Partner Article

Supply crunch looms

The region is heading for a supply crunch which may blunt the pace of logistics and industrial development activity says Simon Haggie, industrial partner, Knight Frank.

With the development process typically taking at least 18 months, it could be 2015 before we see space delivered to the market. While developers are keen to try and resurrect or bring forward new schemes, funding for development continues to be an issue.

As a result it is likely that the shortage of modern stock, particularly at sizes in excess of 20,000 sq ft, will force companies to consider the purpose-build and pre-let routes, which may conceivably be the only way to satisfy their accommodation needs.

One positive point which may come from this is that rental levels for purpose-built space will inevitably need to be higher than current market levels. Such developments should assist developers in establishing new rental levels at which speculative schemes may become viable. The acid test is whether businesses will break the market rent levels to secure the quality of property they desire to operate from.

Looking back to the second half of 2013 take-up in units above of 50,000 sq ft was a modest 611,000 sq ft, down 38% on the first half of the year. However, 2013 was a good year overall for the North East industrial market, with many deals in the pipeline due to conclude in early this year.

As an illustration of the level of activity, at the end of 2013 Knight Frank had 658,000 sq ft under offer in 14 transactions spread fairly evenly across the region from Teesside to south east Northumberland. Current active enquiries in the market also seem to be genuinely looking to do deals, as opposed to ‘window shopping’.

The one speculative scheme likely to start on site this spring is UK Land’s Dukesway Central development on Team Valley, Gateshead. The first phase of will provide three units of 12,000 sq ft, 20,000 sq ft and 26,600 sq ft, with asking rents likely to be between £6.50 to £6.75 per sq ft.

The purpose-built development route could bring forward space within a much shorter timescale of 12 to 18 months. However, the planning process will have to be sympathetically quicker than usual to achieve the timescales demanded by such expanding businesses. On the plus side, banks should be much more approachable towards funding, subject to satisfactory covenant strength.

As an example UK Land Estates is already in advanced negotiations to purpose build a 25,000 sq ft unit at Cramlington, south east Northumberland for one of its existing tenants which should establish a fresh tone of rents for a new build unit.

This was posted in Bdaily's Members' News section by Chris Dobson .