Does size matter when valuing a warehouse?

Does size matter when valuing a warehouse?
More to the point, how is it measured? The warehouse floor area and cubic capacity are viewed in a variety of different ways according to who is doing the measuring, which can significantly affect the cost of rent and rates. sbh’s Andy Melvin offers a safe guide through the minefield.

“Gauging the size of a warehouse or distribution property for rental purposes starts deceptively simply by calculating the gross internal floor dimensions. This straightforward calculation rentalises all the space inside the external walls, irrespective of internal obstructions, columns, corridors, staircases and such. Even upper floor offices, boiler rooms, gatehouses and maintenance areas are included. Very often all these areas are valued the same – with the exception of canopies or other open-sided structures, which normally carry a reduced rate.

This rather rough and ready method means that the full height zone of a 15m-20m high bay store carried the same rental value as the gatehouse and the 4m high vehicle maintenance area.

In contrast office buildings are measured on the net usable internal floor area which excludes stairs, corridors, toilets and other peripheral facilities. As a result, the rental for two office facilities on one site – one integral with the main warehouse, the other a separate block – will be treated quite differently for rental calculations.

Rates

The rating system provides another twist to the tale. Warehouses are valued, as before, on the gross internal floor area, but different rates are applied to other parts
of the building including offices, plant rooms, canteens and other areas. So the Rateable Value, which is meant to reflect a theoretical rent at a given date, is in fact calculated in a different manner to that for a commercial rent. And the UK property market still works in square feet, while the rating system values property in square metres!

The building cube
Such measurements do not in any way reflect the fact that warehouses come in a variety of heights and shapes. A modern institutionally acceptable warehousing property is typically 10m-15m high, and in this well-established market rents can be calculated without complicated formulae or reference to a notional building. However the new breed of high bay warehouses that may offer twice the storage cube on the same footprint threatens to upset the established order.

A recent case in which sbh.uk was involved in acting for the occupier put the dilemma into even greater focus. Around half the warehouse floor space was 30m high, while the remaining half was a more standard 15m high.

The landlord not surprisingly looked to obtain a higher rent for the high bay zone than for the low bay area, reasoning that it provided far more cubic space. However there is still scant market evidence on which to base any significant difference in rent for high bay units, and as a result sbh.uk was able to negotiate a premium of only 5% for the higher zone, even though it offered twice the nominal storage capacity of the low bay zone.

Such evidence will still be hard to come by in the future as the great majority of such tall warehouses are owned freehold, being highly bespoke structures. And most of those offered leasehold are linked to the old-established standard formula with an uplift from the rental level of a 10m-15m building. In addition developers appear to be able to absorb the additional building costs involved, reflecting the fact that doubling the height of a warehouse by no means doubles the cost.

While these are general guidelines, there is no doubt that establishing and negotiating the most favourable rental deal for a modern warehouse can be fraught with difficulty. And for many would-be occupiers the most effective way to deal with a highly professional landlord negotiator is to recruit the help of a specialist consultancy
such as sbh, with the knowledge and expertise to help defend their corner. Over the past five years, sbh’s specialist warehouse and industrial rent review team has saved UK warehouse occupiers more than £37m, an average of around £60,000 each annually. Such savings go straight to the bottom line and can help make a measurable difference to a company’s total business performance.”

July - 2007