It is difficult to find the right word. “Nervous” feels like an overstatement. “Unsettled” sounds too much like bad indigestion. How about “twitchy”? Or “hesitant”?
Whatever the word, there is an odd mood in West Yorkshire’s industrial property market. That is because while demand is strong, and supply is scarce, speculative development in the Aire Valley still needs public sector support because rents are too low.
This taps into a longer-range concern that industrial rents are not rising fast enough to justify building more without prelets.
In other words, while most market-makers insist their glass is half full, many of them secretly fear it might be half empty. And this makes them feel odd – twitchy, hesitant, even a bit uncertain.
The evidence for half-full comes from Muse and Wilton, developers backed by Leeds city council and both at work on 80,000 sq ft developments.
Muse development director David Wells says: “We would not be doing this without the public sector, because although the demand and supply balance is right, historic rents have been too low to justify development and finance is still difficult for some developers to come by. The city council recognised this.”
“We will be quoting £5.60 per sq ft and we are pretty confident we can get it. But historic rents have not grown for many years, and that cannot continue. Build costs have to be reflected somewhere.”
The typical rent for a good secondhand unit of 20,000-40,000 sq ft is around £4 per sq ft, and hasn’t moved for about 20 years, says Tom Lamb, associate at Knight Frank, joint letting agent at the Muse scheme with Carter Towler. But Lamb believes the striking lack of supply will encourage occupiers to pay realistic economic rents.
“There is virtually no grade-A space available between 30,000 and 60,000 sq ft in the Leeds city region, and it is a big step down in quality to the next level where more is available,” he says. “We are already seeing some deals agreed at £5.25 per sq ft, and it is starting to creep up.”
However, Lamb concedes that rental growth is more evident in some locations than others. It is happening at Normanton but is not particularly evident – yet – in the Aire Valley.
DTZ’s head of Yorkshire industrial property, Paul Mack, is also a glass-half-full kind of guy. “We’ve got almost zero good space to offer on the market, and about 11 years of pent-up demand,” he says. “Look at the success of small developments in Normanton. Small-scale speculative schemes there, like CDP’s 38,000 sq ft Trident Park, have let at £5.25 per sq ft on a 10-year lease.”
Mack estimates existing serious West Yorkshire demand for new space at around 500,000 sq ft, almost all of it in the 40,000-60,000 sq ft bracket. “Demand like this is slowly driving up rents,” he says. “It is getting easier to keep rents above £5 per sq ft.”
And it is at this point that the nerves become apparent. Twitchiness is most visible in those who don’t see the rental curve rising quite so smoothly – or who fear public sector intervention may distort the market.
Dave Robinson, head of industrial at Savills, is as delighted as anyone at the surge in demand. “We have a 50,000 sq ft unit under offer and we had four parties chasing it. We could have let it several times over,” he says.
“There are between five and 10 genuine requirements, and plenty more interest. I am handling a 30,000 sq ft refurbishment and we already have four pages of names of interested parties.”
However, Robinson is not so sure about rents in the Aire Valley. “Whatever is quoted, take off 25p,” he advises.
“Are rents going up? Yes and no.” Incentives are sliding – back to about six months rent-free for each five years of lease term, half of what tenants might have expected in the recession. But Robinson says Yorkshire occupiers will go to some lengths to avoid paying rents that they perceive to be over-the-odds.
“Higher rents may put some people off – and they may react by compromising on the property they want,” Robinson says.
The public sector backing on offer to Muse and Wilton also gives him pause for thought. Robinson says: “A client of ours had institutional funding for speculative development on a site nearby, we were looking at 80,000 sq ft, but we cannot compete with the council-backed schemes. I know the council took some time coming to fruition, but today is there really a need for the council to intervene? Because it is ruining a deal for me.”
Andrew Gent, partner at Gent Visick, is second to none in his enthusiasm for speculative development. Yet he, too, questions whether the council has gone down the right route.
“Top rents at Normanton range from £5.25 to £5.50 per sq ft, though even speculative development there has had some public sector support on infrastructure. If a market requires support from the public sector then it isn’t quite there yet – the kettle is on the hob, but the water isn’t boiling,” he says.
“It is good to see speculative development and there is a clear lack of supply, but there is a question mark over why the council decided to help two schemes with support that is not available elsewhere, and a question mark over whether demand has yet reached the point to guarantee the wider spread of speculative development. Maybe the council has stimulated speculative development a bit early in the curve?”
Gent wonders when occupiers will accept that the erosion of the gap between good secondhand rents and new-build rents has to end. He wants to see a wide, clear space between them.
Tom Bridge, chief economic development officer at Leeds city council, says there was a clear need for new industrial floorspace and the city acted quickly to fill it.
“The Leeds city region has the largest concentration of manufacturing in the country, our businesses are in outdated and outmoded properties, and we need a good supply of oven-ready units to attract new businesses and satisfy existing ones as they grow,” he says.
Bridge says the problem of low rents is caused by lack of good quality floorspace to rent. “Rents reflect the quality of space on offer,” he says.
Bridge says he is “mindful” of the risk of squeezing out purely privately funded speculative development as the market improves, and “prudent and mindful” about not distorting the market. “But in the circumstances, what we did was the right thing to do,” he insists.
“Would it be right to sit on our hands and wait for market forces to get going, which might have taken years?” he asks, implying a resounding “no”.
Bridge says the support the council offered Muse and Wilton is “not our standard modus operandi”. However, he does not rule out offering more support for speculative development.
Only market activity in the coming months will tell if the glass was half full or half empty, and whether public money has been wisely or unhappily spent. For now, everyone is simply biting their nails.
Speculative schemes
Leeds city council has stimulated speculative building by taking so-called “put“ and “put-and-call” options on developments by Wilton and Muse.
If neither lets within 18 months the council will step in and buy them or, in the case of Muse, can exercise the right to buy at any time.
Wilton Developments is behind the £5m Connex 45 development at Thornes Farm in the Leeds enterprise zone. The site is backed by a £670,000 grant from the government’s Building Foundations for Growth fund.
Logic Leeds, Muse’s 110-acre manufacturing and distribution scheme close to junction 45 of the M1, now has planning permission and a £2.5m grant agreement with the city council. Speculative development of an 80,000 sq ft industrial unit is the down payment on a 1.6m sq ft enterprise zone scheme.
