Uncertainty rules for Warehouse Rents

The old rules that helped determine rents for warehousing and industrial premises have been washed away by the economic tsunami. Andy Melvin from warehousing and industrial property specialist sbh considers what has changed and what the new rules of the game might be.

Until recently when negotiating new rents or rent reviews for clients we would have access to a wealth of material and data to help justify a fair and reasonable rent, using factors such as recent lettings in the area. However letting activity slowed early in 2008 and virtually ceased after September, with the force of the recession undermining all the assumptions and factors that we would have formerly relied on.

As a result, landlords are now finding it tough to produce evidence of lettings to justify
just what a realistic rental should be for any current rent review. Leases usually assume that at the review date there is a “willing tenant” and “willing landlord” negotiating a deal reflecting the prevailing market conditions. However in the current virtually non-existent market tenants can argue that the hypothetical “willing tenant” may not have any other potential tenants to outbid, and consequently are in a strong position to negotiate a very keen deal.

Tenants can also argue that the “willing landlord” will also be acutely aware that rates still need to be paid on an empty building, with possibly little hope of finding another tenant for years to come.

The astute tenant will use this uncertainty to hold out for a Nil increase, leaving the landlord little option other than to submit the matter for determination by a third party Independent expert or arbitrator, as they have nothing to lose.

However the surveyors acting for both landlord and tenant will likewise have very little evidence of deals to submit to the Arbitrator. Their only solution will be to provide a general picture of the state of the market with statistics on the economy, supply and demand of warehouses, asking rentals on empty buildings, void periods for empty units, incentives offered on empty premises and any other relevant current data available.

As any information that is not up-to-date - probably within the past few months – will be seen as irrelevant, such negotiations will require a high degree of up-to-date knowledge and expertise gained from regular and current contact with the market, something few potential tenants will have.

As a specialist in this sector, sbh has been able to cut an average of 60p/ft² from landlords’ original proposals over the past seven years, culminating in saving drinks giant Diageo more than £1m pa on one distribution centre. So the company has a strong track record in the good times and the expertise to protect tenants’ interest in the bad.

May - 2009