From the impact of economic turbulence to shifting occupier requirements, BNP Paribas Real Estate industrial experts Ben Wiley and Eoghan Morgan give us the lowdown on what the outlook is for the big box sheds market.
1. How Is the Big Sheds Market Looking Right Now, and What Does the Future Look Like?
The demand for big box sheds in the first half of 2023 has been stifled by wider economic headwinds, as occupiers have taken a wait-and-see approach. This has meant that the average take-up has been 34% below the 10-year first-half average, and around half of the same period last year. This constrained demand, alongside the increasing year-on-year supply to the big-box market, might suggest an end to the sector’s considerable rental growth in recent years. However, we do not believe that to be the case. There are high levels of new occupier requirements that will take some time to transact, which have provided landlords with a strong justification in holding firm on asking prices with record rents being achieved.
The fundamentals of the big sheds market continues to be attractive to occupiers, with demand for space increasing as a result of e-commerce and new homes being built and offered for sale or let as the UK housing crisis continues.
Weaker take-up in Q2 2023 belies a strong quarter for the manufacturing sector, particularly the automotive industry, which serves as a bit of an insight of what is to come. Renewals of existing leases for the likes of Jaguar Land Rover as well as the recent announcement that a gigafactory is to be built in Bridgwater are providing some comfort for the industry as there is likely to be a knock-on effect with its suppliers taking space. In addition, we are seeing continued interest from major supermarket retailers, such as Sainsburys and Tesco taking more space as they continue to defy pressure from the competition of online-only grocery delivery services.
2. Does Available Supply Match Demand?
While UK supply to the big-box market has increased quarter-on-quarter over the past year, secondhand space makes up the vast majority of space available at around circa 19 million of the total, which sits at over 34 million. This includes 5.3 million square feet currently available in the UK big box market on a sublease basis which could prove attractive to occupiers. ESG requirements and geographical location are likely to impact the openness to such opportunities, with most of these available units well-placed on both counts.
Despite the increase in supply, the market could not presently meet the annual record levels of demand seen in 2020-22, and the lack of new units capable of meeting prospective energy efficiency standards makes existing supply more problematic.
3. What Are Occupiers Seeking?
Occupiers are willing to part with the record rents that landlords are requesting where properties meet their locational and energy efficiency demands. Rent is a relatively small percentage of a tenant’s operational cost, with energy and transportation expenditure more impactful. Therefore, occupiers are prioritising low energy costs, and, for logistics providers, being able to reach as much of the population as possible is the main area of focus. We see this with the demand for The Midlands which accounted for circa 50% of big box space taken in the second quarter of 2023.
4. Are Occupier Requirements Impacting Build-to-Suit Demand?
With rising labour costs set to continue as well as challenges being faced by the construction industry, it is perhaps unsurprising that the development pipeline for big box industrial space currently under construction has decreased from 13.5 million to 9.5 million. Build-to-suit opportunities are present, but with occupiers presently holding back and with the stated challenges for developers, these projects have been placed on hold for the present.
5. What’s Been the Biggest Changes Over the Past Year?
Perhaps the biggest changes of the last year has been the decrease in demand, the increase in supply and the slowdown in construction.
In the first quarter of 2023, BNP Paribas Real Estate reported that circa 4 million square feet UK Grade A big box industrial and logistics space had become available for sublet from significant owner-occupiers such as Amazon. A number of high profile occupiers began consolidating their spaces, which in many cases were only taken in the previous 24 months or never occupied. Encouragingly, there has been strong demand for these, partly due to the units’ stronger ESG credentials.
Deal activity further backed up the on-shoring trend as occupiers seek to challenge the ongoing supply chain issues. As mentioned, we are seeing an uplift in demand from the manufacturing sector, who enjoyed a strong quarter in terms of take-up from a diverse range of companies.
This first appeared in CoStar.
