Occupiers in the industrial and logistics sector are striving for cost savings and efficiency gains through the acquisition of better quality space, as their needs are increasingly not being met by vacant, low-quality sites in poor locations. A two-tier market is emerging, as demand for better quality space and vacancy of low quality space increase.
Richard Holberton, Director of Research, CBRE EMEA, said: "Rising levels of vacant space, on which rents are declining, co-exists with increasing demand for more modern, flexible space which is in short supply and can often only be satisfied on a build-to-suit basis. A key challenge in the market is to establish lease and funding terms that facilitate delivery of this space."
A reluctance to occupy cheap, vacant space challenges the notion that falling rents have created a "buyer’s market" and demonstrates a demand for increased flexibility in terms of both leases and building specification, such as sustainable building features that deliver the highest cost-benefit trade-off.
"Demand focused on better quality modern space doesn’t mean that organisations are not under pressure to reduce costs," said Holberton. "What it does indicate is recognition that paying more for the right kind of building in the right location can produce greater cost savings and efficiency gains across the business."
According to CBRE, firms in the sector are looking for short, flexible, bespoke solutions which are negotiable in short timescales. This is particularly true of specialist logistics firms but some manufacturers, once tolerant of older, smaller buildings in sub-optimal locations with lower rents, are now also becoming less willing to take this kind of space.
Guy Frampton, Head of Industrial Agency, CBRE EMEA, said: "Occupiers’ requirements in terms of building specification and flexibility are becoming more demanding, they see longer term efficiency gains and cost savings in better quality space in the right location. Flexibility can come at a cost, so occupiers are tasked with finding the right degree of flexibility which will allow them to secure suitable terms without unacceptable consequences for their balance sheets. In a couple of instances occupiers are identifying large-scale campus developments as the optimal solution to their needs. So far this is confined to a small number of markets, including Italy and Belgium, but it is a trend we expect to become more widespread."
Some landlords are accommodating tenants’ demands for more flexibility, realising that the cost of getting a new tenant is often higher than retaining an existing one. High occupier turnover is unwelcome in a weak economic climate and loyalty is often rewarded in the renegotiation of leases. In the current market, leases have often been favourably renegotiated within two or three of a break and CBRE has discovered that some occupiers have been able to secure rent reductions of up to 30% in return for lease extensions.
"Local investors and distressed owners are currently seen to be the most flexible in today’s market, with major institutional investors more resilient. In an environment where flexibility is so highly prized, occupiers of industrial and logistics property are calling for a standardised approach to tenant-friendly leases across Europe," Frampton said.
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