Following a flurry of transactional activity during the second half of 2010, take-up of large industrial space (50,000 sq ft and above) has returned to more subdued levels during the first half of 2011, according to Gerald Eve’s latest Prime Logistics bulletin.
Whereas in 2010, space transacted was driven to a large extent by a build up of retailer demand, the primary drivers of activity in 2011 have been natural expansion, consolidation and lease events. From a three-year high of 10m sq ft of take up in Q4 2010, we saw demand drop to 7.1m sq ft in Q1 2011 before rising to 8.5m sq ft in Q2 2011.
With almost no speculative development underway in the UK, pre-lets continue to dominate the new-build market, with 2.8m sq ft of space pre-let (or pre-sold) during Q2 2011, the highest level since 2007. Whilst the secondary market remains open to competitive deals, the prime end of the market is close to the watershed where demand will outstrip supply. This will ultimately swing back in the favour of landlords, resulting in increased rents and reduced incentives in the most sought-after locations.
Richard Ludlow, Head of UK Logistics at Gerald Eve, comments: “The emphasis on pre-lets and build-to-suit opportunities has become a driving factor of this market. With a shortage of available sites to deliver new product, we expect to see more strategic land buying during 2011 as developers wait to selectively and perhaps even speculatively develop in 2012.”
Steve Sharman, Associate at Gerald Eve, comments: “As many of us suspected, 2010 was about satisfying pent-up demand for space that had accumulated during 08/09. The healthy levels of activity seen thus far in 2011 are perhaps a more accurate reflection of demand levels in the marketplace.”
The constraint of suitable space at the prime end of the market belies the wealth of available second-hand stock and there is now almost 100 million sq ft being marketed across our regions. In supply terms this equates to a national average of around 10 years’ supply and in some regions this is extended to around 20 years’ supply. It is clear that much of this stock is unlikely to be occupied and is therefore ripe for redevelopment. The total availability rate for all industrial space across all our regions stands at 16% as at the end of Q2 2011, down from 16.8% in Q4 2010.
Despite recent levels of letting activity, Gerald Eve sounds a note of caution as the sector’s fortunes are dependent to a large extent on the recovery of the stagnant UK economy (and the fortunes of the faltering economies of our main European export markets) as well as an uplift in consumer confidence. Whilst at one end of the spectrum, many retailers have performed well and fuelled demand for large pre-lets, we have also seen a number of household names such as Habitat and Jane Norman fall into administration.
In this context, Gerald Eve predicts that headline take-up figures for 2011 will be down by as much as 20% on 2010. However, the nature of letting activity seen so far in 2011 combined with the healthy number of active requirements in the market gives ground to some confidence in the fact that deals will continue to be done during the second half of 2011.