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Warehouses: the offices of the future?

David Thame reports from the frontline of an unexpected and fast-growing new segment of the office market.

15/12/2020 6 min read
Aver Property Partnership logistics hub, Bicester

The surge in e-commerce is creating up to nine million sq ft of new offices in the UK regions. But those offices are in warehouses, not office blocks.

Warehouses have had a good pandemic. Whilst the office market shudders and retail property collapses, the ‘shed’ sector has been riding a tidal wave of new demand, generated by lockdown e-commerce.

But what has largely escaped notice is the growing proportion of new warehouse floorspace that isn’t warehousing at all – it is offices.

New data shows that sheds could easily be the biggest source of new regional office floorspace supply in the coming 18-36 months, with as much as nine million sq ft of new warehouse-related offices coming on stream by 2023.

That is because warehouse developers are building more offices (as a proportion of their total floorspace), and building them to a higher quality than ever before.

So how much office space is being included in these new schemes? The answer is that it varies, but warehouse developers typically offer between 5% and 12% of their total floorspace for offices – a figure that is now settling at the higher end of the spectrum.

Take a trip to the heart of the UK logistics sector in the Golden Triangle, a zone of motorway junctions and enormous distribution centres stretching from Tamworth south to Milton Keynes, and embracing much of the M40 corridor.

Aver Property Partnership’s logistics hub, Bicester

Close to Junction 9 at Bicester Aver Property Partnership, a joint venture, backed by NFU Mutual, has invested in excess of £24 million on a 200,000 sq ft development of five units. Each of the high-specification units of this first phase, which range in size from 23,500 sq ft to 65,000 sq ft, has ample production and distribution facilities, plus Grade A office space at the rate of about 8% (the lower end of today’s expectations).

Aver Asset Manager, Leigh Burnett, says the office floorspace is an important part of the appeal of new warehousing.

‘We’re responding to tenant demand, which is for better quality. In Bicester we’ve created Grade A open plan floorspace, raised floors, ducting for data wiring, comfort cooling – its really high standard office space of the kind you wouldn’t expect in a shed,’ she says.

Until recently, warehouse occupiers used office space in a fairly basic way to service their warehousing operation: stock control and the staff canteen were the principal purposes of what was always a scant allocation of office space. Today, says Leigh, they can insist on space for back office functions, regional management or even the company HQ.

‘We know this office space is important to tenants. It needs to look like a corporate environment, which means the entrance has to look good as well as the floorspace. It has to look professional, look well-presented, be somewhere clients and customers can come that doesn’t look like they’re being shunted into a mucky warehouse,’ she says.

Of course, this level of quality office provision doesn’t come without a cost. Yet the surprise to many in the office interiors world will be that it is not a cost carried by the occupier.

Aver estimates that their budget to create their Grade A floorspace is a cost-effective £65 per sq ft. This compares with the (seriously) sub-£20 per sq ft typical budget for creating the warehoused floorspace. Yet developers like Aver reckon the extra expense of creating the office floorspace is well worth it. They do not charge separately for the offices, which are rented at the same £8.50 per sq ft as the warehouse. This makes it the best value regional office space on offer. By miles!

‘For us, the extra cost is not significant because adding the office floorspace means the building lets more quickly, and appeals to a wide range of tenants. So it is worth paying because it gets the building let so much quicker,’ Leigh says.

Her tenants are looking at eaves heights, power supplies and the volume and location of docking bays, not primarily at swanky offices.

To grasp the maths that sits behind this apparently generous approach to office floorspace, talk to Cushman & Wakefield’s Birmingham-based Industrial and Logistics Director, Simon Lloyd.

Interior shells at Aver’s Bicester hub

If Aver are charging £8.50 rent on a 65,000 sq ft building, that amounts to £550,000 rent per year. If you can let the building six months earlier than you hoped, that means more than £250,000 of extra income (and a corresponding amount of saved interest payments on the money you borrowed to build it). It also means a rent-paying tenant and thus an assured income flow in the longer-term. In the mind of developers, says Simon, this is very well worth the modest investment in good offices.

‘Developers see the office space as part of making their building more appealing. It means a quicker letting, a shorter void period, and that is worth it from their point of view. They want occupiers to see their warehouse at their best,’ he explains.

Developers tread a tightrope, however, in their efforts to win quick letters. Some occupiers want fancier fit-outs than others, Simon tells us.

‘I’ve seen some very nice regional and head offices in warehouses,’ he says. Some want considerably more office space than others, and if the number in the occupier’s head is appreciably different from that on the developer’s working drawings, this can get expensive. Adding extra office floorspace – typically at first floor level, and typically in a mezzanine – is not cheap.

‘There’s no doubt the office element is climbing up the agenda for warehouse occupiers. It’s not just the staff welfare angle that can stretch from restaurants to gyms, it’s becoming more normal to see CAT A office space in warehouses. I expect city office brokers would dispute that this is really what it is, but really there isn’t much difference,’ says Simon.

The consensus is that three trends will dominate this market in the coming months.

First, the amount of floorspace included in warehousing will grow. Simon reckons 5% has been the norm, Aver opt for 8%, but when Harworth launched a new 50,800 sq ft speculative warehouse at Logistics North, Bolton, they opted for 11% of CAT A floorspace at first floor.

Some caution is required here: 11% is only a shade over 6,000 sq ft, and the eagle-eyed will recall that in the larger Aver unit, their 8% of a 65,000 sq ft unit came out at roughly the same amount (although not proportion) of offices. It may be that warehouse offices tend to hover around 6,000 sq ft. There are, however, exceptions: Mountpark is building 359,500 sq ft of warehousing in Bristol and has included 18,250 sq ft of offices over two storeys, plus another 4,000 sq ft for direct warehouse supervision. That amounts to a little over 6%.

Second, there’s a likelihood that, despite the surge in e-commerce demand for new warehousing, traditional high street retail will need less warehouse floorspace. An example arrived in late October when US fashion retailer, Gap, announced it would abandon its UK and European stand-alone store portfolio, and as a result would not need its 1.3 million sq ft warehouse in Rugby. If this floorspace returns to the market it may need additional office floorspace because it dates from an earlier less office-friendly era. The Gap warehouse, for instance, was built 20 years ago.

Third, demand for warehouse is not going to slow. The problem is that developers can’t (or won’t) build them fast enough. The safe conclusion would be that Knight Frank’s estimate about the volume of new warehousing required (see Sidepanel) – and hence volume of warehouse offices – is likely to be an under- rather than an over-estimate.

The shed/office market is still in its infancy. The idea of top grade CAT A floorspace is still relatively new. And if office floorspace volumes rise, then developers may have to re-think their (currently rather generous) offers to tenants.

How much shed/office floorspace will get built?

As much as nine million sq ft of new office floorspace could be created in warehouses in the next 36 months.

New research by Gerald Eve shows that construction began on 7.4 million sq ft of new speculative floorspace. In all, there were 25 separate new buildings under construction.  Warehouse developers launched a frenzy of new build activity during the autumn quarter, with a five-fold increase in the volume of new floorspace under construction. By the end of Q3 2020, there was 19.7 million sq ft of space under construction across the country, within 90 individual buildings. A little short of half – 9.6 million sq ft – is speculatively developed.

Now do a quick calculation: warehouse developers typically offer between 5% and 12% of their total floorspace for offices (as we stated earlier, a figure that is now settling at the higher end of the spectrum). Make the conservative assumption that a modest 8% of warehouse floorspace is in fact offices, and that means 1.6 million sq ft of new office floorspace was under construction as part of warehouse schemes at the end of September 2020.

Fast-forward and the numbers get much larger. Earlier this autumn, Knight Frank released predictions that e-commerce will stimulate demand for up to 92 million sq ft of new UK warehouse space in the next three years. They base their calculation on analysis which shows that every billion pounds of online spend requires 1.36 million sq ft of new logistics floorspace. Assuming a conservative 8% of warehouse floorspace is in fact devoted to offices, that implies 7.4 million sq ft.

Add the 2020 figures to the Knight Frank longer-range projection and you have some nine million sq ft in prospect.

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