End of year industrial market update

The clock cannot be turned back, delivery demands and expectations of customers will only grow greater.

The effect of the pandemic on the warehouse sector has to some extent crept under the public’s radar, unless you happen to be an agent or developer, or an occupier in the market for such space.

The inexorable rise of e-commerce and the need to efficiently store and deliver products has already created an almost insatiable demand for warehousing on an unprecedented scale, and COVID has resulted in a further dramatic increase in online demand as customers are faced with little option but to buy certain goods in this fashion, particularly food, a sector where inroads have tended to be slower.

Over time warehouses have grown larger as occupiers and third party distributors delivery methods and efficiencies have evolved, with COVID arguably bringing forward changes in retailing that might otherwise have taken some years to adapt, albeit in a dramatic and wholly unexpected fashion.

The clock cannot be turned back and the delivery demands and expectations of customers will only grow ever greater. Many of today’s millennials would be shocked by mail order delivery timelines back in the day, “allow 28 days for delivery”!

What this does mean for development opportunities.

The first question is, will it suit a distribution scheme and how large can a building be constructed? Economies of scale naturally coming into play. And, as a result smaller requirements are frequently not catered for by new schemes, and in the vast majority of instances units are only offered for rent. Britain is often described as a nation of home owners and at the smaller end of the market, broadly sub 5,000sqft, this also rings true with commercial occupiers, many of whom are owned by entrepreneurs who yearn to buy their own premises, but simply don’t have the options to do so.

With consistently low interest rates, borrowing remains relatively cheap for those with a financial track record plus a meaningful deposit and, when opportunities arise, we find that freehold factory/warehouse space almost sells itself. This might seem a little strange in the current climate, but with a freehold an occupier is largely in control of their destiny, ultimately giving greater flexibility. Not having a landlord to answer to is hugely appealing, plus building improvements over time are to the benefit of the owner and there is no risk of having to reinstate alterations.

We have concluded a number of freehold sales recently, with COVID not proving to be a factor and have most recently completed a sale on a unit in Kings Langley at a capital figure of c£230.00psf.

From one extreme, to the other. At the very smallest end of the market we experienced strong demand for small units of less than 1,000sqft throughout 2020. This market is largely ignored by developers simply due to lack of economies of scale in terms of construction, and a perception that small lettings can be a handful to manage, so product is in short supply. We have a couple of estates in Hatfield and Watford, where we have completed 7 lettings this year at rents as high as £20.00psf and quite literally have a queue of applicants eager to hear if and when the next unit might be available on the market.

Particular casualties of COVID have been businesses in the hospitality and events sectors. Both having noticeable representation in our market, given proximity to London. Whilst government support may have helped, one wonders if some may seek to offload property.

In a similar vein, an unknown number of occupiers may only be continuing to trade due to Government support and rent holidays, and then may cease to be viable, potentially releasing space to the market. However for the time being, there remains a tight supply pipeline, both new build and churn, which is resulting in rents holding up, much to the surprise of many enquiries who assume the market will be apocalyptic, with cut price deals on offer.

Whether this demand for factory/warehouse space across all sizes will continue is open to debate, but it seems likely. One thing is certain however, it is always going to be a challenge to carry out a volume storage or manufacturing process working from home, so the sector looks safe for the time being.