Our Thoughts
Thu, 02/12/2021 - 12:00
· 4 min read

Environmental Deadline Set to Highlight Obsolescence Risk in Industrial Real Estate

Ahead of the COP26 conference in November, the UK Government released its up-to-date directive on creating a framework for sustainable real estate; The “Net Zero Strategy: Build Back Better”.

The ambitious framework aims to improve the compliance and enforcement process to ensure that by 2030 all non-domestic rented buildings achieve an EPC (Energy Performance Certificate) rating of least 'B, with a secondary target proposing a minimum requirement of EPC rating 'C' by 2027.

Energy efficiency, and concurrent long-term asset resilience is the most pressing issue facing stakeholders invested in real estate. Each sub-sector within the built-environment will face unique challenges. And despite the impressive structural growth in industrial and logistics, it is not immune.

The top line market data is positive. Demand for industrial warehouses has continued to break records following the pandemic induced consumer shift towards increase levels of retail spend online. An additional 7.5m sq ft of warehouse space has been delivered in 2021 and 3.5m sq ft is currently under construction and set for delivery by the end of the year. Take-up for big box units totalled 13.5m sq ft in the third quarter of the year and our figures indicate that 2021 is likely to be another record-breaking year for the sector.

Current dynamics are proof that the sector remains the hottest asset class in the UK; but the longer-term resilience of the market should be a red flag. As a consequence of this continuing demand for Grade-A fit-for-purpose warehouse space, there are concerns about the long tail of stock that is deemed less attractive. According to our own analysis, over 80% of stock nationally was built before 2009. Age is only one indicator of a buildings ability to attract potential occupiers, but when you factor in the need to increase the environmental credentials of all stock, questions are raised about the costs of repurposing warehouse space when it might be more cost effective in the long run to pursue cost-effective futureproofed “build-to-suit” opportunities.

There is no doubt a desire to build out more stock, but headwinds are affecting the ability of developers getting shovels in the ground. Supply chain issues, increasing costs, and labour and material shortages have all resulted in a slower rate of development for new warehouses at a time when industries require them most. As a consequence, many project completions will have to be pushed into 2022 and beyond. Crucially, these issues come on top of incoming environmental legislation that will render large swathes of units currently on the market unlettable.

As repurposing real estate becomes a more common theme throughout all the built-environment sectors, it is the industrial market which may be most adversely affected as occupiers continue to clamour for brand new fit-for-purpose units. Our own analysis can reveal that the top 50 industrial markets in the UK will be affected by incoming changes to the EPC regulations. Approximately 87% of the largest 50 markets, which covers over 1.3 billion sq ft of industrial space, and some 37% of the UK’s entire industrial footprint, will fail the EPC regulation change in meeting a B certificate or below by 2030. Only 13% of all industrial sites in the UK are currently failing to comply with the 2030 legislation deadline, and 61% of the UK’s footprint will fail to observe the 2027 target of “C” or above.

With growing pressure on landlords to deliver or retrofit stranded assets into environmentally resilient properties, there are concerns surrounding the CapEx available which will enable such a transition.

The challenges are not uniform across the real estate spectrum. Research compiled by PwC and ULI indicates that logistics space is one of the least favourable asset classes to repurpose existing real estate space into, behind only retail. This is because the scale of infrastructure and technology that is required to set up logistics premises makes it more difficult to create those spaces without starting from scratch. Just one reason we would witness structural obsolescence in the logistics sector more quickly than other asset classes.

Given the new environmental regulations and deadlines, stakeholders within real estate have some real, tangible targets to aim for. Considerations are already made for the development of new stock across all asset classes, especially across the selected quantum of new buildings considered prime. Challenges will however be faced when it comes to re-adding value to the stock that is already standing.

As repurposing and reimaging space become a more common theme this decade, environmental resilience of space will determine the attractiveness of assets to potential occupiers and investors alike. This is perhaps more true of the industrial sector than any other as obsolescence in this space increases at a faster rate than other sectors.

Our new location analysis tool IndSITE: is perfectly placed to help our clients navigate these changes, by unearthing pockets primed for redevelopment. As a result of analysing a unique and extensive range of innovative and traditional metrics, IndSITE: gives real estate decision makers power to comprehensively evaluate the future of the industrial sector.

To find out more about how IndSITE: can help your business today, click here

Environmental Deadline Set to Highlight Obsolescence Risk in Industrial Real Estate