• Availability very low at 12.4% despite fall in take-up
• Restricted supply to put upward pressure on headline rents during 2013
Take-up of large industrial space (50,000 sq ft and above) during 2012 was down 9% on the previous year, but restricted supply should lead to rental growth over the course of 2013, according to Gerald Eve’s latest Prime Logistics report.
Overall take-up for 2012 stood at 32.6 million sq ft, compared to 35.7 million sq ft during 2011 and marked only a modest 10% improvement on the nadir of 2009.
The fall in take-up has been driven by a combination of ongoing fears concerning the economy and a relative lack of suitable space. With the prevailing economic conditions weighing heavily on occupier confidence many property decisions have been delayed, while even those companies looking to expand and happy to commit to new space have often struggled to find the accommodation to suit their requirements.
Reinforcing the conclusion that a restricted supply of prime logistics space is a constraint on the market, total availability rate fell to 12.4% at the end of Q4 2012 (Q4 2011: 15.8%), leading to hopes that rents will start to rise and incentives reduce. The supply of new or refurbished stock across the country is now the lowest since availability was first recorded by the Prime Logistics report in 2006, standing at just 13 million sq ft at the end of Q4 2012.
Indeed, the return of speculative development appears overdue, as virtually all completions since 2010 have been purpose-built. New development during 2012 was up by a quarter on 2011 levels at 8.8 million sq ft; the handful of speculative buildings that were completed were mostly in Enterprise Zones and were nearly all for less than 100,000 sq ft.
Richard Ludlow, partner at Gerald Eve, comments: “The list of candidates of who will be the first to speculatively develop a meaningful-size shed first is quite short. The main ‘big shed’ developers are at the top of the list because they have the sites, however, one should not rule out an opportunistic fund chasing higher returns.”
With prime rents static since 2010, current constrained supply will provide upward pressure, with rental growth forecast to be 1% per annum between 2013 and 2016, with the greatest uplifts in locations such as Heathrow, Park Royal, Birmingham, Coventry and Northampton. The prospects of rising headline rents, combined with the Chancellor’s announcement in the Autumn Statement regarding the creation of an 18-month empty rates grace period on newly-built buildings, could go some way towards spurring speculative development.
Sally Bruer, partner and head of industrial research at Gerald Eve, comments: “The fall in take-up on 2011 levels is mainly a result of economic uncertainty, but the relative paucity of appropriate prime logistics space is also a factor. Put simply, firms were often frustrated by a lack of the right space in the right locations, a fact reflected in the very low availability rate of 12.4% at the end of the year.
“With newly-developed space growing by 26% year-on-year, virtually all of it purpose-built, there is clearly a strong and growing demand for prime logistics space. We expect this demand, together with the current relatively constrained supply, to lead to rental growth in 2013 and with it a rise in the number of speculative schemes that start on site.”
Investment-wise, overall volumes were down 8% in 2012 compared to the previous 12 months mainly due to a lack of suitable institutional-grade stock. However, demand for prime logistics investments with strong fundamentals (long lease lengths, strong covenants and fixed uplifts) remained strong and overall industrial property yields continue to look attractive in the context of the broader general investment market.
Richard Ludlow adds: “Fund-grade assets that tick the relevant boxes are in high demand but relatively short supply, and this is currently driving yield compression in the prime market. Transactions at this end of the market are regularly taking place at sub-6% yields, highlighting not only the disparity in supply and demand for such assets, but also the ongoing risk-averse nature of investors.”
First produced in 2006 (analysing the 2005 market), Gerald Eve’s Prime Logistics report focuses solely on industrial warehouse properties of 50,000 sq ft or more in size.