Looking after the little guy

David McGougan, development director south east, Panattoni

IT CERTAINLY seems so from a developer/investor perspective - and not a moment too soon.

Right now the small to mid-box warehouses sector is woefully under supported with a shortfall in supply that researchers estimate is costing the economy an estimated £480 million Gross Value Added a year.

In fact, JLL lead director EMEA logistics & industrial research Jon Sleeman notes: “Mid-box demand has held up better than that of Big Box demand over the last year.”

Indeed, Potter Space managing director Jason Rockett - in the company’s research collaboration with Savills Big things in Small Boxes - unequivocally says: “The small to mid-box warehouse sector is the under appreciated jewel in England’s economic crown that has proven highly resilient and agile over time.”

Jason Rockett, managing director, Potter Space

Around 95% of the industrial and logistics property market operates out of small to mid-box warehousing units sub 100,000 ft2, employing some 2.1 million people delivering £124 million GVA into the economy each year – 7% of the total economy  in terms of GVA.

It is true to say transactional demand has slowed with take-up in mid-box and multi-let units sub 100,000 ft2 down 18% year-on-year - much of this is being laid at the door of general economic uncertainty and the rising cost of debt resulting in a reluctance by business to invest in new buildings but in some geographical areas the lack of supply is the chief cause holding back demand and transactions.

Panattoni development director south east David McGougan says: “Demand is strong in certain locations, many of the key urban areas in the south east haven’t had overdevelopment of Grade A stock and thus a supply/demand imbalance still exists. Many locations have legacy stock from the 1980s and 90s some of which is reaching the end of its economic life and refurbishment to meet government targets for minimum energy performance can be uneconomic.”

The developer is bringing forward mid-box schemes in Brighton and Burgess Hill where there has been virtually no speculative modern mid box development for 20 years.

The lack of small to mid-box development is not just in the Southeast. According to Potter Space and Savills report suppressed demand – the gap between the amount of space provided and actual occupier demand – in England averaged 38% equating to a shortfall of some 6 million ft2 and in some areas this figure climbs to 100% meaning demand is double that of the space provided.

Rockett says: “Simply put, there aren’t enough small to mid-box developments being built to meet the current demand levels, let alone the increased demand still to come.”

“There really is a shortage of mid-box space in the  Midlands,” says Sleeman. Potter Space and Savills Suppressed Demand Model notes that suppressed demand in Stoke and Stafford is at 50%, in Nottingham and Derbyshire it currently sits at 51% climbing to 57% in Birmingham and reaching 101% in Leicestershire, making the Midlands the hardest hit region. But taking the crown for an individual town, is Crawley in the Southeast, where suppressed demand hits 166%.  

Jon Sleeman, lead director EMEA logistics & industrial research, JLL

But why is demand remaining so resilient for small to mid-box space? For starters the space lends itself to a far larger cross section of occupiers, almost all are SMEs which make up the backbone of the economy. Increasingly there are larger national players seeking mid-box space as operational bases and last mile delivery hubs - in 2022, 6% of the small to mid-box space taken up was by bluechip and large companies while innovative and R&D accounted for 2% of take up.

Interestingly, according to JLL head of multi-let and mid-box industrial and logistics Tim Clement: “The economy is not a driver of demand, [which given its unstable state must be a godsend]. Instead occupier demand stems from consolidation, restructuring and expansion.

“Sustainability is playing a part but, so too, is the move to bring separate offices and warehouse real estate together in one location largely made possible by the jump in quality of modern Grade A warehousing and associated office space with its onus on wellbeing and carbon neutrality both in operation and construction.”

Tim Clement, head of multi-let and mid-box industrial and logistics, JLL

Macroeconomic forecasts suggest momentum for the small to mid-box market will increase around 2025 to 2026 with those which have so far ‘put off’ or ‘made do’ in the past 12-18 months, taking advantage of a more stable economy and with interests rate cuts forecast, starting to look to secure space.

While not increasing demand per se, there is the fact that much of the small to mid-box supply in the UK is old. According to research by property analyst CoStar 79.3% of all industrial and logistics stock below 100,000 ft2 was built in the last century. Less than 10% of the total stock has been built since 2010 in terms of ft2 space.

McGougan says: “A lot of that old stock is getting to the point of obsolescence, where it is too inefficient or expensive to refurbish or recycle it to meet even the minimum EPC threshold.”

Rockett agrees: “The small to mid-box warehouse stock is often older and can be of lower quality compared to the big box sector. The proportion of ‘good’ quality smaller premises is over seven times lower than for larger premises. That is why the sector needs renewal, and new development land, at pace.”

It is hardly surprising then to see a renewed interest in this particular sector of the market.

According to JLL’s latest Multi-let and Mid-box research investor appetite is strong. In fact in the first nine months of 2023, within the industrial sector, the value of multi-let assets transacted exceeded that of distribution warehouses logistics for the first time since 2011  with £1.9 billion and £1.5 billion respectively traded.

Clement says: “The positivity towards multi-let and mid box assets reflects various factors. First, despite some slowdown in occupational demand this year, investors regard the market fundamentals as strong in large part because these assets are predominantly located in built up urban geographies which in the main have registered both a decline in their stock of industrial land and a growth in their resident populations.

“As such, investors still see a positive rental growth outlook for prime assets in core markets including London and major regional markets. 

“Second, and closely related to the first, forecasts remain relatively favourable for industrial compared with offices and high street retail, shopping centres and all property generally, and third, many investors are attracted by the potential offered by multi-let assets to diversify risk, secure reversions and add value by asset management initiatives.”

In a recent JLL Investor Survey multi-let industrial came out top when investors were asked which of 13 commercial property sectors they expected to provide the greatest opportunity over the next five years, whereas logistics ranked sixth. 

Recently global real estate investor Hines secured a portfolio of four multi-let industrial estates in the Midlands comprising 47 units for its Hines European Value Fund 2 (HEVF2). HEVF2 fund manager Paul White says: “This transaction reflects our conviction in the vital importance of the small to mid-box industrial and logistics property market to the regional and national UK economy.”

As well as the established multi-let and mid-box players such as Chancerygate, Bridges and Goya, bigger investor developers such as GLP, Prologis and Panattoni have turned towards the sector and in the past 12 months there have been a number of new entrants to the market. These include real estate investment and development manager, Delancey, launching a new mid box development joint venture called Greenlight with privately owned commercial property company Coltham.

The joint venture has already acquired five sites from a variety of vendors in Kings Heath, Redditch, Colnbrook, Milton Keynes, and Reading. These sites will deliver over 500,000 ft2 of best-in-class mid box logistics space within the next 18 month. The joint venture has ambitions to grow its pipeline further in the near term.

Greenlight Kings Heath in Birmingham, has already secured letting to Screwfix and Howdens. It totals 72,999 ft2 and comprises a 30,000 ft2 warehouse (Unit 3) along with nine multi use/trade units ranging in size from 3,583 ft2 to 7,167 ft2. Rents for the units are being quoted at £15 per ft2 for the smaller units and £12 per ft2 for Unit 3.

Mark Garrity, UK development director UK, Verdion

Big box developer Verdion is also looking to enter the market with the appointment of ex-Chancerygate development director Mark Garrity as development director UK.

Garrity says: “There is a significant growth potential in the UK’s regional urban logistics markets, especially where challenges around delivery may be holding back optimum use of brownfield land.”

Local developers too are looking to promote and develop multi-let and mid-box schemes and developments, with Greenham Business Park owner Greenham Trust launching a 33,117 ft2 property with the express notion of tapping into pent up demand. Greenham Trust CEO Chris Boulton says: “There is market demand for warehouses of this size and very little existing supply or new development coming through the pipeline, so it is ideally placed to soak up demand.”

Chris Boulton, CEO, Greenham Trust