View West Midlands: October 2022

View West Midlands

Offices, industrial & logistics

Introduction

The commercial property market in Birmingham and the wider West Midlands region has experienced an exciting 2022, with a renaissance not seen in the region for a generation.

The major driving force behind this has been the Commonwealth Games, in preparation for which, Birmingham and its environs have undergone a complete transformation over the last five years.

The result? A second city that we can absolutely be proud of, and a commercial property market which has undoubtedly benefitted as result.

In tandem with the delivery of public realm and infrastructure improvements in Birmingham, we’ve seen the delivery of some fantastic office space. But more is needed if we are to meet the demands of occupiers returning with a hybrid working strategy.

Meanwhile in the industrial, warehouse and logistics market, new, high-quality, energy efficient space simply cannot come to market quick enough, and we must see more development land come through to address the supply / demand dynamic.

Of course, the ever evolving economic situation, the prospect of a challenging winter and the potential impact this could have on businesses, together with rising rents and business costs, is something that we continue to monitor closely for clients.

But for now, let’s take a moment to enjoy the success of the Commonwealth Games which has so transformed the region – and will continue to do so – as its legacy plays out in economic, occupier and investment terms.

If you would like to discuss any of the issues explored within this report, or you would like support with your own office or industrial requirements – whether as an occupier, or landlord, investor or developer / landowner, get in touch.

Yours sincerely

Carole Taylor

Regional Managing Partner, Midlands and North.

Office sector

Office market review

As businesses across the Midlands emerge from the pandemic, people have continued to return to the office in their droves – spurred in part by encouragement from their employers, but also by the completion of several office redevelopments, particularly in Birmingham ahead of the Commonwealth Games.

Businesses have continued to finalise their new workplace strategies with a flight to office quality in mind, and we have seen this translate into demand for high quality office space across the region to encourage workforces back to the office, as well as to attract new talent.

As a result, newer or refurbished space offering collaborative areas with attractive facilities is en vogue, and this continues to motivate landlords to invest in improving existing office assets in the region.

Of course, delivery of a good standard of office product to market to meet this flight to quality is a positive development, but we must also be mindful of the gap between prime space and the rest of the office market widening.

Market activity

The main thrust of office activity in the first two quarters of 2022 was within the professional, insurance and financial services sectors, where several firms committed to new or expanded space including Browne Jacobson, RSM Tenon, Gallaghers and Arcadis.

Following on from the strong finish to 2021 which saw 160,498 sq ft let in Q4 and total take-up levels for the year just 10% below the 10-year average, take-up in the first half of 2022 has remained consistent.

There were 32 deals totalling 175,261 sq ft of office space in Q1 – the most transactions in a quarter since Q3 2019. Meanwhile in Q2, 117,599 sq ft of space was let across 28 deals. When combined with Q1, these 60 deals represent the strongest activity in an H1 period since 2016 in transactional terms.

The major focus of activity and interest in Birmingham city centre lies at 103 Colmore Row which is already 75% let, with Browne Jacobson, Gallagher Insurance, Arcadis and RSM Tenon each taking space in the last six months.

Gallagher Insurance are moving 150 staff there from Newater House, which is currently undergoing a comprehensive refurbishment.

It is pleasing to see the landlord of Newater House respond to the flight to quality, by investing significantly in their asset. As letting agents for the building, we are confident that the high specification that will be delivered, will result in significant interest.

Other notable deals in Birmingham include the Office of the Public Guardian (OPG) committing to an additional 27,132 sq ft at Victoria Square House, coworking business Cubo Work taking 24,297 sq ft at Two Chamberlain Square, and Department for Transport committing to 22,928 sq ft at The Colmore Building.

Outside the City centre, Birmingham Business Park saw its largest letting in two decades, with a Q1 letting of 37,509 sq ft at 3010 and 3020 The Crescent, to the Department for Digital Culture, Media and Sport.

Design & Sustainability

Alongside the desire for a better standard of building and facilities is a focus on the health and wellbeing of teams, together with improved sustainability and environmental credentials, particularly from larger corporate occupiers where it remains high on their acquisition agenda.

Both new build space and refurbishments will focus on sustainability, wellness credentials and smart technology into 2023, particularly with changes in EPC Regulations and a race to net zero carbon emissions on the horizon.

Roof terraces and an increased focus on biophilic design are helping workforces to connect with the natural environment, and bike racks and showers are supporting a more sustainable commute and better wellbeing which, in turn, is boosting workforce productivity.

This is creating an environmentally conscious, safe and desirable city in which to work, and those landlords that answer to the demand for better sustainability credentials in their buildings will continue to win out over their competitors.

As well as investing in the refurbishment of existing office stock, landlords are offering more flexibility and fully-fitted Cat A+ sustainable solutions, allowing occupiers to sign up quickly on short leases – saving both time and capital expenditure on fitout.

103 Colmore Row, which brought 103,000 sq ft of office space to the market in 2021, is one such building –the CBD’s first to connect to the city’s fourth district energy system, resulting in lower energy costs, reduced carbon emissions and improved air quality, whilst boasting a service charge which is, on average, 12% less than its peers.

Meanwhile 10 Brindleyplace is Birmingham’s first building to receive Fitwell accreditation – a standard to measure occupant health and wellbeing.

This is creating an environmentally conscious, safe and desirable city in which to work, and those landlords that answer to the demand for better sustainability credentials in their buildings will continue to win out over their competitors.

What’s available?

Demand for Grade A office space will continue throughout 2022. However, the market for high-quality office space in the city remains significantly undersupplied.

It is estimated that there is less than 250,000 sq ft of Grade A office space currently available in the city.

This is giving developers the confidence to push on with the next phase of their schemes, with 597,400 sq ft of space currently under speculative development at sites including Paradise, where Argent is progressing well.

Supply of serviced office provision continues to come to market with X+Why’s entry to 103 Colmore Row where they took 34,500 sq ft. However, we have seen WeWork pull out of Brindleyplace, which has been picked up by X+Why.

Demand for office space in the Birmingham Out of Town (OOT) market continues to outstrip supply as occupiers look to capitalise on the excellent connectivity to the rest of the country.

This is reflected in the Q2 take-up figures totalling only 35,419 sq ft across seven deals – the lowest sq ft takeup since Q3 2013. This is very much a reflection of a lack of supply rather than diminished demand, however.

New build continues to be limited as developers favour industrial / warehouse construction for optimal returns, albeit new schemes are on the horizon with development proposals such as the NEC Masterplan and Arden Cross. Whilst these are highly likely to come to fruition, they are still in the initial planning phase and can do nothing to meet short / medium term demand.

Current demand continues to drive refurbishment of existing stock on parks such as Blythe Valley and Birmingham Business Park, but as demand continues to outstrip supply occupiers are looking further afield to locations such as Coventry, Warwick and Leamington Spa.

Two Friargate, Coventry is nearing completion, delivering 134,000 sq ft of brand new Grade A space adjacent to the railway station, whilst IM Properties BOURN is targeted for delivery in September this year. BOURN is a refurbishment of the former HMRC building and will deliver a further 92,000 sq ft of Grade A space to the former City of Culture.

Leamington Spa continues to attract occupiers in the gaming, digital and creative sectors, with the 40,000 sq ft former House of Fraser, now Bedford Street Studios, understood to be snapped up by Sumo Digital.

This letting demonstrates the preference from these occupiers for town centre locations to exploit public transport hubs and local amenities. This has fuelled developments such as the refurbishment of Spencer Yard, driving Leamington’s Creative Quarter initiative farther still.

Demand for office space in the Birmingham Out of Town (OOT) market continues to outstrip supply as occupiers look to capitalise on the excellent connectivity to the rest of the country.

What you can expect to pay

Rents continue to rise in central Birmingham particularly for serviced accommodation, as businesses hedge flexibility and speed of entry into space, against a cost premium, where desk rates now exceed £450 per month.

Meanwhile at schemes such as 103 Colmore Row, Paradise and Arena Central, which are delivering high-quality Grade A stock, rents continue to push north of £38.00 psf. We predict that rents will exceed £45.00 psf on Grade A space currently under development, as a result of rising construction costs.

The diminishing availability of Grade A space is driving the appetite by landlords to refurbish older stock, including Newater House, which we are marketing on behalf of Nurton Developments and Hortus. The comprehensive refurbishment is expected to move rents on in excess of £25.00psf.

The urban chic, open-plan loft style office at Bennetts Hill House which we are currently marketing has achieved £25.00 psf demonstrating a circa 70% increase on passing rents in the building pre-refurbishment.

OOT lettings at Birmingham Business Park and Blythe Valley Business Park have reached £26.00 - £27.00 psf and whilst much of the Coventry / Warwick / Leamington market remain at £17.00 - £20.00 psf, new schemes are breaking these barriers.

IM Properties is marketing BOURN at £23.50 psf, whilst Two Friargate is closer to £28.00 - £30.00 psf for brand new Grade A space. Meanwhile, the Bedford Street Studios, Leamington letting is understood to be at £26.50 psf.

Record rents

103 Colmore Row

Paradise Arena Central

£38.00 to £45.00 psf

Headline rents Increasing rents Increasing rents

Newater House

Bennetts Hill House

Birmingham Business Park

Blythe Valley Business Park

to £27.00

Coventry / Warwick / Leamington

£17.00 to £20.00 psf

Market transactions

Birmingham

Location: Victoria Square House

Transaction type: Letting

Size: 27,132 sq ft

Rent: Confidential

Tenant: The Office of the Public Guardian

Landlord: Kennedy Wilson Europe Ardstone

Birmingham

Location: Two Chamberlain Square

Transaction type: Letting

Size: 24,297 sq ft

Rent: £37.50 per sq ft

Tenant: Cubo Work

Landlord: Federated Hermes, Inc

Birmingham

Location: 103 Colmore Row

Transaction type: 10-year lease

Size: 12,132 sq ft

Rent: Confidential: Understood to be >£38.00

Tenant: Browne Jacobson

Landlord: Tristan Capital Partners

Birmingham

Location: 103 Colmore Row

Transaction

type: 10-year lease

Size: 12,132 sq ft

Rent: Confidential: Understood to be >£38.00

Tenant: Gallagher Insurance

Landlord: Tristan Capital Partners

Market transactions

Birmingham

Location: 103 Colmore Row

Transaction type: 10-year lease

Size: 12,132 sq ft

Rent: Confidential: Understood to be >£38.00

Tenant: Arcadis

Landlord: Tristan Capital Partners

Birmingham

Location: 103 Colmore Row

Transaction type: 10-year lease

Size: 12,132 sq ft

Rent: Confidential: Understood to be >£38.00

Tenant: RSM Tenon

Landlord: Tristan Capital Partners

Industrial sector

Industrial market review

The industrial and logistics market across the Midlands continues to lead by example, with the first quarter of 2022 witnessing the highest logistics take-up nationally – accounting for almost half of the total space taken across the UK.

As rents continue to rise, and a lack of meaningful supply persists, this is creating a worrying picture for the occupier – particularly ahead of Revaluation 2023.

Many occupiers are asking just how high will rents go, and what Revaluation 2023 might bring in terms of business rates hikes across the industrial and logistics sector.

We saw record levels of industrial take up continued throughout Q1 and Q2, well above the long-term average – not just in last mile distribution but also regional and national distribution, owing to the shift to digital retail that we witnessed throughout the pandemic.

However, with online sales down 8% as the cost-ofliving crisis begins to bite, this is something that we are monitoring closely.

Such is the demand for industrial premises, that there are often no existing units available for occupiers wanting a big shed and many are waiting for new units to be built or for more development land to come forth. This is putting pressure on market supply as land is promoted through the planning process.

New large sheds of 150,000 sq ft or more now need to be build-to-suit (BTS) or pre-let, but cost inflation is starting to pose a significant problem – both for the developer and the potential occupier.

We are also seeing the way in which industrial occupiers enter into lease agreements evolve.

Whereas you would traditionally agree Heads & Terms and then enter into an agreement to lease or purchase a building based on a fixed rent, we are seeing a great deal more proposals with inflation related caveats and scenarios built in.

This is particularly the case on the ‘subject to planning’ deals where the rent is not fixed until planning is received and construction is about to start on site, or in some cases day one rent reviews.

This is leaving occupiers having to make significant investment decisions for large premises without concrete knowledge of what they will get at the end, or how much it will cost.

Also gone are the days where landlords are happy with just RPI-linked rental increases.

On new or modern units, landlords are looking for the higher of open market or RPI linked increases and the cap and collar for RPI increases has moved in a lot of cases from 2% and 4% to 3% and 5% if not higher.

To summarise, over the past six months, the whole nature of an industrial deal has changed and occupiers need to budget for rent inflations and ensure that, working with a property professional, they forecast for every potential scenario to avoid any unwanted surprises.

Rising build costs mean that developers and landlords can’t fix a price today, they need to build in inflation.

Vail Williams has the professional expertise and market knowledge to run various scenarios for you – whether occupier or landlord – from open market rent review and index-linked reviews, or the higher of both, so that you can plan effectively.

Market activity

Approximately 28.6 million sq ft of industrial stock was transacted in the first half of the year, with a significant level of logistics space under offer across the region as demand continues in distribution and last mile delivery. This surpassed last year’s H1 total of 24.5 million sq ft, highlighting a notable increase in occupier appetite.

The region’s major manufacturers remain active, with many upgrading or delivering design and build space, particularly in the motor and aerospace sectors.

We are currently supporting building products company Alumasc in the acquisition of higher quality space at a reduced footprint and different configuration, as the company mirrors the flight to quality that we are seeing in the office market.

The same pursuit of quality has been sought by US owned client, Thermo Fisher Scientific, who have showed creativity in the pursuit of the space they want, and have been willing to take a lesser footprint at a higher eaves height to achieve the quality they want, whilst sourcing a site that will accommodate their requirement.

We continue to see the big sheds gets bigger, meanwhile at the other end of the market in the 30,000 -50,000 sq ft category, we are seeing demand for industrial space rise close to town centres.

Ecommerce, and specifically the urban logistics and parcel delivery companies, continue to drive the mid-sized and big box industrial property market, as do manufacturers with lots of development for this market too.

Design & Sustainability

Most industrial stock currently available across the Midlands is made up of lower quality second-hand units, with less than a quarter of available stock comprising the more in demand new high specification space.

This, together with an increase in overall occupier requirements, is leading many landlords, investors and developers to inject capital into the refurbishment of existing stock to ensure it is fit for the needs of the modern industrial occupier.

The industrial market has traditionally always been single storey. However, as land values creep up and materials handling processes improve, we are seeing developers be more creative in how they maximise the value out of the land and buildings they construct.

Eaves heights continue to increase to improve cubic capacity and maximise the value derived from it for occupiers and developers, whilst making best use of limited land supply.

Outside, there is growing demand for more secure yard space and larger turning circles to account for the size of HGVs, but developers need to balance this with the added pressure to maximise investment return on the land.

We continue to see the delivery of much more sustainable industrial premises, as occupiers and landlords / developers alike, increase their focus on Environmental, Social, and Governance (ESG) policies.

Indeed, the success of some deals has hinged on such sustainability credibility, with EPC ratings, solar PV, rainwater harvesting, more efficient heating, heat pump (new build), EV charging points, LED lighting all important factors.

Ahead of the EPC Regulations coming into force next year, we must see more investment in the refurbishment of existing buildings with green credentials in mind, or else landlords will find that their buildings, particularly those with EPCs of F and G, simply will not let.

We continue to see the delivery of much more sustainable industrial premises, as occupiers and landlords / developers alike, increase their focus on Environmental, Social, and Governance (ESG) policies.

Supply

The Midlands is a shining light for advanced manufacturing for the automotive, rail, aerospace and motorsport industries, which employ some 40,000 people in Coventry alone.

With access to the M6, M69 and M1 motorways, it is the perfect location for businesses operating in the logistics and distribution sectors.

Yet there remains a continued shortage of new ready to occupy space and whilst there is some speculative development in the pipeline, this is quickly being let up in the usual locations around major motorway junctions.

Developers have responded by building speculatively again, with the next phases of Prologis’ developments at Hams Hall and Apex Park in Daventry now delivered. However, there is a feeling in the investment market that industrial yields are hardening off ever so slightly.

As the UK economy evolves we may see some of the money that has been awash in the market for speculative development start to dissipate and this is something that we are monitoring.

Availability of big box industrial units continues to decrease with approximately 1.7m sq ft currently available. It’s a similar picture for mid-sized units with just 1.6m sq ft of space, meanwhile at the smaller end of the scale, there is approximately 941,000 sq ft available.

Goodman has already delivered 800,000 sq ft of industrial and logistics space, including a 464,000 sq ft distribution facility for Amazon and a 135,000 sq ft space let to Jaguar Land Rover.

Its new development Lyons 106 will provide 105,699 sq ft of industrial / warehouse accommodation just three miles from Coventry city centre, which is expected to create employment space for circa 200 new jobs. Features include a 12.5m clear internal height, 50m yard depth, 10 dock-level loading doors and 29 HGV spaces.

Meanwhile, Prologis is building the last two units at Prologis Park Ryton. DC8 was pre-let to Furnolic, the UK subsidary of Ziel Group and DC9, the new 330,770 sq ft speculative unit is now let to an international third party logistics company and construction will be completed imminently.

To complement that, Coventry Logistics Park, the former Toys R Us site acquired by Bericote in partnership with JP Morgan Asset Management for £60m, currently has three big distribution units spanning 47,544 – 485,120 sq ft under construction.

To the east of the city, Ansty Technology Park, which is home to London Taxi International, and Meggit, is bringing 1.7 million sq ft of highly specified, BTS logistics accommodation to market.

The UK’s biggest ever single BTS at Mercia Park for Jaguar Land Rover’s global distribution base is now complete and two units that were surplus to requirements of 215,000 sq ft and 315,000 sq ft are now on the market

The site is adjacent to J11 of the M42 at Appleby Magna and has been developed by IM Properties, funded by Intermediate Capital Group (ICG).

Following a flurry of activity at Magna Park, GLP is about to start construction on the final phase of their G-Park Ashby de la Zouche development adjacent to J12 A42. This will comprise two units of 421,406 sq ft and 218,291 sq ft.

Rental trends

Rental growth for industrial premises has continued as occupiers find themselves in increasing competition for units, exacerbated by a lack of new product coming to market, with just a handful of prospects on the horizon.

For big distribution space ranging over 100,000 sq ft in West Midlands, you can expect to pay between £7.50 - £8.25 psf, depending on the exact location. Mid-sized space of between 30,000 to 100,000 sq ft will cost between £6.75 to upwards of £7.75 psf depending on how strategic a location it is.

At the smaller end of the scale, brand new units of between 10,000 - 30,000 sq ft will command rents of between £7.75 - £8.75 psf, depending on exact location and size.

The average industrial rent across the Birmingham market is £6.10 per sq ft, which sits 20% above its preglobal financial crisis peak. Prime Birmingham rents are now £7.50 - £8.00 per sq ft for units over 40,000 sq ft, meanwhile smaller units can be significantly higher.

Some sources expect this growth to plateau as a new “norm” of rents emerges across Birmingham and its submarkets.

However, we believe rents – particularly for BTS opportunities – will continue to rise as build costs soar, with some developers predicting that build costs will increase by 20% by the end of the year.

In contrast, rental figures for second-hand stock have ranged between £5.00 and £6.50 psf depending on the condition of the space and the extent of the work / refurbishment needed to accommodate prospective occupiers.

Alongside rental tone, we are seeing lease terms evolve too. Until recently, it was commonplace to be able to agree a 15-year term with a break at 10 years on a new big box from the main shed developers.

Now, some developers are insisting on a straight 15-year term, such is the level of competition in the market, meanwhile others are not putting forward proposals at any level on a speculative unit, unless you can offer a blue-chip covenant.

Market transactions

Coleshill

Location: DC3 Canton Lane, Hams Hall

Transaction type: 10-year lease

Size: 131,780 sq ft

Rent: £8.75per sq ft

Tenant: LTS Global Solutions

Landlord: Prologis

Tamworth

Location: C1 Core 42, Watling Street

Transaction type: 15-year lease

Size: 345,414 sq ft

Rent: £7.75 per sq ft

Tenant: Maersk

Landlord: Hodgetts Estates

Tamworth

Location: Unit 48B Green Lane, J10 M42

Transaction type: 10-year lease

Size: 97,600 sq ft

Rent: £7.50 per sq ft

Tenant: Moonpig.com

Landlord: St Modwen Properties Limited

Coventry

Location: DC9 Prologis Park Ryton

Transaction type: 10-year lease

Size: 330,770 sq ft

Rent: £7.50 per sq ft

Tenant: Ceva Logistics

Landlord: Prologis

Wolverhampton

Location: Unit 110 Steelpark Way

Transaction type: Letting / Confidential

Size: 58,320 sq ft

Rent: Confidential

Tenant: DPD

Landlord: Schroders

Sandwell

Location: Pinnacle 191 Dartmouth Road, Smethwick

Transaction type: 10-year lease

Size: 191,268 sq ft

Rent: £6.40 per sq ft

Tenant: Hadley Group

Landlord: Topland Group

Wolverhampton

Location: Innovation Drive i54

Transaction type: 25-year lease

Size: 102,500 sq ft

Rent: £7.18 per sq ft

Tenant: Fablink UK Limited

Landlord: Barberry Industrial Limited

Get in touch

Vail Williams has operated in the Midlands commercial property market for the past 15 years.

Our office and industrial agency experts know the market inside out, and can advise you on the full lifecycle of your commercial property needs – whether you are an occupier seeking to lease, acquire or sell property, or an investor, developer or landlord wishing to build, fitout and let a building.

We work with a variety of public and private sector occupiers, landlords and investors, across the region, including Molson Coors, National Express and First Group – operators of Avanti West Coast.

To discuss your property requirements, please get in touch.

Carole Taylor

Partner – Office & industrial agency

Occupier Advisory

T: +44 (0)7717 814835

E: ctaylor@vailwilliams.com

Oli Muscutt

Surveyor – Office & industrial agency

Acquisition & Disposal

T: +44 (0)7823 791049

E: omuscutt@vailwilliams.com

Charlotte Fullard

Associate – Office & industrial agency

Acquisition & Disposal

T: +44 (0)7901 037998

E: cfullard@vailwilliams.com

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