IN FOCUS | Logistics is showing signs of cooling as funding tightens

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The previously sizzling real estate sector is seeing prices and demand drop as developers, lenders and occupiers “pause and wait for greater market stability”.

According to John Sullivan, director of Colliers’ industrial and logistics team in Manchester, developed land values ​​in the North West have fallen around 30% since the start of the year – even more so in some secondary locations – while financing new build developments is becoming increasingly difficult to come by.

To cite one example, the development loan offer for a prime location in Warrington in recent weeks has been £20 a square foot cheaper than another lender’s offer for a similar property just a month earlier, another industry official said Place Northwest.

On the demand side, the nationwide take-up of logistics real estate fell “significantly” in the third quarter of this year – down 28% quarter-on-quarter to 11.6 million square feet from 16.2 million square feet, according to the latest Market Update from consultancy Cushman & Wakefield .

The study released today nonetheless claims that despite macroeconomic challenges, logistics property in the UK remains healthy as take-up is still 40% above the pre-pandemic third quarter average. Additionally, a total of 43.9 million square feet of space was leased in the first nine months of 2022, ahead of the five-year average.

“Activity was primarily fueled by demand from third-party retailers, well-positioned retailers and manufacturing, which collectively account for 67% of the space occupied so far in 2022,” said Cushman & Wakefield. The study did not provide a regional breakdown.

price reset

Industrial agents in the Northwest told Place Northwest the market has definitely cooled off compared to the past few years of near-frantic development and leasing activity, where sales and prices have reached record highs.

John Sullivan of Colliers. Recognition: Place Northwest

“The current economic instability has not yet had a major impact on the housing market, but there is no doubt that the pressure on the cost of living will have an impact,” Sullivan said.

“The investment market has slowed and spec funding has almost ground to a halt and is certainly seeing a price setback. While there are still residents looking for space, property values ​​have fallen, so it often doesn’t make sense for developers to build when you factor in high construction costs.”

Industrial yields for 100,000-square-foot units are currently estimated at 5.5% to 6% — still healthier than other commercial real estate sectors like retail, where they’re often around 7% — but not so long ago they were around 3 .75%, Sullivan added.

“Many of the area’s industrial developers have set up a land bank so they don’t panic, but others say the numbers won’t work as they would make a loss, or they’re going to market with design and build contracts, and users in the market.” to address the market in this way. I can count that on one hand [number of schemes] get ahead.”

Sullivan predicted some tenant bankruptcies in the coming months, which would shrink the market, while other companies may only seek new space as leases expire or are renewed. “Many are just holding back, pausing and waiting and seeing where the economy goes because if they move, they won’t get the same offer.”

In recent years, a lack of quality industrial space in the North West to meet skyrocketing demand, fueled in part by the rise in e-commerce, has kept rents high.

“We’re still saying it’s a rental market,” Sullivan said. “But the occupiers are pushing for compromises when their margins come under serious pressure. It’s a bit of a conundrum for both landlords and residents.”

Colliers still forecasts that industrial rents in all types of units in the region will increase this year, but at a slower rate of about 4.9% compared to 9.9% in 2021, Sullivan added. “There are changes and uncertainties in the marketplace, and we’re constantly having these conversations and making assurances,” he said.

pipelines below

Joe Burnett, development director at Network Space, which builds warehouses in Greater Manchester and Merseyside, agreed the market faces some challenges.

Joe Burnett Network Room p Network Room

Joe Burnett. Source: via Network Space

“A lot has changed over the course of a year,” he said Place Northwest. “From a developer perspective, inflation and cost pressures have been building for some time. However, until recently this has been offset by continued appreciation resulting from the good depth of the occupier market and an undersupply of space, coupled with a strong appetite from investors looking for commercial properties.

“However, we are now seeing a slowdown in the investment market, with investors suffering from interest rate hikes and increased funding costs, affecting returns and the price they can pay for a property to achieve the required yield.

“We saw some early signs of a market shift earlier this year and the trend appears to have continued through the summer months and into today.”

While the rental market has remained strong to date, with rising demand and rising rents, “it seems inevitable that it will follow the investment market and slow down,” Burnett added, saying he’s heard from several large tenants reporting reduced volume forecasts in the over the next year.

“When you add all these factors together, the viability of industrial development is really at risk and I expect the number of projects moving forward, at least in the short term, to decrease significantly.”

Peel Ports this month warned of impending redundancies at the Port of Liverpool as the operator restructures its container division following a “significant deterioration” in the volume of containers the port handles. This is largely due to “the gloomy outlook for the global economy, with rising interest rates, higher energy costs and weaker consumer demand for manufactured and imported goods,” the company said.

But prognosis still “strong”

Steve Widdowson, director of construction firm Caddick, said one can speculate about the impact of the global economic outlook on almost every commercial real estate sector, but because the industry has been so hot any change is likely to be felt acutely. “Land and rental prices are very high, so a small adjustment needs to be made.” Funding for large projects has “virtually stopped for now,” he added.

Caddick’s Steve Widdowson. Credit: via Caddick

“However, in general, we believe that the market is suffering from inventory and the temporary suspension of funding for new developments will only make the situation worse. Therefore, we assume that the demand for space and the resulting prices will remain high and the forecast for the sector is quite good.”

Burnett also highlighted the underlying fundamentals of the sector. “It is positive to note that there is an undersupply of high-quality space on the market; the shift in consumer retail habits from the high street to online commerce continues, which will sustain demand for warehousing, warehousing and delivery; Tenants appear to be honoring their rental commitments and we are not seeing too many defaults and finally investors appear to remain committed to acquiring industrial space in the future.”

Cushman & Wakefield reached the same conclusion in its report, suggesting a temporary pause in market activity rather than a sustained slowdown.

The consultancy’s head of UK logistics, Richard Evans, said: “Despite the current economic outlook, user demand remains robust and while the market will no doubt slow down, it remains well positioned to weather the macroeconomic storm. After unprecedented post-pandemic growth, some compression is inevitable and likely necessary.”

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