Why industrial is favouring speculative development
Big box speculative development is picking up in the UK as developers see opportunity in the low supply and high demand market.
Over the last 18 months, construction of larger speculative developments of 400,000 and 500,000 square foot has also started across the country. Demand for larger warehouses has been increasing in recent years, especially among e-commerce occupiers in need of more storage space.
This is bringing a different product to the market, says Tessa English, industrial research director at JLL.
“Developers are breaking into a different size band.”
Last year, sector specialist Gazeley completed the first warehouse of more than 500,000 square feet to be speculatively developed in the UK for about 10 years. This was followed by Panattoni completing its development of a 550,000 square foot unit in Nottingham. There are a further four units over 500,000 square feet speculatively under construction nationally which are expected to complete this year.
“How investors choose to speculatively develop stock is changing,” says English, pointing to the influence of U.S.-backed logistics developers such as Panattoni. “Speculative development forms a big part of take-up in the U.S. – higher than in the U.K.”
Developers are building these larger units to bring more immediate choice to the market and “eat into build-to-suit take-up”, says English, which historically has accounted for the largest share of new take-up in the UK.
Not without risk
Speculative delivery of sizeable assets come with some risk. Occupiers in the upper size bracket tend to be more specific in their needs and not all assets being developed suit everyone. Therefore, more exact demands have usually meant build-to-suit methods have worked best.
While build-to-suit strategies remain strong and speculative development is picking up, existing warehouses built in previous decades to a high standard remain popular, English says.
“Many existing assets can still be considered Grade A quality,” she says. “Occupiers still take these buildings – as long as the specifications and location fit the bill.”
Clipper Logistics, for example, signed for an existing second-hand building in Sheffield last year totalling 615,000 square feet.
Across the UK, supply of Grade A space is expected to rise this year, English says.
“As well as speculative development starts this year, good quality second-hand units will return to the market through occupiers upgrading to new or larger facilities or retailers who have gone into administration exiting buildings,” she says.
However, take-up levels in 2019 could also be lower than in 2018.
“Following such a strong year of take-up in 2018 and given the political uncertainties around Brexit and weak projected economic growth, we do not expect take-up in 2019 to match the level recorded in 2018,” says English. “However, it will be interesting to see how these larger speculatively-developed units are taken up and the demand they receive.”