As the demand for brick and mortar shops starts to decline, the rise on the demand for industrial leasing continues to soar. In 2021, the growth in industrial property lettings is driven by the logistic needs of online retail companies. Expanding warehouses and hubs in strategic parts of the country allows online businesses to reach their customers for lesser shipping costs.
If you’re looking into renting an industrial space, it pays to be thorough and do every step of the process with due diligence to ensure that the building or establishment will work best for you. As a trusted chartered surveying company in London, Phoenix & Partners aims to help business owners have the best deals out of their industrial leasing agreements.
In this post, we will share the factors that you should consider in leasing industrial space, the costs that you should expect, and the step-by-step process from property evaluation to stepping into your newly rented industrial space.
What is an industrial property?
Industrial property is a type of commercial space where manufacturing, assembly, storage, and trade of products or services occur. It usually involves buildings that can be anything from temperature-controlled storage facilities to areas that handle heavy machinery.
Properties under this category involve a significant amount of capital to handle personnel and business resources.
Like most commercial spaces, the lease in industrial properties ranges from 1 to 25 years. Therefore, careful evaluation and planning should take place before signing a lease for an industrial space because once the agreement is signed, it’s already a point of no return.
Types of an industrial property
The industrial property market covers different types of specialty spaces designated for every use. Here are the eight types of industrial buildings n the UK:
The term industrial has always been tied up to the manufacturing sector. The industrial properties under this category can handle high loads of energy to power both light and heavy machinery.
They are the usual types of buildings that produce noise and other industrial impacts that are not suitable to be placed around residential areas. There are two types of manufacturing buildings:
- Light manufacturing buildings. Properties under this category are ideal for businesses that focus on assembling and storing products. Common examples of industries that use this kind of property are the clothing and assembly industry.
- Heavy manufacturing buildings. The properties under this category are the industries that require heavy machinery. They require specialised features to handle a big demand on energy and enough space for safety protocols. Industries under this category are machine tool building, metal fabrication, and chemical production
Warehouse or bulk distribution buildings
Properties under this category are used for the storage and distribution of products in a strategic location for businesses. With the rise of online retail, bulk distribution covers a big chunk of the letting industry in the UK for the past year. These industrial properties are usually located in a very accessible area to ensure the fast shipment of products and lower delivery costs for consumers.
Cold storage buildings
Cold storage buildings are properties with special features that can handle freezer and cold storage space. Common industries that use these properties are food logistics. They are temperature-controlled, which demands a high energy supply.
Truck terminals are commercial spaces that serve as a meeting place for the exchange of goods between trucks and trailer shipments. They are located in central areas accessible by road links across a region.
Research & Development buildings
Industrial properties intended for research and development contain a combination of office space and specialized laboratories. Industries that occupy this type of building can range from highly-sensitive products like vaccines and electronics products like smartphones.
Industrial properties under this category house several servers that handle web, telecommunications, and cloud computing services. They are temperature-controlled to keep the servers working at optimal condition.
Showroom buildings are a unique type of industrial space that can contain an office, a showroom, and storage. They are often used for car dealership businesses and light suppliers to allow the public to see their newest models.
Flex buildings or co-working spaces
The term flex building is often known in the UK as flex offices or co-working spaces. These are industrial properties that have no special features and with default structural designs. They are a perfect space for a wide range of industries because they can change the interior design to tailor-fit their business processes.
Due to the digital growth in the UK, flex office is among the fastest-growing space markets today.
Industrial Leasing Process Roadmap: How does leasing industrial space work?
The whole industrial leasing process is a huge undertaking with many factors to consider. Therefore, it also consists of several processes to ensure wise-decision making and avoid huge long-term financial losses.
To help you visualize what’s the road ahead of you, here is a brief industrial leasing process roadmap to guide you in your journey.
While every leasing process differs depending on the type of industrial property, some stages are generally the same. These stages include:
- Evaluation of business needs
- Location strategy
- Estimating and budgeting the costs
- Property selection and proposal review
- Site visit/ocular inspection
- Legal documents evaluation
- Signing of agreement
- Move-in or renovation
- Review of responsibilities as a tenant
Some stages in the leasing process are more complex than others. Let us break down the crucial and elaborate stages of industrial leasing that require in-depth planning and research.
Business needs assessment: What to consider when leasing an industrial space?
More than the business needs of the company, there are some real estate and zonal laws that you should also consider. By checking the following factors, you can either save from capital costs due to incentives or save yourself from spending so much time on a property that will affect your business process due to usage restrictions.
- Local Enterprise Partnerships (LEPs): LEP is a local partnership between the local council and business owners built to decide on local economic growth and to open more job opportunities for the local community. As a member of the partnership, the organization behind the LEP can initiate activities that will help boost your business and increase your competence in your industry. Currently, there are 38 LEP across England, ten of which include:
- Black Country LEP
- Buckinghamshire Local Enterprise Partnership
- The Business Board of the Combined Authority
- Cheshire and Warrington Local Enterprise Partnership
- Coast to Capital
- Cornwall and Isles of Scilly Local Enterprise Partnership (CIOS)
- Coventry & Warwickshire Local Enterprise Partnership
- Cumbria LEP
- Dorset LEP
- Enterprise M3
- GFIRST LEP
- Enterprise Zones(EZ): EZs are small geographic areas in the UK built to encourage several businesses across industries into the area to improve the local economy. Within five years, businesses within these EZs can enjoy several incentives, such as:
- Tax breaks
- Business rates discount or exemption
- Fast processing of planning application
(To learn more about the nearest enterprise zone, you may check here.)
- Landlord & Tenant Act: The Landlord & Tenant Act is a guide for both tenants and landlords regarding their duties and responsibilities in maintaining a peaceful tenant-landlord relationship. It is only applicable for tenancy and not for licenses. The act may look like it’s a simple guide, but it has been the cause of several commercial property disputes that ended in court. One example of a clause in the LTA that causes some issues between landlord and tenant is lease renewal.
Commercial tenants have certain protections under the Landlord & Tenant Act of 1954 where they can have the same terms from their previous lease during renewal. However, the landlord can refuse to renew a commercial if the tenant’s behavior qualifies for any of the following:
- Neglect the duty to repair the property
- Consistent delays in payment
- Breaches of other terms in the lease
- Alternative accommodation is provided by the landlord
- The tenancy is based on sub-letting
- The landlord wishes to demolish or reconstruct the building
- The landlord aims to use the building for his business or residence. The example above is just one of the many clauses in the LTA that can be a cause of dispute. To be on the winning end of a lease agreement, it’s best to have a solicitor help you sort the legal matters.
- Usage restrictions: Aside from checking the potential of an industrial building, you should also consider the impact of your business on the area. The possible usage restrictions may vary per area or region, but it usually involves:
- Noise restrictions: Local councils can halt the business operations of a company if it is causing too much noise to its neighbors. The fines are usually higher for industrial noises than in residential areas.
- Environmental concerns and public safety: An industrial property may have the best facilities for your business, but if it is close to a protected or residential area, you may face costly modifications and penalties in the future.
- Property modification restrictions: Local councils may have some restrictions on the appearance and location of the buildings or the size of the parking space that may affect your vision for the industrial property. If your business is within the heavy manufacturing sector and the building you’re looking into is within a residential area or a protected environmental zone, you may face some usage restrictions along the way.
Questions to ask when leasing an industrial building
As you prepare to find the best industrial space for your business, having your questions ready can guide and help you stay focused on your priorities. Once you begin with your site visits, it can be easy to get swayed by the facilities without considering your goals. Here are some questions to reflect upon before starting the property hunt:
- How soon can I move in?
Legal & restrictions
- Does the building belong to the property class B?
- How many years can I sign up for my lease?
- Is the lease under the Landlord & Tenant Act?
- What are the restrictions in place in the area and within the property?
- What are the specifics of my responsibilities for the repairs and maintenance of the property?
- Am I charged for service or maintenance fees, and what does it include?
- What are the available utility supplies in the building?
- Does the property include a parking area or a yard?
- How much is the rent, and is it subject to a rent review?
- What is the consolidated monthly cost inclusive of the rent & deposit, utilities, insurance, and legal fees?
What to expect on the true cost of an industrial lease
Cost is one of the first considerations of tenants aside from the technical requirements of industrial property. The rents on industrial property in rural areas are usually more affordable, but there are some disadvantages like not being accessible to most road links.
Before you balance your decisions between your priorities in finding a property, here are the factors that will affect your budget in industrial leasing:
A lease or security deposit is the amount you pay to the landlord on top of the rent and other fees. It is usually worth three to six months’ rent. Deposits help protect landlords from unprecedented loss during the term of the lease. It is not required by law, but the majority of property owners prefer having one for security purposes.
Government charges for business rates
Business rates are fees required by the government for non-domestic properties. The amount of the business rate is based on the rateable value of the building or property. It is usually sent by the local council during February or March.
If the property is within an Enterprise Zone(EZ), you may get relief or be exempted in your business rates for five years, whichever is granted to you by the local council. To have a rough idea of your business rates, you may estimate them here.
The 20% value-added tax is usually included in the monthly rent of the tenant. In some cases, you may also pay the tax on behalf of the landlord.
Service or maintenance charge
A service and maintenance charge is a fee used by the landlord for maintaining the property. Not all industrial leases have these charges, but they may apply for properties that require tenants to share some facilities.
Repairs and renovations
A large chunk of your expenses will go for the renovation and repair of the building to meet the structural needs of your business. Industrial units usually come in a blank canvass since there are varying interior designs for different industries.
A dilapidation claim is a clause in the lease agreement where the tenant is required to leave the property with a clean slate and restore it in the same condition before they rented it.
The tenant and landlord can agree to have a cash settlement for all the work needed, or the tenants can do the tasks by themselves. Dilapidations claims are one of the tricky processes because some UK leases impose the demolition and removal of facilities regardless of being in pristine condition.
Most commercial spaces in the UK require tenants to secure liability insurance before they sign a lease. The insurance will serve as the safety net for the landlord in case there are accidents during the lease term.
The liability insurance will take effect in case of fire to cover the damages to the property and the treatment of the injured personnel. Especially in heavy and light manufacturing industries, having liability insurance can help weigh out the high risks involved with machinery use.
The property you’re looking into leasing may already have some utilities in place. However, if you need some modifications, like increasing the energy load capacity to accommodate the energy demand of heavy machinery, you will need to do the necessary processes by yourself.
What areas to look for to save on costs
Any tenant would love to have some discount or relief from the tons of costs in leasing an industrial unit. The good thing is you can check on the following opportunities to save on costs:
- Local Enterprise Partnerships (LEPs): As part of a local LEP, the organization may conduct some activities that will benefit your business, like considering the use of renewable energy.
- Enterprise Zones: Renting an industrial property within an Enterprise Zone may grant you some business rate relief or even an exemption and tax breaks.
- Structures and Building Allowance(SBA): All commercial buildings, including industrial properties, are qualified for the Structures and Building Allowance(SBA). It is a 2% relief per year on the cost of the building. To qualify for the allowance, the property must be constructed or renovated and available for letting. If the lease of the tenant lasts for about 35 years, the lessee will be treated as the landlord and can claim the allowance.
- Capital allowances on plant and machinery: Industrial businesses can claim an allowance for their equipment which includes air conditioning units, lifts, and heating systems. They can have about 6% to 18% of the total amount of machinery.
- Professional service fees, and market rent reviews: When talking to landlords and checking some proposals, negotiate for more affordable service fees and a compromise on market rent reviews. These are some of the variable costs that may change throughout the lease term, and negotiating it with your prospects ahead of time can help you land a good financial position.
- Business rates relief: You may enjoy business rates relief if you consider renting an industrial space in an Enterprise Zone. The incentive may only last for a few years, but it can save you a lot of money that you can use for other business expenses.
Industrial property leasing checklist
For thorough planning and preparation in leasing an industrial unit, here’s a comprehensive checklist so you won’t miss a crucial process before landing on a lease agreement:
Step 1: Identify business needs and the type of industrial space you need
It can be easy to get swayed by beautiful and strategically-located properties in the market if you have no set standards for the exact property you’re looking for. The answers to the following questions can help you build your ideal building standards and stand firm on your priorities:
- How much space does my business need?
- How long do I need the space?
- What type of industrial space do I need?
- Do I need exceptional features?
- What necessary access should I look for?
Step 2: Strategize your location based on your business goals
Find a location that can both benefit your business processes as well as ease the costs. You may consider checking some Enterprise Zones that may also work for your business or find some prospective locations in areas with competent LEPs.
Step 3: Evaluate what you can afford
Conduct a forecasted estimate on the costs of renting an industrial unit. Check how much you can go and identify your deal-breaker amount. You may also set some buffers in case some deals fit your standards but at a higher cost than your budget.
Step 4: Locate your ideal industrial properties and get some proposals
Find the local commercial rental properties in the locations you consider fit for your business. You can check on the following resources:
- Commercial letting agents
Step 5: Start visiting your prospect industrial sites
Visiting the prospect properties allows you to verify the features they claim in their ads or proposal. It also gives you an opportunity to chat with the tenants and the surrounding community about the property you’re looking into letting.
Give yourself some time to gauge the pros and cons of each property to find the best one. Consider the factors we mentioned earlier in this post to achieve a wise and educated decision.
Step 6: Negotiate with your best prospect industrial property or hire a chartered surveyor
Once you select the industrial space that works for you, you may start negotiating your terms. To help you throughout the process, it is worth consulting a local chartered surveyor who knows the ins and outs of the local commercial property market. Richard Phoenix is a trusted commercial property expert based in London who helps business owners and companies close their ideal industrial property within their budget. You may schedule an appointment here to help you sort out your terms with your prospective property owners.
Step 7: Sort out your legal documents and consider a solicitor
Processing legal matters is one of the tedious parts of the industrial leasing process. You have to make sure that every clause on the lease agreement is good for long-term projection and risks are considered. You may hire a solicitor to guide you with the legal process and see the opportunities that you might have missed without professional help like the dilapidation clauses.
Here are some of the documents you need to prepare and study before signing a lease:
- Heads of Terms (HOTs)
- Schedule of Condition (SOC)
- Identification documents
- Bank debit account
Step 8: Sign the leasing documents
Once you have come to terms with your landlord and are satisfied with the agreement and costs, you can finally sign the leasing documents. You can now proceed with the elaborate process of bringing your visions for the industrial place to life. Ask your landlord when you can finally move into the building.
Step 9: Take the keys and get ready to move in to renovate the property
After a very long process, you can now finally have the key. With that, you can start the renovation and modification of the place. Once done, you may settle in with your staff and launch your new office or industrial facility.
Step 10: Sort out your liabilities and responsibilities as an industrial property tenant
Though it may look like the last stage is having the keys to the property, it is just the beginning of another undertaking. You will be responsible for the space and anything that may happen in it throughout the lease term. As a new tenant, here are some questions worth pondering:
- What are the things or services that the landlord should provide?
- What are my responsibilities as a tenant?
- What are the steps in case I want to leave the property for good?
- What is the worst thing that can happen if I can’t pay the rent on time?
- Can I extend my facilities on the property if I need more or less space?