NW in 2017: The year of the shed

Continuing the series on trends and challenges facing the North West in the year ahead, Jim Purves looks at the region’s thriving logistics sector.

Christmas is approaching and the bright lights of the Liverpool2 container terminal illuminate the sky like the star of Bethlehem. There is no room at the inn – the North West’s burgeoning tourism industry has seen to that – but ships and lorries are shepherding vast flocks of containers towards the region’s numerous sheds, where wise men deposit gold, frankincense, myrrh and other containerised commodities…

This year has been a positive year for the logistics sector in the North West and that trend looks certain to continue through 2017.

Peel Ports’ ambitious Liverpool2 deep-water container terminal is inevitably being proclaimed as a post-Brexit saviour, and 2017 will witness the arrival of the largest container ships in the world within easy reach for most of the population. Diverting this traffic away from the South East ports will further stimulate an already booming logistics sector in the region.

However, success will bring its own challenges. Despite the Omega expansion and Peel Ports’ investment all along the Manchester Ship Canal, a lack of sufficient speculative development in recent years means that supply is unlikely to be able to keep pace with escalating demand in 2017.

Speculative development will continue to grow, but developers will increasingly have to fight for appropriate sites against other competing uses, including residential development.

Delays in the timely availability of a new supply of quality sheds in the right locations mean that occupiers will also have to compete for the best sites. Modern buildings already fitted out by, and at the cost of, previous tenants will be in short supply. Rents will rise and logistics providers taking a developer’s shell will also have to factor in expensive fit-out costs.

We will increasingly see landlords maximising their advantage by demanding longer lease terms, with 10 years becoming the norm and some landlords seeking 15 years. Logistics contracts rarely exceed three to five years, creating a significant risk for the logistics provider if their supply contract is not renewed.

With providers operating on increasingly tight margins, a lease that extends beyond the supply contract on which the provider depends can more than wipe out any profit made on the supply contract. If the shed is in a sufficiently desirable location, the logistics provider may be prepared to take a commercial view that it can find another use for it if the worst happens.

Those landlords who will still consider shorter leases are increasingly demanding premium rents and no security of tenure. This reflects current market conditions, but for the logistics provider it merely substitutes one problem for another, since it allows the landlord to hold the provider to ransom on lease renewal should the customer renew the supply contract.

We also expect the trend for substantial customers to take the lease themselves to swell during 2017. While this protects the logistics provider from property costs – and the risk of being left with a lease once the supply contract ends – it weakens the provider’s bargaining position with its customer and means that the loss of a supply contract can also result in the loss of a key strategic location.

So, a positive prognosis generally, although supply and demand issues mean that the market is unlikely to fully return to a more recognisable equilibrium until after 2017.

• Jim Purves is head of the Manchester property team at Hill Dickinson