Michael Gibbens and Laurence Alden look at what the combination of an energy crisis and increasing standards around sustainability may mean for the warehouse development sector.
Thanks to recent steepling price rises across the sector, energy sourcing for commercial properties has become a hot topic and will come into even more focus as the Minimum Energy Efficiency Standards (MEES) are tightened this year. It will be a challenge for all commercial properties but not least in the warehouse sector.
Whereas some commentators have gone as far as to say that we may have already built all the office and retail property we’ll ever need and that retro-fitting is all that is needed, the requirement for warehousing space will continue to grow – not least because it’s estimated that 1m sq ft of new space is required to service every additional £1bn of online retailing. As the UK population increases – it is projected to grow by a further 2m people by 2030 – then there will be a concomitant effect on the level of online retailing and also the requirements for warehousing.
Even though they are the most ostensibly straightforward commercial properties, warehouses do face considerable hurdles in terms of the specification of new development. As with all commercial development, a more sustainable approach is already becoming ‘baked in’ to the planning process with local authorities expecting developers to produce buildings which embody best practice and progressively comply with the introduction of new regulations.
A good example of this is the UK government’s commitment to phase out the use of gas-powered boilers by 2025. In response to this, some major institutions, funds and REITs – which have to be conscious of their ESG credentials and their journey to net zero carbon status – are already taking pre-emptive action to compel compliance by not installing gas boilers into new warehouse developments.
This often involves not even providing the servicing infrastructure (connection to a gas main/trunking etc) that would allow installation of gas boilers at a later date by an occupier. This stringent adherence to the regulations then effectively aligns the ESG requirements of the developers with the way in which occupiers use the property in future and ensures compliance.
EPC-ratings – the standards by which the energy efficiency of all buildings are judged – have ushered in the new EPC A+ certification and will also play a major role in this new development landscape. For a building to achieve an EPC A+ rating, it must have the best insulation, be energy efficient and produce clean energy which will be consumed on site. In parallel to this, we’re also seeing a shift towards net-zero carbon construction which governs the sourcing of steel and concrete – the two main components of warehouse development.
Full compliance with the development and specification measures outlined above could add around £3-6 per sq ft to the construction cost of a warehouse project. This is a cost which generally will not vary across the country and so is likely to have a disproportionate impact on developments in locations where rents are lower than in prime areas.
Of course, if the upside is that you have de-risked your development by ensuring it won’t become a ‘stranded’ second-class asset and that it also can achieve a higher sale price to an institutional investor which demands these standards then maybe the additional cost will be more than offset.
During the past decade, sustainability standards have been constantly evolving and there is no sign of that stopping. The major unknown in all of this is how much the present – and successive – Governments will compel compliance and raise the bar ever-higher. There was something of a backlash against ESG last year -both in political circles and amongst those who suspect widespread ‘greenwashing’ – but it would be a brave warehouse developer who banked the future of their assets on a retreat from the kind of standards that are now being rolled out.
But if the situation is problematic for developers, the greatest challenge may actually be faced by the owners of existing warehouses rather than those who are building from square one. At some point in the future, non-compliant assets will need to be either redeveloped or retro-fitted to ensure that they can meet the same institutional-grade criteria or they will face a substantially negative effect on pricing.
In the meantime, the longer-term need for increased capex to accommodate either redevelopment or re-fitting will need to be factored into the value of an asset – and this may mean an outward shift in yields for that segment of affected stock.
Michael Gibbens is Managing Director of Taurus Developments and Laurence Alden is a Director at KAM Project Consultants. This viewpoint first appeared on CoStar (costar.com) on 5.1.23.