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News Release

Nottingham

Dwindling supply in big sheds provides opportunity for Built To Suit

According to Jones Lang LaSalle


Nottingham, 25 April 2012 – With the continued moratorium on big box speculative development and a lack of available large logistics warehouses in the market, James Keeton Associate Director of National Industrial and Logistics at the Nottingham offices of Jones Lang LaSalle believes occupiers will increasingly have to consider built to suit facilities to meet their requirements.

Keeton bases his thoughts on the latest Big Box Industrial and Logistics Market report published by Jones Lang LaSalle, which focuses on Grade A quality distribution space over 100,000 sq ft compromising both new and good quality second-hand space.

The report says that the available supply of Grade A space fell by just under 2 million sq ft over the second half of 2011 to reach 26.2 million sq ft at the end of the year.  This represents a vacancy rate of around 12%.  This is against a backdrop of outstanding requirements in the South and Midlands totalling 24 million sq ft, according to Jones Lang LaSalle’s records.  The availability of new floorspace fell by 16% over the last six months of 2011.  By the end of the year, the availability of new space stood at under 10 million sq ft.  Good quality second-hand floorspace was virtually unchanged in net terms at the end of 2011 compared with six months earlier.

Apart from one new speculatively constructed unit which was delivered to the market in 2011, there has been no speculative construction in units of 100,00 sq ft and over completed since the first half of 2009.

The one speculative unit to be completed since mid-2009 was built by Muse Developments at Eurocentral in Scotland.  The unit totals 128,731 sq ft and is currently available.  The report doesn’t expect to see any speculative units of 100,000 sq ft and over to take place in 2012.

“With a lack of speculative build properties coming onto the market or likely to emerge in the foreseeable future and an absorption of existing new and good quality second-hand accommodation, the supply is dropping in The East Midlands and is leading to very limited choice.  The main players in the occupier market are retailers, third party logistic companies and recently automotive companies, all of which have very specific requirements,” states Keeton.

“Whilst economic growth and confidence are likely to restrain occupier demand in the first half of this year, there still remains a large volume of active requirements in the market which we would expect to boost take-up in the second half of the year, assuming the economic outlook improves.

Last year, retailers accounted for 42% (5.6 million sq ft) of all floorspace taken up in Grade A units, logistics companies accounted for 34%(4.4 million sq ft), manufacturers accounted for 13% (1.7 million sq ft) and ‘others’ accounted for 11% (1.5 million sq ft).

“It is less likely, therefore, that within the dwindling supply of stock there are not going to be enough good quality sheds to meet occupiers needs and Built to Suit will increasingly be the route forward,” said Keeton.

In 2011 Built to Suit started to gather pace with the likes of Henry Boot, Prologis, Gazeley and Goodman all active in the sector.  Jones Lang LaSalle acted for Henry Boot for the construction of a new 100,000 square foot distribution facility for Andrew Page at Markham Vale which is on-site now, following on from a string of other build to suit deals at the scheme.

Other similar deals in 2011 included circa 470,000 square foot for the co-op at Castlewood Business Park, and two giant deals – One million square foot for M&S at East Midlands Distribution Centre and 840,000 square foot at Daventry Industrial, Rail and Freight Terminal.

 “Occupiers will have to move fast and plan well ahead to go down the Built to Suit route and be prepared to pay higher rents than for speculatively built facilities, also taking longer leases, typically 15 years,” said Keeton.

Allan Wilson who heads up the Capital Markets team for Jones Lang LaSalle in the Midlands region added that Built to Suit properties were also likely to be an attractive proposition for investors. Allan said: “The Built to Suit market ticks all the boxes for investment returns.  The nature of the deals are such that they’re generally in prime locations occupied by large, profitable companies with good covenants offering safe income for a significant period of time.”

Investment in UK industrial property in 2011 was 42% higher than in the previous year (2.4billion) and 48% higher than in 2009 (£2.3billion).

A surge at the end of last year accounted for 44% of all investment in UK industrial property during the year, with three large portfolio deals accounting for some £800 million of investment.

Prime distribution rents remained broadly unchanged at the end of 2011 compared with mid-year in the majority of major markets, although the picture is complicated by the availability of incentives.  As a result, rents can vary widely even for buildings of a similar quality in the same location.

At the end of last year, regional prime yields also remained stable over the final quarter at 6.75% and in the current economic climate, investors are increasingly keen to acquire units let to good covenants on long lease lengths.