sector is responding to the need to match market conditions with market demands, what’s happening in leases, and future trends
The panel
Charlie Howard, UK managing director, Logicor (part of Blackstone)
Ian Henderson, group property director, Wincanton
Richard Sullivan, director and national head of industrial and logistics agency, Savills
Alison Yard, joint ventures director, SEGRO
Nigel Godfrey, executive director and UK head, IDI Gazeley
Peter Ward, chief executive, UK Warehousing Association
Market demand
Nigel Godfrey: At the moment, demand is as good as I have ever known in my career. There’s take-up of all sizes, and the areas where we are seeing that in particular are the Midlands, South East and, to a degree, the North West. We have got a relative lack of supplier product brought to the market, and we are seeing really good strong rental growth.
We are going to see an acceleration of the voluminous spec space brought into the market, but I don’t think that is going to cater for the demand that is coming out there. Whether that means people are going to start constructing in inappropriate locations, I’m not sure. But I don’t think we are going to see a repeat of the excessiveness of the last cycle. Debt is certainly coming up, which constrains some developers, but we are in a bit of a sweet spot at the moment.
Alison Yard: At Heathrow we are seeing increased take-up and a lack of supply, particularly grade A. Our issue is a development pipeline. Increasingly, we are looking to our existing stock and redeveloping our secondary stock and providing new grade-A stock for our customers.
Land and leases
Ian Henderson: The challenge is not so much the lack of space, but the space in the right terms. If the leases are 10-15 years, that creates an issue. Also it is about the development of space and how much space is out there. It is also about the lease renewals.
Charlie Howard: I have never known a period when there have been so many willing customers signing up to long-term leases. An awful lot of our customers are pumping more capital share into their buildings and, as a result, they will drop anchor and take long-term commitments, so we have had an amazing success.
NG: There has been a difference in the leases that occupiers will take. Retailers will take very long leases, 25-30 years, but occupiers will prefer to take shorter leases that match the contracts they are doing. In our recent experience, we can get commitments from 3PLs [third-party logistics] for 10-year leases. Anything in excess of that tends to be a struggle, but we can certainly work with that.
Peter Ward: We are looking just slightly further ahead than 2017/18. We are looking at current trends and the way demographics are changing on a global scale. London is a great example of this and the UK in general. What we will see is growth in global population from 7bn to 9bn over the next 20 years, and alongside that this urban drift as well as the demographic shift of the growing ageing population.
We are waking our membership up to realising actually that against the consumer habits of just doing everything on a little and often basis, you can’t serve that little and often market from a big shed up in the Midlands; it has got to be edge of town.
Development constraints
Richard Sullivan: It is the concept of matching the right product for the market and the fact remains at the moment that while there is a little bit of secondhand space coming back to the market from time to time, it is relatively limited. This is probably why you get more flexibility and, bluntly, the spec development and build-to-suit sector are where the focus is right now.
IH: There are a number of constraints, such as availability of land, timescale for delivery, the planning process. So when you guys say “I want a building”, we can build very fast, we can build in about four months. But we have a planning system that is broken and doesn’t respond within the timescales we really need.
At the moment, we have got things like construction costs inflation, which is probably running at about 5% and is impacting development, and we have also got steel ordering constraint. If you want to place an order for steel today, it is some 20 weeks before delivery.
AY: At Heathrow last year, about 240,000 sq ft of spec new stock was delivered to that market, and all of it has been taken up or is let or under offer. There is a lack of available sites in core locations, so, as I said earlier, we are increasingly looking at our existing stock and redeveloping greatly.
CH: The supply that is coming on stream now is having an impact, and rightly so, on the balance between build-to-suit and existing deals. Last year, 84% of deals were done through the build-to-suit market, which was too high and that was because predominantly there wasn’t product out there.
RS: Obviously the market is significantly more mature than 10 years ago – in 2006/07 there was a huge supply. The analysis going into these things and trying to ensure you are matching the right type of product to suit the customer is much more prevalent. The reality is that the amount of development you can do is constrained by this land and delivery situation.
CH: And, I think, also on funding. Yes, there is more funding out there today, but the constraints from funding departments are still very rigorous – their controls are in place.
Next 12 to 18 months?
CH: We will see more supply coming into the market, but that supply will be limited for the reasons we discussed earlier. Rents will increase. They have been increasing in the Midlands with 50p, 70p added, which is 10%, and they will continue rising. The market is looking robust for the next 12 to 18 months.
AY: Market dynamics and supply and demand are such that we will see some new supply.
PW: I don’t think the 3PL sector that I represent can carry the increased costs, so I think the consumer pays at the end of the day.
There is going to be a greater level of collaboration within the 3PL sector. There will be vehicle sharing, there has to be more cross-party collaboration within the sector and across the users as well, and balancing and optimising the limited assets that we have to play with.
NG: There is the bargaining power determined by the supply and demand equation. There will be a continuation of demand over supply, which is going to be taken up as quickly as it is delivered. Therefore I see an acceleration of rental growth.
Over the last 12 months, certain locations have seen rental growth of 10% per annum – I see that continuing. As a landlord, as an investor and a developer, that is a good thing, but clearly we want to work with our customers to serve them as best we can. It’s great market dynamics at the moment.
Future trends
NG: We will see more multi-level occupation – there are some occupiers looking at mezzanines.
PW: Let’s convert the underground car park at Park Lane into a logistics centre to fulfil the West End of London and let’s build an ATL or a Goodman site building in central London to replicate what happened in Hong Kong 25-35 years ago, because we ain’t got the space here. That’s the future. I can’t see any other way out of it.
RS: We will see multi-deck warehousing. I genuinely think it is back on the agenda. It’s due to the land constraint issue, and because of the changing nature of customer fulfilment being that proximity to customer lifestyle delivery. There could be a number of challenges around that, not least the fact that they are expensive to build, but also you are probably going to be competing again with high-value uses.
So, if you can do a multi-deck warehouse and it’s £6m an acre, fantastic, But if the equivalent is £25m an acre to do a residential scheme, you will have to have some sort of influence to say: “No, it won’t be residential – it will be employment.”
