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Industrial Revolutions

26th August 2015

Prime office space is in dwindling supply in the city, and for anyone whose lease is up in the next few years, it’s probably wise to not hang around. In fact, get some good advice, fairly promptly!

But what of the industrial market? Surely there is no shortage of traditional, edge of town industrial property, on well connected industrial estates, offering good value accommodation to the UK’s beating heart?

Well, several recent experiences have made me realise that we might need to think again.

Firstly, the planning push toward residential development on brownfield sites, and the surge in residential values, particularly in London and the south-east, but also in other major UK cities, has consumed considerable tracts of former industrial land.

Obvious examples in London include the areas around Stratford, King’s Cross and Nine Elms/Battersea, but these are just exemplars of a major trend.

Equally, the emergence over the last 20 years of super large high-bay distribution warehouses has consumed many smaller UK industrial estates, as developers have sought to exploit the post-war growth in supermarket shopping and more recently the move to just-in-time online shopping.

The net effect of both these trends has been a dramatic reduction in the availability of smaller (say 2500 ft.² to 20,000 ft.²) traditional industrial/manufacturing premises. Once this land has gone to alternative uses it will not come back.

When I sought to locate new premises for clients, ideally close to central London, to facilitate overnight rail-related maintenance activity, the nearest available opportunities were in Greenford to the west, or Beckton to the east. In both cases the operators would need to drive for one hour at each end of their shift (and then presumably drive home).

Extrapolate this, accounting for the growing service- industry requirements of an ever-denser central urban environment, and it is easy to foresee a trend of increasing demand for premises within a white van’s drive of the town/city centre.

Another trend is the rise of ‘re-shoring’ of manufacturing activity. As the domestic economies and middle-class consumption in China and India drive up manufacturing and transportation costs, and technology (the obvious example being 3-D printing) permits more local manufacturing, we are seeing a trend towards major investment by our occupational clients in high-tech UK industrial premises. Often, the real estate expense is small compared to the capital equipment installed, but the premises to support this equipment must be fit for purpose, and this is increasingly scarce given the absorption by residential and the limited new development taking place.

With the move towards zero carbon buildings, we foresee a whole new generation of high-tech industrial property supporting significant capital equipment, robotics, printing and other technologies, with just-in-time delivery to the market without the need for large warehousing of inventory. This is reminiscent of the creation of the new B1 asset class in the late 80s.

Some of this will come from the refurbishment of first-generation, post-war industrial property, but we also foresee the development of new high-tech industrial and manufacturing parks and we are working with many of our land owning clients, for example in utilities and infrastructure, to bring land throughout the UK for development into the sector.

The final factor worthy of note, given announcements in the past week by the Davies Commission, is the critical factor of UK transportation strategy. The location of the next runway, whether at Heathrow as recommended, or elsewhere, will be critical. Equally, continued development of the road, rail and port infrastructure are also important to our long-term success. Not everything can be 3D printed at home and our reliance upon imported freight by sea and air, and effective distribution across the UK, will be continuing factors.

All of this, I think bodes well for investors and developers of industrial property, and presents the need for industrial and manufacturing occupiers to think carefully about their future real estate occupancy plans.

 

Jeremy Day is head of corporate real estate at Capita

 

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