Sheds market: a sector caught in a perfect storm

The Sheds market is caught in a perfect storm; on one hand demand for industrial and warehouse stock is continuing to rise significantly, while on the other we're seeing available stock levels continuing to dwindle - according to data across our region specifically demand is 28% higher than pre-Brexit*. In part, this imbalance can be traced back to a slowdown in the institutional sectors' desire to fund speculative developments; this perfect storm is driving rents, both prime and secondary, to a high level and certainly exceeding those rents achieved before the Global Financial Crisis. This upward pressure on rents caused by the imbalance in supply and demand is being exaggerated by alternative use redevelopment pressures; tenants seeking business planning certainty; and the number of leases that have been granted outside of the security of tenure provisions of the Landlord and Tenant Act. The dwindling supply is not just limited to prime stock and is also creating a very compelling second-hand rental growth story. While prime rents perform strongly moving ahead of rents adopted to development appraisals it is the second-hand rents that have jumped at a pace, forcing the rental gap between prime and existing stock to narrow perceivably.  This can act as a break to development and further exacerbate the supply problem, thus causing a Catch-22 situation. Within Glenny's core agency catchment there has been a negligible 2.5% vacancy rate feeding strong rental growth. Tenants are demanding certainty, causing them to seek longer leases, forego lease breaks and seek protection from the Landlord and Tenant Act. Some might say it's a "Landlords Market", given the relationship between supply and demand, but as we know tenants are the ones that create the demand, drive expansion and generate the market deals. This is now the right time for close engagements, irrespective of lease events. In this landscape a well-advised and prudent tenant will align their property portfolio with their business plan objectives, and may regard a market leading rent worth paying if they can secure the right premises at the right lease-length with Landlord and Tenant Act protection.  Beginning that dialogue without an impending lease expiry on the horizon allows a collaborative approach to landlord and tenant negotiations and removes undue pressure. An immediate response to this "storm" is the vacation of tenants that can't afford the high rents in desirable locations, such as those within the A406, to areas where the rents are more affordable. As a result well-connected outer-London alternatives such as Harlow and Basildon are receiving strong occupational interest. A long-term solution is to provide more land designated to business space, specifically urban logistics in high density locations. We're witnessing some sites being brought forward, but they are limited and more are needed. We expect the gap between secondary and prime to continue to narrow and both landlords and tenants must recognise the need to engage early to try to create security for their property portfolios in what could be an uncertain economic and political climate in the coming years. If we are at a high water mark, will the level keep rising? It's as difficult to predict as the British weather. View William Martin's article in this week's Property Week Sheds supplement here.