RetailWarehousingMarket: After a period of spectacular growth, the retail warehousing market now faces changing times, writes Gretchen Friemann.

Property experts warn rental values in the rapidly expanding retail warehousing sector are likely to fall over the next few years as the recent upsurge in construction starts to outpace tenant and consumer demand for these schemes.

The concern is chiefly focused on regional locations where developers have rushed to cash in on the intensifying competition between the large-scale DIY operators.

Over the past three to four years, rents in retail warehousing have jumped 60 per cent to between €23 and €25 per sq ft from €15 per sq ft. They are now at the same level as suburban or regional office rentals.

But the returns on these schemes can be far more profitable than an office development since the basic box-like design of a retail park means it is relatively cheap to construct.

As one institutional investor commented, developers have been making a packet on retail warehouses. "They can construct them for around €200 per sq ft and then sell them on for anything between €700 and €800 per sq ft. It's these value levels that are driving the sector."

However, he claimed most retail warehousing schemes were unattractive to investors because of the limited scope for rental growth in what is becoming an increasingly overcrowded market.

Even property experts who have previously been bullish on the sector admit that in some towns "there is an excess of retail warehousing space which will inevitably lead to a downward pressure on rents".

But they point out that there is still significant room for growth in densely populated urban centres, particularly south city and county Dublin.

However, the capital's spiralling land prices mean this area is an unrealistic option for developers.

Residential developments command far higher returns in such affluent locations than retail warehousing schemes, which is why The Park scheme in Carrickmines is expected to achieve high rents when it is fully let.

Developer Michael Cotter has already secured Woodies as the anchor tenant and sources indicate that the Australian bulky goods retailer, Harvey Norman, is also negotiating for space in the scheme.

Harvey Norman, which already has outlets in the north Dublin Airside retail park - as well as the 20,439sq m (220,000sq ft) Dundalk scheme - has made no secret of the fact that it's seeking additional space in south Dublin.

But industry sources claim the Australian retailer is struggling to generate solid sales at it Dundalk base. Although this is partly blamed on the company's business structure, others claim the Dundalk retail park is far too big for its target population base of just over 30,000 people.

As one industry expert pointed out: "Dundalk consumers have the benefit of being able to access the diversified retail offering across the Border. I believe the town will see significant population growth but the retail park there should have been 150,000 sq ft (13,935sq m) rather than 220,000 sq ft (20,439sq m)."

Yet these ominous warning signs are not deterring developers. According to Mark Reynolds of HOK, there are currently around 34 to 36 retail parks being marketed. He estimates the average build for each scheme, including site costs, is around €40 million which means that over the last two to three years - this is the typical timeframe for these schemes - up to €1.4 billion has been spent.

Michael Conroy of CB Richard Ellis Gunne argues the pace of growth of retail warehousing in provincial locations will slow as "within two years, most towns of around 20,000 will have a successful retail park".

But some property experts believe certain towns, such as Athlone and Naas, where there are two retail parks planned, will result in competitive rents for retailers.

The regional centre of Athlone, which has a urban population of 18,000 and a surrounding population of up to 45,000, will shortly have three full-scale retail parks of around 13,935sq m (150,000sq ft). At the moment Woodies anchors a scheme just outside the town but Homebase and B & Q have agreed to take space in two separate developments.

A fourth retail warehousing scheme may be given the go-ahead from Roscommon County Council as the consortium of developers claim to have signed up Atlantic Homecare. If planning permission were granted, Athlone would then have all of the top four DIY retailers.

But property sources believe Atlantic, which is now operated by Woodies' parent company, Grafton, will pull out of the scheme, chiefly because its new owners will not want the brand cannibalising Woodies' market share.

Many industry sources are predicting that Woodies and Atlantic will now refrain from competing directly against each other. But if this is the case, it means developers will have a smaller pool of DIY retailers to anchor their schemes.

Retail parks are generally granted planning permission once they have secured an anchor tenant. And property sources now believe that some "poorly located" schemes will struggle to attract one of the top DIY operators.

However, they claim a number of household goods retailers, such as Harry Corry, may fill in the gaps.

But with the growth in retail warehousing showing little sign of slowing, many developers are finding it difficult to secure smaller retailers for their subsidiary units and are resorting to incentives, such as break-options and generous rental terms.

As one source pointed out: "The problem is retail parks are restricted mostly to bulky goods retailers and there's only a certain number of them to go around. So in some cases developers are offering significant incentives just to fill their smaller units."