Rents are on the rise in the trade counter sector as a result of the dearth of new space and strong demand from non-traditional occupiers.
With no sign that the land shortage is getting anything but worse, some landlords, developers and occupiers are beginning to rethink how they operate.
So will their new tactics work?
The issue is more acute in London, where many lets are going to best bids - a situation caused by the sheer number of occupiers vying for space.
Rents have risen by more than 50% in the past 18 months and the continued demand from tenants looks set to push them up further.
“There is a general lack of supply,” says Jo Buckley, assistant portfolio manager for Savills Investment Management. “Everyone is talking about the lack of industrial and warehouse space generally in London and the fact it is being lost to residential.”
Traditional trade counter occupiers in London are now competing against food manufacturing and logistics warehousing for these kinds of units, not to mention motor spares operators, florists, cash and carry operators, courier services, printing and graphics businesses.
The land needed to create new trade counters is scarce, but development is going ahead. At Mowlem Trading Estate in Tottenham, north London, Savills IM recently secured a
10,000 sq ft pre-let to Travis Perkins before speculatively developing a further four units totalling 50,000 sq ft. Despite high prices thanks to their location and road frontage, two non-traditional tenants - a food manufacturer and printing business - snapped up two of the units.
Everyone is talking about the lack of space and it being lost to residential - Jo Buckley, Savills IM
After the success of the first phase, Savills IM is now demolishing and redeveloping the estate and half of the proposed development is already pre-let to distribution specialist Bunzl UK, which will move from a terrace of five older units on a 15-year lease.
Savills IM is developing a further 18,000 sq ft of speculative units in the space vacated by Bunzl.
Elsewhere on the estates, restaurant operator Tortilla has taken a site to serve as a kitchen to supply its units in London. “They want to be in north-west London but could not find appropriate style units. We are able to bring them over to Tottenham,” says Toby Green, a director in Savills’ industrial team.
Historically, non-trade counter occupiers have been unwilling to pay the higher rents associated with trade counter units, which have typically let for a 20% to 30% premium. Some now have little choice, says Green. “Traditional trade occupiers are facing competition for the prime units in some locations.”
The latest phase at Mowlem Trading Estate is set to achieve record rents for the area, mirroring the rental increase seen in prime locations such as Park Royal, west London, over the past year.
“We saw £24/sq ft in one case in Park Royal,” says Steve Williams, national head of industrial and logistics at Lambert Smith Hampton. “While it is difficult to extrapolate on the basis of one deal, it gives an indication of the level occupiers are prepared to pay.”
This dynamic of intensifying demand is likely to spread beyond the capital. “These trends ripple out from London,” says Green. “Most regional markets are going to see this situation where there is tight supply. It is not just symptomatic of London.”
Jonathan Green, senior development surveyor at Midlands-based St Modwen, says the appetite for trade counters has grown since last year. Several of its schemes are 100% let and it is speculatively building more trade counter units that it expects will attract high levels of interest.
It is developing two sites in Worcester. At Great Western Business Park, where it responded to demand by bringing forward phase three, it has completed the design and build of a 14,000 sq ft unit for Travis Perkins and is completing six more units totalling 50,000 sq ft.
It is also building 55,000 sq ft of units suitable for trade counters as part of a 20-acre scheme on Nunnery Way between junctions 6 and 7 of the M5, due for completion at the end of October.
Developers are giving credence to combining small units and resi - Steve Williams, LSH
New supply is limited because developers continue to face competition from other uses, notably residential, agrees Williams. “While the general market for warehousing and industrial space has been responding well to a lack of supply by bringing on new space, this has been much more muted at the trade counter end of the market.
“It’s a well-trodden path. We are seeing competition from higher value uses and areas close to town centres being taken for resi rather than industrial and logistics.”
In response, landlords have refurbished dated industrial premises to suit trade counter occupiers and, according to Daniel Cook, senior associate at Rapleys, there is scope for further expansion.
“The demand is there for it and the rent differential can be as high as 40%. There is space out there. Funds like Aviva will want to actively manage their estates. They know they can split units and get higher rents. There is still a lot of that sort of opportunity.”
Cook claims, however, that some landlords are stretching the ‘trade counter’ term too far. “It is a label some use to try to get higher rents,” he says. “They call it a trade counter even when it isn’t; like a single unit buried on an industrial estate.”
Some occupiers, meanwhile, are adapting how they occupy space and are becoming more flexible with different formats and sizes. “Screwfix takes a large number of different size units. You have to compromise if you are a national brand and you want to grow by 10% a year,” says Cook.
Occupiers are also evolving in the way they serve their clients and, in terms of the space they need, many are taking smaller premises, says Buckley. “It is a function of a few things, including rents versus income and some larger national occupiers serving multiple brands from one premises, as well as the rise of click & collect services.”
Another answer to space shortages could be to transform struggling retail parks into trade counter centres, says Williams. “We are getting to the point where rents for trade counters are almost the same as for an empty retail warehouse. Our survey every year shows average prime rental growth of more than 5% and in various geographical regions percentage increases of 10%.”
More radical options are being considered where space is most at a premium, such as intensification of use, perhaps through subterranean or double-deck use. “We feel developers need to arrest the decline in trade counter stock,” says Williams. “To keep the market going there’s a need to challenge the status quo.
“We are now seeing developers give credence to the combination of small unit development and resi. While you would not traditionally see those two uses together, with smaller business units that open at 7am and close at 6pm to 7pm it is consistent with a residential neighbourhood. We are seeing that being supported in different locations by local authorities, one in Colindale, north London, led by Neat Developments. It is too early to tell how such schemes are being received.”
However, Tony Morpeth, of developer Glenmore Group, which is working on two trade counter schemes, in Andover and Blandford Forum, doubts mixed-use could work at scale.
“That can only work in those incredibly high-density areas such as London where you’ve got to create mixed value out of scarce land. I don’t see that being rolled out everywhere. Would you want to live on an industrial estate?”
The long-term solution to space shortages is closer engagement with local authorities, believes Morpeth, who has been meeting local authority chief executives and property directors to urge them to identify potential sites and put pressure on private land owners sitting on sites.
“We are hoping to encourage them to bring these sites forward for development. Some are more receptive than others but they all get the point. They know they need to create a better market. The difficulty is the time it takes for a council to agree to sell and then deliver it. It can take years.”
Those who control land must be made more aware of how to deliver it - Tony Morpeth
Morpeth recently walked away from negotiations to secure a site because it would have taken more than three years to deliver.
“You can’t work like that,” he says. “You need returns based on today’s values. That creates a further impasse. It takes time to build clusters to create a critical mass for these occupiers. Those who control land must be made more aware of how to deliver it and the planning process needs to be streamlined and simplified to take place more quickly.”
It is a reality that is in turn forcing national trade counter occupiers to take an ever longer view. “Trade counter operators are taking pre-lets of space that might not be available for 12 months,” says Buckley. “They want to commit to it. In August last year, Tool Station committed to 4,000 sq ft of space in Lewisham that will not be ready until 2018.”
Meanwhile, those unable to be so strategic or patient could see their growth prospects hampered.
“There is a ceiling for many trade counter operators, beyond which they will not go,” argues Morpeth. “Many are losing market share because they won’t pay the rents they are being asked for.”
But if they are not prepared to break this rental ceiling, this could have an impact on the sector’s future growth.