Building Zero - Why Industrial is a key battleground

Why Industrial is a key battleground

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 and 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.

The scale of the task ahead is vast

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, the scale of the task ahead in terms of making a sustainable industrial sector is vast.

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 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. 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 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 are vital to British car manufacturing, as well as fuelling the clean HGVs of the future. 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.

Changing locational demand Development opportunities 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.

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 and the growth of data centres. 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, with demand estimated to grow by around 10% per annum over the next five years.

Innovation 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 and is likely to increase as a result of reduced labour supply, as well as 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 to cater to both technical and human requirements.

Greening supply chains

While all companies have supply chains, those involved in product production, distribution, retailing and infrastructure tend to be most carbon intensive. Indeed, the eight largest value chains make up more than 50% of global emissions alone. 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 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 or minimisation of ultra-fast deliveries. 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. Read our Building Zero report for the full analysis.