The West Country
Unprecedented Demand! In My View by Rob Russell MRICS Director Russell Property Consultants Ltd Bristol
We now have a highly unusual set of market circumstances. There are fewer deals being done, but this is not being reflected in lower rents because of the lack of stock. This means that, from an agency and landlord perspective, the total value of deals being done now is actually higher than in earlier, busier years because rents have almost doubled in city centres, and grown by some 40 – 50% elsewhere.
That isn’t to say we are not starting to see some tenant distress in the market reflecting the current economic situation and sentiment, and will continue to do so over the coming 12 months. Most landlords are anticipating a marginally higher level of voids – but we are coming from a position of an historic low. That will also allow some churn to return to the market – enabling landlords to reset the rent, and trigger more deals.
Looking forward The pressure on city centre industrial and distribution location remains, as we see stock being lost to higher value uses (housing/ students), which in turn is leading to a real shortage of supply and hence rents will continue to rise in city centres, due to continuing strong demand.
Power is becoming a bigger issue as the grid seems to be at full capacity, so we are witnessing premium rents being paid for stock that has a decent power supply.
Following the pandemic, we have seen unprecedented demand for industrial/warehousing, which has firmly cemented industrial as the preferred asset class for investors. Industrial stock has flown and rents have soared, as demand has out- stripped supply, which is mainly as a result of the demand for on-line shopping and other associated businesses.
However, there is no doubt the debacle in Downing St at the end of 2022 and increase in interest rates as caused a slow-down in demand, and 2023 was unquestionably a more challenging year for the sector, with many occupiers stalling decisions – particularly at the big-box end.
New development went on hold with higher borrowing and construction costs making them unviable, even though land values have undergone something of a correction. The only new buildings to come out of the ground have been those already committed.
However, at the smaller end, the multi-let estates have also continued to perform well. In certain locations, we have seen rents double in the past few years. That said, landlords are being more cautious – not least with who they let to, with more due diligence being undertaken with prospective tenants.
Those buildings with ready access to high levels of power now command a premium –
especially those with their own PV
sources. Many more industrial buildings look set to host PV in years to come as the price of energy reduces payback times and offers businesses greater resilience.
The last couple of years have reset expectations for the sector, as the demand for warehouses to fulfil online shopping orders outstripped supply. City centre estates have come under additional pressure as competing demands such as residential and student housing continue to take stock out of circulation.
We are also witnessing many funds, property companies and occupiers becoming more concerned about ESG credentials and EPC ratings for their warehouses, with many trying to get away from fossil fuels and replace with more environmentally friendly alternatives.
Certain industrial areas also have poor public transport and this is becoming more of a concern, as companies now want their staff to cycle/walk to work and this has never been an issue in the past, but may become more prevalent in future years.
The economic situation may see some distressed tenants, due to the substantial increase in rents, rates and utility costs and we may see a further drop in transactions, but it won’t necessarily lead to a drop in the levels of rent or capital values.
One of the possible outcomes of this combination of factors may well be more people looking ahead at a lease event and electing to go down the design and build route… which might wake up developers to the opportunities out there. Landlords can also afford to be creative, and take back leases with a few years left in them, undertake refurbishments and move the rent significantly.
It used to be all about Location, Location, Location but in the current market it Labour supply!
For more details please visit
www.russellpc.co.uk is now also as much about ESG, Power and
COMMERCIAL PROPERTY MONTHLY 2024
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