A recent panel discussion organised by Lockton on June 5th shed light on the state of industrial and logistics real estate in the UK and Europe. While the overall sentiment remains positive with robust demand, several challenges need addressing. These issues require a concerted effort among stakeholders, including governments, to ensure sustainable growth.
Supply and demand imbalances
The multi-tenanted commercial real estate sector, especially smaller unit spaces, faces significant supply constraints. Despite political emphasis on housing development, opportunities exist to create smaller unit spaces close to city centres where retail is declining. Integrating commercial real estate with residential properties also presents potential growth areas. To capitalise on these opportunities, real estate sector specialists are forming alliances with investors and asset managers.
In contrast, the supply of large industrial and logistics properties is expected to exceed demand due to high capital costs and tenants' focus on efficiency through automation. Although tenants may not immediately pay a premium for ESG-friendly features, these attributes are increasingly becoming essential, and they are set to enhance property sales values.
Insurance pricing
The insurance industry has benefitted from inflationary rises in the reinstatement value of industrial and logistics real estate, along with premiums rates hardening from 2021-2023. The upward pressure is now easing and increased capacity in the market has resulted in greater competition, ultimately to the benefit of insurance buyers. However, insurers are adopting more selective underwriting approaches, scrutinising risk profiles, property management processes and the claims performance. Concerns over fire risks from technologies like photovoltaic panels and rising claims from weather events are also prompting insurers to review portfolios more closely.
Insurers are now receiving more data from insurance buyers than ever before. To help underwriters process this information more efficiently, insurance buyers need expert advice to demonstrate the positive features of their portfolio, while seeking to ensure a fair presentation of risk to insurers.
Environmental considerations (E in ESG)
Tenants are under pressure to adhere to ESG agendas, leading to requests for solar panels, LED lighting and electric vehicle charging points. However, such installations can increase risk exposure, making insurers more selective. Insurers will likely scrutinise any new technology installed in properties, so property owners should be prepared to provide detailed information to address these concerns. With an increasing focus on embodied carbon and sustainable development, eco-friendly building materials such as timber and green cement need to be explored further in order to meet the level of required supply in the market.
Social considerations (S in ESG)
ESG requirements are increasingly embedded in investment strategies, with a growing emphasis on the social aspect. This can also result in property owners supporting tenants in attracting and retaining talent, as the availability of a skilled workforce influences property values. The demand for specialised skills is rising due to growing automation in the industrial and logistics sectors. Investors not only need to ensure properties are fit for purpose but also support training and education initiatives to make their properties more attractive for businesses.
The trend toward online retail is impacting multi-tenanted properties, pushing business-to-consumer retailers into more central, higher-value properties. This shift requires property owners to upgrade low-sophistication properties to appeal to a diverse workforce.
Governance considerations (G in ESG)
Governance issues are becoming crucial in relation to both new and existing tenants. Core to this is ensuring rent payments and avoiding sanctions as this can create reputational risk. But investors are also increasingly required to gather detailed information about tenant operations, supply chains, and building occupancy to manage ESG risks effectively. Legislation now imposes penalties for inadequate ESG data disclosure, making it imperative for investors and tenants to cooperate closely.
Large occupiers with published ESG targets are easier to partner with for ESG data disclosure tasks. However, for smaller tenants, the relationship should focus less on offering incentives to supply the required data but rather on suggesting practical solutions to help the clients meet their own ESG targets.
Meanwhile, tenants are increasingly vetting property owners, and property owners are increasingly vetting their third-party service providers, adding to administrative burdens by requesting detailed policy documents and procurement forms.
Power bottlenecks
The growing reliance on automation is driving up electricity demand, creating energy supply bottlenecks, particularly where infrastructure is outdated. Decarbonising the power network adds further pressure, with industrial and logistics businesses competing with housing and data centres for electricity. Investors must assess properties and portfolios for consumption expectations, considering automation levels, on-site power generation, and the availability of electricity in the network. Developing backup plans to ensure continuous power supply is becoming increasingly necessary.
For further information, please visit the Lockton Real Estate and Construction page (opens a new window), or contact your Lockton relationship manager.
