SPECULATIVE DEVELOPMENT SURGES AS TAKE-UP HITS 10.5m SQ FT
Speculative development of large industrial units (50,000 sq ft) surged during the third quarter of 2015, with 3.4 million sq ft of new space beginning construction, according to Gerald Eve’s latest Prime Logistics bulletin.
This increase – a rise of 17% on the 2.9 million sq ft starting on site during the second quarter – means that over six million sq ft of new space is currently being speculatively developed, a reaction to take-up that has been at or above the five-year average since the end of 2013.
Total take-up during the third quarter hit 10.5 million sq ft, up 7% from the 9.8 million sq ft seen during Q2 and was driven on by the occupational activity of internet retailers. Amazon alone signed for a total of 1.2 million sq ft across eight buildings, accounting for more than 11% of all take-up. The dominance of this sector, as well as the swiftness of its growth, is underlined by the fact that internet retailers are the largest occupiers of speculative space built in the current cycle.
The surge in take-up, combined with a development market that has been sluggish until relatively recently, has seen availability fall yet again to 6.4%, an all-time low. This is just half the rate recorded in Q3 2012 and highlights the acute shortage of quality space in prime markets.
Richard Ludlow, partner at Gerald Eve, said: “What we are seeing is the development market recognising the mismatch between near-record demand and critically-low supply of quality space in the traditional prime locations. An acute shortage of appropriate space has constrained the occupational market for some time now, and this is only just beginning to be addressed.
“Speculative starts last quarter hit their highest level since the start of 2007 and were higher again during Q3, highlighting just how much developers are waking up to the opportunities in the marketplace. And it is instructive that it is internet retailers dominating the take-up of speculatively-developed units: this is a fast-growing sector that is hungry for space, something that bodes well for developments currently on-site.”
Confidence among investors in the sector remains extremely high, with buyers continuing to be attracted to the compelling fundamentals of extremely low availability rates, resilient occupational demand and sustained rental growth. The weight of money targeting the sector is such that Q3 saw the lowest net initial yield of the current cycle transacted through Eyre Estate’s purchase of the DPD / Geopost facility at Orion Park in Dagenham for £17.2m / 4.15%.
George Underwood, partner at Gerald Eve, said: “Notwithstanding this latest evidence, prime yields have generally reached a level where, aside from the occasional best-in-class deal, investors appear reticent to chase deals beyond the current yield benchmarks. The aggressive pricing of prime assets is prompting more investors to seek greater income returns, which in turn is leading to further convergence between prime and secondary yields, as well as a noticeable shift in yields for sub £10m lot sizes.
“The availability of prime standing stock in the market remains very thin, albeit a limited supply of new product is starting to return as some developers look to profit-take from speculatively developed units which have let. The lack of prime deliverable logistics investments is forcing more investors to consider forward-funding deals as a way of securing an institutional-quality of product, which is increasingly difficult to source in the up-and-built market.”
First produced in 2006 (analysing the 2005 market), Gerald Eve’s Prime Logistics focuses solely on industrial warehouse properties of 50,000 sq ft or more in size.