• Total availability rate stands at 10% following quarterly take-up of 9.8 million sq ft
• 1.2 million sq ft of space currently being speculatively developed
• Further yield compression in prime investment market and investors accept greater risk levels
Large industrial space (50,000 sq ft plus) take-up during Q1 2014 was 30% higher than the previous quarter and 11% above the quarterly average since 2007, according to Gerald Eve’s latest Prime Logistics bulletin.
Total take-up for the quarter stood at 9.8 million sq ft, compared to 7.5 million sq ft during Q4 2013, with performance strongest in core locations such as the West Midlands and the South East, although most areas saw some uplift in take-up.
Retailers and manufacturers, together accounting for almost 60% of total take-up, were the sectors that continued to drive the market, and this is likely to continue given the ongoing expansion plans of companies such as Lidl and the continued strength of the automotive sector.
The overall availability rate ticked up slightly to 10% (from 9.8% at the end of 2013) as a result of the release back to the market of large buildings such as the one million sq ft ex-Tesco ‘Bigfoot’ shed in Daventry; but in reality supply remains at a very low level, particularly for high-quality stock.
It is this shortage of supply that has driven speculative development to a post-2007 high, with 1.2 million sq ft of such space across ten schemes currently under construction, all of which is in either the West Midlands or London / South East and is expected to complete by the end of the year. Occupiers are also reacting to the constrained supply by pre-leasing space, and there were 17 design-and-build schemes which started construction during Q1.
Steve Sharman of Gerald Eve’s research team said: “The recent strength of the large industrial occupier market continued in the first quarter – as evidenced by a positive performance across every indicator in all parts of the market – and this is now comfortably the best the market has looked since the downturn.
“And the signs are fairly clear that this will continue. The positive outlook for the sector is reflected by higher levels of development driven by pre-leases and, in the West Midlands and the South East at least, the return of significant speculative development.
“However, the relative shortage of space, particularly high-quality stock, remains a constraint on the market and although the upturn in the speculative development market is welcome, it will not be sufficient to relieve the latent demand in the market.”
Investor appetite for industrial stock continues unabated, and as such prices are continuing to rise and prime yields nationwide have moved in by 75 basis points in the past year; in London and the Midlands, prime yields have moved even further, by up to 90 basis points.
The sector continues to be defined by a growing weight of money targeting a small and diminishing supply of suitable stock; fund allocations for industrial have been increasing, and even those investors who own suitable stock are reluctant to sell given the desire to be positive net investors in the sector.
Richard Ludlow, partner at Gerald Eve, adds: “Demand for suitable industrial stock continues to outstrip supply, and as a result not only are yields tightening but investors are increasingly amenable to greater levels of risk in search of returns. The outlook for the rest of 2014 is very much along this theme and we expect the improving occupational market to continue to feed through to the investment market.
“As more schemes, either speculative or design-and-build, complete, the market will be provided with more prime stock on which to trade, but at current levels this is unlikely to match demand. As such, we anticipate secondary to outperform prime over the medium term as the yield spread between the two narrows.”
First produced in 2006 (analysing the 2005 market), Gerald Eve’s Prime Logistics bulletin focuses solely on industrial warehouse properties of 50,000 sq ft or more in size.