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Buoyed by demand from industrial companies Q1 2010 UK distribution take-up increased by 40% on previous quarter

Returning occupier demand will help stabilise prime rents during year

London, 4th May 2010 – Total take-up of industrial and distribution warehousing units in the UK (over 100,000 sq ft) reached 4.3 million sq ft in Q1 2010; reflecting an increase of almost 40% compared to the previous quarter and was nearly 70% higher than the take-up recorded in Q1 2009 according to research from Jones Lang LaSalle.
In the first three months of 2010, sustained by improving industrial production, occupier demand from the industrial sector increased recording one-third of the total UK take-up volume in this period. Retail-led demand remained strong in Q1 2010, reflecting nearly 30% of the total take-up volume, as retail companies continued to re-align their distribution network and plan ahead of future retail trends, particularly internet-retailing.
Richard Evans, joint head of Jones Lang LaSalle’s National Industrial and Logistics team, said: “During the first three months of 2010 the majority of leasing activity took place in existing vacant stock built over the last 2-3 years which has helped reduce vacancy levels in most traded markets. Occupier activity for design-build units also increased, but has yet to be reflected in actual take-up, with just 10% of total take-up in Q1 2010.”
Nearly 60% of the total Q1 2010 take-up was recorded in the Midlands, and this region has already exceeded total 2009 take-up volumes by 25%. The second strongest occupier activity in Q1 2010 was recorded in the Eastern region, recording 22% of total take-up (up by 30% on the total 2009 volume) and the Greater London market with 12% of total take-up and a volume more than three times higher than in the whole of 2009.
Jones Lang LaSalle expects that ongoing consolidation, supply chain efficiency improvements including outsourcing and changing transportation models, the changing retail landscape and increasing sustainability measures will drive further demand. Occupiers will primarily focus on modern prime, good quality space near to larger cities or strong transport locations and increasingly neglect older second-hand space and remote locations. An increasing proportion of design-build take-up in the market is also anticipated.
With lending conditions remaining tight, in the last months of 2009, development activity continued to be subdued and as a consequence no new developments were completed during Q1 2010. However, growing occupier activity, combined with rising developer confidence and improving credit conditions, has led to developers starting on site on a number of design-build distribution warehouses. At the end of Q1 2010 around 4 million sq ft of new distribution warehousing space was under construction, 20% more than three months ago.
Cameron Mitchell, joint head of Jones Lang LaSalle’s National Industrial and Logistics team, added: “With a lack of speculative development activity, the volume of vacant large scale modern distribution floor-space continued to edge down in Q1 2010. Vacancy rates in older second-hand units on the other hand continues to be relatively high across the UK as this space does not meet modern occupier requirements.”
Landlords responded to the slowdown in activity in 2009 by reducing asking rents. With the exception of Birmingham, where they remained stable over the last 12 months, prime distribution warehousing headline rents decreased across all main distribution warehousing markets. Rents declined by more than 20% in Edinburgh, by -12.5% in Glasgow, -8.3% in Leeds, -6.0% in Manchester and -1.6% in London year-on-year. Prime rents started to stabilise during the first quarter of 2010. Further rental declines were recorded only in Manchester (-2.7% quarter-on-quarter) during this period. Rents remained stable in Birmingham, Edinburgh, Glasgow and Leeds. Prime London distribution warehousing rents, due to shrinking modern supply, saw an upturn Q1 2010, recording a 4.5% increase on the previous quarter.
Alexandra Tornow, head of European Industrial Research at Jones Lang LaSalle concluded: “On the whole, we anticipate prime distribution headline rents to stabilise during 2010. Due to improving credit conditions and occupier demand, development activity will gradually return to the market as well. The general ability of developers to deliver design-build assets on a relatively short timetable offers a competitive pipeline supply in most regions. Despite shrinking vacancy in large modern units, this will prevent significant rental growth but is expected to reduce average incentive levels over the next 12 months.”