Total take-up of UK warehouse space - units measuring 100,000 sq ft + - exceeded 14.62m sq ft in the first half of the year, 29% above the long term average of 11.3m sq ft, driven by the continued demand from high street and online retailers, according to the latest Big Shed Briefing report by Savills.
Examining demand by occupier type, Savills figures reveal that online retailers and parcel delivery companies now account for exactly a quarter of the market in 2016, up from last year’s previous record of 17%.
The property consultant notes that so far, 2016 has seen strong levels of take-up for units over 500,000 sq ft, with five deals already completed this year, compared to a yearly average of seven. This includes Amazon taking 1.3m sq ft at Bardon and L&G homes taking The Big 555 in Sherburn In Elmet.
But with a general shortage of good quality large units available, Savills anticipates that occupiers will have to turn to the build-to-suit (BTS) market to satisfy larger requirements in the future, especially as the rate of speculative announcements continue to slow. This creates potentially lucrative alternative investment opportunities for property investors, especially those with contacts or expertise in this area of the market.
So far this year, almost half - 48% - of the space transacted has been for bespoke BTS units. This is due to the fact that Grade A and large unit supply continues to fall, with only one shed of this standard over 400,000 sq ft currently available to pre-let at Magna Park in Lutterworth. On a smaller scale, the supply of existing units of over 100,000 sq ft stands at just 29m sq ft, across 170 separate units, which has already fallen by 14% since the start of the year.
Kevin Mofid, head of industrial research at Savills, commented: “The supply of good quality large units remains at critically low levels, meaning that the increased prevalence of the build-to-suit segment within the market is here to stay for the foreseeable future.”
Regionally, the South West is experiencing a record year, having transacted 3.6m sq ft in the first half of the year, which is 2.1m sq ft more than the annual average. One of the largest local deals in the region, and country, has seen The Range take 1.158m sq ft at Central Park. On the other hand, Savills highlights that the South East has seen significant recovery in the second quarter with 1.3m sq ft of deals compared to a record low in the first quarter of just 262,000 sq ft.
Richard Sullivan, national head industrial and logistics at Savills, added: “Despite the current market uncertainty, we expect the manufacturing and distribution sectors to remain robust. Whilst it is likely that speculative development will slow, we do not anticipate that take-up levels will drop significantly as there are still a number of live large unsatisfied requirements across the country including Lidl in the North West and Amazon who are continuing to roll out its Prime and Fresh services.
“Overall, we are operating in a very different landscape to 2008/9 when almost 100 million sq ft of space was actively being marketing. Even accounting for the current development pipeline, supply remains at historic lows, in contrast to strong take-up levels.”
Furthermore, Savills notes that the investment market for logistics units continues to attract investors. In the first half of 2016, £1.2bn of stock was transacted, which is £350m above the long term average. Key to this has been the increased prevalence of overseas investors in the market, combined with the increased levels of take-up from the likes of Amazon creating a supply of prime investment stock. As a result, Q2 saw two of the three keenest net initial yields paid this year for Amazon units, with a 4.5% yield at Bardon and 4.66% at Airport City, Manchester respectively.
James Williams, head of industrial and logistics investment at Savills, commented: “‘Whilst there has been a great deal of uncertainty in the investment market since the referendum, indicators from some completed sales and bids are that investors are still keen to acquire good quality logistics opportunities.’