Limited stock produces challenges for the Midlands

Associate director at Innes England’s Derby office, Stuart Waite, talks about the demand for distribution hubs in the Midlands and the challenge of limited stock.

Undoubtedly there is a lack of standing stock following a national surge in take-up during the last 12 to 18 months. Occupiers are being forced to consider other regions with existing or new build availability in order to secure space on relatively favourable terms. That said, there is now a shortage of existing stock across the country and occupiers are being forced to consider the design & build route while speculative development remains limited. This dynamic is actually reflected in lower take-up levels this year (measured by total footprint across all grades of stock) across certain regions, including The Midlands, due to the lack of existing buildings.

In terms of ‘big box’ logistics, take-up has been dominated by retailers, third-party logistics and, within The Midlands, the automotive and aerospace sectors have also been active.

We have seen how the distribution market is changing, largely as a result of e-tailing. Parcel delivery companies such as Geopost, have concluded significant deals as they develop their delivery networks, focusing on mid-box, cross-docked facilities on two to three acre sites with a mix of dock level and ground level loading doors, centred around urban conurbations in order to meet the requirements of internet retailing.

Speculative development is happening but at present is very selective being limited to prime, well connected sites and the key in meeting demand moving forward is to have fully deliverable sites on the market with outline or detailed planning in place, infrastructure and quick delivery available –  albeit viability still remains a concern.

Development finance generally still requires good covenants and longer term lease commitments, which over recent years occupiers have not been used to, having been largely able to dictate terms on standing stock. That said, improving occupier demand and shortage of stock is starting to impact on positively on rental growth. We have seen recently on the few remaining new-build, vacant distribution units of 400,000 sq ft – plus that deals have been agreed at strong headline figures as a result of supply and demand dynamics shifting in favour of landlords.

There is a re-education process required in many circumstances as second-hand stock reduces. The key is in communication between developers, agents, occupiers and funding partners in order to give new developments the best possible chance of happening.  Property providers need to consider the ‘new occupier’ needs, understanding the occupier and their requirements is key, especially with new and emerging markets largely as a result of e-tailing, including strategically located smaller parcel depots, ‘dark stores’ and click & collect facilities.

With no surge in speculative development predicted, occupiers will be forced to plan further ahead than perhaps they are used to, factoring in lead in times for site identification, planning and construction in order to meet their requirements. Sites where infrastructure is in place and planning has been granted are likely to steal a march on the competition.

The logistics market is proving popular for investors and the return of occupier confidence (albeit at a slower pace) should enable development to come forward as standing stock reduces. Communication between key players is vital; a collaborative approach is required in order to provide viable and effective solutions for occupiers.