As Keith Stewart, director of Naylors, told me, an upside of the slowing of the commercial property market over the summer, “gave everyone a breather” and, since then, “there have been signs of reasonable activity with further improvement on the run into Christmas”.
Indeed, the market is now brisk, says Bill Lynn, director of capital markets at Lambert Smith Hampton.
“If anything, we are looking at a shortage of accommodation through lack of development, certainly at the quality end of life,” he says.
Russell Taylor, director at HTA Real Estate, agrees the market has been slower, though “strangely, general activity over the summer was higher than in previous years mainly due to companies exploring opportunities in the market rather than transactional activity”. In short, a lot of viewings have taken place but with fewer transactions as a result.
Demand is mainly from companies and individuals who are looking to buy rather than lease, which is probably due to low interest rates. There is little available to purchase, however, and even less freehold as opposed to long leasehold.
Russell continues: “One major factor driving demand is lack of supply. Nothing new is being built as the economics are still marginal. There has been rental growth because of the lack of stock and investment yields are strong, which would indicate a strong market for development. However, build costs are still proving prohibitive and are often in excess of end value.
“Build costs have plateaued a bit this year finally but speculative schemes are still rare and are only viable with grant funding. Lack of debt funding for speculative space is also an issue.”
He adds: “Pre-let and pre-sales are also difficult as the rents required to make transactions viable are in excess of market level, particularly in the smaller size ranges. Market rents are starting to catch up but one feature over the last few years is a two-tier market between existing stock and pre-let and pre-sale.
“Retail distribution is still a major factor affecting demand, particularly in the larger size ranges (50,000 to 500,000 sq ft). There are also a few requirements in the 100,000 to 200,000 sq ft size range from manufacturers with distribution attached.”
Keith Stewart feels manufacturing is still strong and is seeing an improving position with many companies picking up contracts that export.
Similarly, Bill Lynn, director of agency and investment at Lambert Smith Hampton’s Newcastle office, thinks a lot of activity “goes down to the supply chain, particularly as regards the motor industry and to a certain extent the offshore and alternative energy markets”.
A lot of the demand is also for skilled engineering with an element of increased demand from logistics and retailers.
As for the strongest locations for industrial activity, Keith Stewart says Team Valley remains the number one location with regards to being the focal point of activity because of its premier position geographically and the array of unit sizes.
“That said, the void rate on Team Valley is particularly low meaning other locations are being brought into play or indeed design and build opportunities,” he adds. “Stockton and Middlesbrough are also performing well together with Cramlington, Tyne Tunnel and Boldon where void levels are very low.”
Bill Lynn agrees about the dominance of Team Valley: “It is all about the Team Valley – it absolutely dominates the North East industrial scene and others trail in its wake. Newburn and Cramlington are not bad, Washington is ‘OK’ and Tyne Tunnel is emerging but they are all second fiddle to Team Valley.”
To prove Team Valley’s dominance, a new rental high of £8.10 per sq ft has been achieved on a recent letting. But Bill warns: “Team Valley is by far the exception – the £8.00 mentioned by UK Land Estates is but one building. £6.00 plus is common, but that is not at all the picture elsewhere, particularly when you get down to Teesside and the like.
“The problem is a lack of development outside of the prime areas. Yes, there is plenty of demand for investments and we have acquired several on behalf of Threadneedle Properties over the last couple of years. The market would like to see more but one of the major difficulties is that most of the stock is held by one operator, and they do not often sell,” says Bill. “However, when industrial investments do come on the market, they do sell if correctly priced. There is certainly a perception and to a certain extent the reality is that you get better yield in the North East than you do further south, certainly in the South East.”
Simon Haggie, partner of industrial agency at Knight Frank, says that current demand remains strong for modern units, which are now available in very limited numbers and consequently there is now a significant disparity in rental and capital values between modern and older, second-hand space.
He says: “This is particularly highlighted by the letting that UK Land has agreed on its brand new 11,614 sq ft unit at 12 Queens Court, Team Valley. This has established a record rent level of £8.10 sq ft for a unit of this size on the estate. In comparison rents on modern second hand space are typically between £5.50 – £6.50 sq ft.
“The success of this letting has encouraged UK Land to proceed with a larger phase of units on Team Valley which is now well underway and will complete in March 2017. Dukesway Central as it is known will provide three units ranging from 12,183 sq ft to 26,694 sq ft. Quoting rents start at £7.65 sq ft.”
UK Land is also currently seeking planning consent for two 35,000 sq ft units on the prominent former Huwood site fronting Kingsway on Team Valley, but it is unlikely that construction will start unless there is a pre-let.
The last point comes from HTA’s Russell Taylor: “Investment has been competitive over the last two years with industrial proving to be popular. Demand has been strong and has probably now peaked with yields improving to sub seven per cent. London Investors have retracted since the Brexit vote but regional investors remain keen to place cash albeit on a more selective basis,” he says.
A low yield example is the sale at the start of this year of the modern, 45,814 sq ft, warehouse occupied by PTS Group unit, North Shields, by Cushman & Wakefield of 6.62 per cent.