The industrial landscape is evolving. Structural shifts across the economy are helping to fuel the continuing surge in demand for industrial and warehouse space, with longer-term undercurrents of change also impacting the sector. While the trajectory of the industrial market’s development is reliant on multiple external drivers, it is itself a critical factor in the outlook for several other sectors and trends, including the UK’s net zero goals.
Demand for industrial and warehouse space continues to rise, driven by a combination of e-commerce growth and a global disruption to supply chains. For many organisations, their logistics operations are also under intense scrutiny in their drive to decarbonise. The residual increase in the volume of e-commerce transactions during the pandemic combined with downstream disruption, goods shortages and the global spotlight on ESG, has put supply chains under the microscope like never before – including the long-term sustainability of the sector.
Owners and developers of warehousing and logistics space are setting increasingly stringent carbon and sustainability targets for both new and existing portfolios, responding to demand drivers from across real estate and the consumer base. While change is already underway and visible – and often cited as an ‘easy win’ compared to other sectors – the scale of the task ahead in terms of making a sustainable industrial sector is vast. Furthermore, the size of the sector and its environmental impact mean that it is a key battleground for the UK’s net zero strategy – one with a multitude of highly influential trends to consider.
INDUSTRIAL DEMAND IS EXCEPTIONALLY STRONG
As shopping habits have changed over the past decade, with online retailing accounting for a growing share of the market, there has been a consequential increase in demand for industrial space. The heat of the market has not only caused increased transactional activity across the sector – Amazon alone have acquired c.40 million sq ft since 2016 – but has also driven efficiency in the use of space and automation. Industrial and warehouse facilities are no longer seen just as ‘big sheds’, but rather sophisticated spaces of innovation and state-of-the-art technology.
POST BREXIT UK
While the impacts of Brexit on trade are still to fully play out, it has encouraged companies to de-risk supply chains, providing a further fillip to UK industrial demand, at least in the short term. With added impetus from the Covid pandemic, the increased focus on contingency planning requires increased levels of stock by reshoring, as just-in-time inventories become just-in-case. Higher shipping costs, a weaker Sterling and the desire to increase sustainable supply chains have all contributed to an element of ‘old demand’ returning to the UK. In addition, post-Brexit UK has increased financial incentives, with the creation of eight ‘free ports’ spearheading this policy – and expected to catalyse demand.
GREEN GROWTH
The technological and green revolution will itself be a catalyst for further demand in the sector.
The electrification of the automotive industry is a key element to the UK’s zero carbon goals. Advanced electrical engineering is a growth driver to industrial demand and gigafactories, which produce batteries for electric vehicles, are vital to the future of the British car manufacturing industries, as well as fuelling the clean HGVs of the future – the essence of the logistics industry. Gigafactories are due to be built in Blyth and Coventry, while Nissan and its battery partner Envision have also announced plans to build a gigafactory near their existing plants in Sunderland. There will be further growth in this sector in the short – medium term.
CHANGING LOCATIONAL DEMAND
Development opportunities in the industrial sector are being created not only from the increasing level of occupier demand but also the increasingly bespoke supply and the proliferation of supply in historically non-prime locations, providing greater labour availability, lower cost solutions and more pre-let opportunities as well as, in some cases, power availability.
Locations in the North East, East Midlands and Yorkshire have witnessed considerable increases in big box development, while recent historic de-industrialisation of stock in inner cities has been tempered by the reverse obsolescence created by new e-commerce demand for old urban industrial units.
Source: Avison Young, VOA
POWER
The uses of industrial space are also evolving – bringing with them increased needs for renewable energy. Aspects of the green revolution are contributing to this, such as high-tech manufacturing including gigafactories. The growth of data centres is also adding to the pursuit of power. The proliferation of cloud computing and the advent of the internet of things is driving increased demand for data centres, which have seen considerable growth over the last five years and particularly during Covid. Demand is expected to accelerate further in years to come, with estimated growth of around 10% per annum over the next five years.
Innovation within the industrial and logistics sector is also having an impact, with the rollout of 5G-enabled supply chains and the rise of automation. The move towards automation in warehousing and on the factory floor has accelerated, with this only likely to increase as a result of reduced labour supply, as well as due to the efficiency upgrades that the technology can offer. Benefits from automation are often maximised through having an optimal mix of robotics and human, high-skilled jobs. However, this arrangement typically requires more power – having to cater for both technical and human requirements and conditions.
While there will be partial offsetting of the growing energy requirement through increased energy efficiency, the availability of clean-sourced power is an increasingly important consideration for high-consumption occupiers.
GREENING SUPPLY CHAINS
As businesses become increasingly focused on their strategy towards net zero carbon emissions, taking care of one’s own actions is the relatively easy win. Direct emissions from owned or controlled sources (Scope 1) and indirect emissions from heat, power and water (Scope 2) are often simpler to measure and address as they are under the direct remit of the company. ‘Scope 3’ emissions, however, which encompass all other indirect emissions across the supply chain and hence are more difficult to quantify and control, are typically over 11 times higher than their operational – scope 1 & 2 – emissions1.
While all companies have supply chains, those involved in product production, distribution, retailing and infrastructure – i.e. the users of industrial and distribution real estate – tend to be most carbon intensive. Indeed, the eight largest value chains make up more than 50% of global emissions alone2 – providing significant scope for change. As leading companies from every sector move down their own net zero carbon paths, the demands they will place on their suppliers will continue to rise.
The eight largest value chains make up more than 50% of global emissions alone – providing significant scope for change
The inherent complexity of supply chain management lends itself well to greening. Smart management systems will enable carbon accounting across each component of supply chains. Some of the improvements being made are relatively simple – whether that’s through SKU and packaging rationalisation, consolidation of deliveries, minimisation of ultra-fast deliveries or through collaboration across providers such as the DPD/Post Offive tie-in3. However, on a larger scale, this supply chain reaction is leading to improvements across entire logistics networks and driving greater focus on the sustainability credentials of a site from prospective occupiers. This is already visible at the top end of the market and is filtering through to the smaller tenants. Combined with the transparency of green certifications, buildings which do not align with companies’ sustainability targets will simply be filtered out before the search has even begun.
For both new and existing industrial property, this greening of the supply chain means that there will be an increasing focus on demand-led decarbonisation and is being matched by innovation from developers and landlords. For example, Prologis reduced its greenhouse gas emissions by 37% between 2016 and 2020 – the equivalent of removing 482,000 vehicles from the road. Increasing demand provides the opportunity to advance sustainable technologies and design innovations in new developments that could be used to create a strategy to limit embodied and operational carbon in existing buildings.While there will be partial offsetting of the growing energy requirement through increased energy efficiency, the availability of clean-sourced power is an increasingly important consideration for high-consumption occupiers.
REFERENCES
1https://www.cdp.net/en/research/global-reports/transparency-to-transformation
2https://www.weforum.org/reports/net-zero-challenge-the-supply-chain-opportunity
3https://m.translogistics.uk/2021/08/on-the-road-to-net-zero-logistics/