Manufacturing and distribution buildings are often shaped to serve the functions they contain. It’s a strategy that risks buildings becoming redundant as the way we use them evolves continually. We identify the building characteristics investors should look for that underpin long term value.
Scrambling to mute the doorbell from interrupting our regular sector call, I almost miss this month’s eye-catching statistic which comes from the industrial and logistics sector. Take-up in just the first three quarters of 2020 has been higher than any previous yearly total on record. This exceptional level of letting activity is being driven by the rapid growth in e-commerce since the onset of the pandemic.
Online retail accounted for a third of this take-up with the largest business in this sector continuing its relentless expansion alongside other online retailers growing at a phenomenal pace. The seismic move to online retail has driven the demand for larger units. Online warehouses need three times as much space as traditional racked warehouses. With UK logistics buildings being developed to suit these occupiers’ specific demands the average size of a modern logistics building is thought to be around 40% larger than in 2007 and 30% taller.
But is bigger always better? As an evolution of logistics practice over the past few years, it looks like a trend that’s here to stay. There aren’t many sites that can accommodate a 500,000 sq ft plus footprint, but there have already been seventeen deals this year for large buildings like this.
With this in mind, what characteristics should investors look for to underpin long-term value?
Flexibility – With supply struggling to cope with the abrupt increase in demand, some repurposing of other assets, such as mid-size retail warehousing could be expected. Can existing buildings, or land in case of a development site, flex to suit emerging occupier trends? Identifying sites and assets able to provide a large footprint building or be repurposed is key to maintaining future value. With this move to larger units it seems likely that mid-size buildings will have less appeal, putting them at risk of shorter leases and poorer covenants unless an alternative higher value use can be found for them.
Resilience - Buildings need to be designed and operated to be resilient to climate change (including flood risk) now and into the future, as well being safeguarded from other physical climate risks. From a wider perspective, environmental performance and industry commitments to ESG values are emerging as key drivers for occupiers and investors and will likely continue to exert increasing influence on shaping the buildings we develop, and equally how we see older stock in this sector.
Infrastructure - The key long-term challenge will be availability of power as automation, electric, transportation, and robotics become ingrained in our lives. Does the current infrastructure support a likely increased demand? Can renewable energy sources be installed such as ground source pumps, solar panels; even wind turbines like B&Q’s warehouse?
Wellness – High quality construction should be a given, but the brief for today’s buildings push people towards the top of the agenda. Providing outside amenities and community space is becoming common. However, one of the challenges facing the sector is a shortage of labour. New buildings are now incorporating, among other things: gyms, high-quality canteens and locker rooms, full-height atrium reception areas. Mountpark’s new 366,000 sq ft speculative unit at Avonmouth will have a roof garden above two storeys of offices when complete. Offices and amenities of this quality wouldn’t be out of place in London’s West End. It shouldn’t be a surprise then that the latest urban logistics sector transactions show pricing now hitting levels akin to those of New Bond Street.
Sustainability – We face many challenges as we aim to eliminate our carbon footprint by 2050, but the largest of the UK’s logistics developers are leading the way. GLP, investor and developer of logistics warehouses and distribution parks, recently announced that it had delivered the world’s first development to be officially verified as net zero carbon for construction in line with the UKGBC Net Zero Carbon Buildings Framework definition. Many developers in the sector are equally committed to building sustainably, working on low energy, low carbon strategies and selecting building materials, components and systems to ensure they can be recycled or their life expectancy extending when a new occupier comes in.
There is an expectation that the industrial and logistics sector will continue to outperform other property sectors. There are many interconnected factors that determine demand and help drive value in this sector. Building specification is one of them. Having assets that have the capacity to respond to the demands of the market helps sustain their value over the longer term. As Darwin might have said, long term survival is the prize awarded to those best able to adapt.