The East of England is becoming increasingly desirable for both office and industrial occupiers due to its location, connectivity and relatively cheap rents
Record low vacancy
National occupier demand for industrial properties above 100,000 sq. ft. in the first six months of 2019 reached 1.19 million sq. ft., 48% above the long-term average. Within the local Peterborough market, take-up on units above 10,000 sq. ft. in the first six months of 2019 reached 861,512 sq. ft., 13% above the long-term annual average.
Moreover, recent strong occupational activity paired with limited new development has kept vacancy rates at chronic lows currently standing at 2.6%, a positive for the rental tone within the market. The constrained supply has caused rents to grow by roughly 40% since the low of £3.70 in the 2008 economic crisis to £5.50 or £7.50 for prime units, depending on size.
The supply of industrial units above 10,000 sq. ft. in the region currently stands at 744,428 sq. ft. meaning there is less than a year’s supply in the market. This chronic shortage of supply has created opportunities for speculative development. This strategy has been seen at Gateway Park, where strong levels of demand have recently led to the decision to develop two further speculative units.
Limited office supply in Peterborough has restricted office take-up in recent years. During 2018, Peterborough saw total office take-up of 43,000 sq. ft., which was below the long-term average. During the first six months of 2019, Peterborough has seen 19,000 sq. ft. of space occupied, suggesting that 2019 take-up will be down again from the preceding year.
The permitted development (PD) of office stock to residential has seen office supply in Peterborough rapidly fall. In recent years, over 600,000 sq. ft. has been purchased for conversion. The conversion of Bayard Place, the former Peterborough City Council HQ, into 115 residential flats will see a further 60,000 sq. ft. of office stock removed from the city.
Conversions combined with limited new development has resulted in office availability in Peterborough currently standing at just 250,000 sq. ft. There is only one building that can provide over 20,000 sq. ft. of contiguous space, demonstrating a need for development if Peterborough is able to attract and retain large occupiers. This has resulted in significant rental growth over the past five years. Prime rents currently stand £17.50 per sq ft representing growth of 8% per year since 2015.
Local supply pipeline
Occupier demand within Peterborough’s industrial and logistics market continues to revolve around better quality units. Landlords are undertaking quality refurbishments of second-hand space and there is the opportunity to generate lettings at increased rental levels which will in turn help with rent reviews and portfolio valuation.
High demand, quality rental growth opportunities and lack of quality stock on the market has also increased demand for investment opportunities. Savills national prime yields have remained largely static for the last 12 months and now stand at 4.25% for prime single let logistics units and 4.00% for multi-let industrial estates, the lowest levels ever seen. The current pricing, high demand and low yields provide an opportunity for current asset owners to sell off stock for higher capital values.
Upgrading existing stock
There are similar opportunities in the office sector. Owners of secondary buildings can optimise the benefits from increased demand and rising rents by refurbishing and upgrading existing stock to meet the demands of modern office occupiers.
Savills What Workers Want survey found that only 39% of respondents felt the office had a positive effect on their mental health. With wellness rising on the corporate agenda, office buildings with wellness facilities are increasing in popularity, as occupiers aim to meet the needs of their employees. For example, Stuart House saw significantly increased interest after an extensive refurbishment to include gym, secure indoor cycle parking, an onsite coffee shop and co-working space. The building, which previously struggled to let, now only has a handful of suites available.
Read the articles within Spotlight: Peterborough below.