Next generation of industrial property

For many businesses, the extent to which they and their real estate partners invest in features which improve environmental, social and governance (ESG) standards is becoming an increasingly important consideration.

Tuesday, April 27th 2021, 6:36AM

This is going to have a material impact on future development of industrial properties across the country, says a recent Jones Lang LaSalle (JLL) report on a sustainable future for industrial property.

Tenants are likely to increasingly demand specific sustainability metrics are met under new lease agreements, says the report.

That dynamic is already playing out in the development and acquisition space. There is a strong market for larger sites with older buildings primed for demolition and redevelopment to modern standards.

This is particularly common, given that a substantial proportion of industrial stock is second grade and no longer fit-for-purpose in a modern context.

From a tenant’s perspective, a focus on improving the sustainability of their premises is important to not only their marketability and brand, but also to their capacity to build a financially sustainable business, says the report.

Gone are the days of being able to throw up a generic shed suiting most businesses and expect it to be leased overnight. Industrial property has become far more sophisticated over the past 15 years.

A recent report by the New Zealand Green Building Council shows savings on operating costs over a five-year period can be as high as 15% in industrial buildings which are Green Star rated.

The World Building Council’s research indicates that a 2% upfront cost – to support sustainable design principles – can result in average savings of 20% of total construction costs over the lifetime of an asset.

The choice of premises by tenants is already critical in terms of a business’ sustainability credentials. More than 70% of emissions are released during the occupation phase of a building’s life cycle, according to BRANZ (Building Research Association of NZ).

The carbon emissions in the typical 60-year life cycle of a building are 28% before the building is occupied; 70% during the 60 years of occupation; plus 2% of emissions related to water consumption over the life cycle of the property.

The way in which tenants make choices, including an increased focus on the social and environmental costs of occupying premises, will have a substantial impact on the types of properties made available in the industrial market.

Assets that fail to adapt will be left behind

Over the long run, properties that fail to keep up with the evolving ESG requirements of industrial tenants will risk extended vacancy times, shorter lease terms and declining asset values.

To hedge against this, industrial property investors and owners will need to become increasingly selective in their capital allocation.

This will include accounting for a broader range of factors in analysing the long-term viability of the rental income stream.

Developers will also need to become increasingly deliberate in their design practices and adoption of ESG principles to minimise embedded emissions in industrial buildings during the development phase.

It is likely the use of technology to minimise operational emissions (eg solar power, water recycling) will expand beyond new developments, and be increasingly retrofitted on existing buildings in order to combat risks to their value.

Population is a key multiplier for industrial development

New Zealand needs industrial stock built at a rate of approximately 4.5m² per additional resident, according to JLL’s report.

Based on population forecasts from Oxford Economics, it is expected between one million and 1.3 million m² of stock will need to be built between 2021 and 2025.

About 1.15 million m² of projects are in the pipeline across Auckland, Wellington and Christchurch and due to be completed in this period.

However, declining land availability and construction cost pressures are making development in these key markets increasingly challenging.

Tags: commercial property ESG industrial property JLL property investment Sustainability