ESG - how will the property market fare in the manufacturing sector?

With a major focus on logistics provision from a development perspective, and demand outstripping supply when it comes to the majority of sectors, the market appears to be pretty competitive in a number of areas. As occupiers (particularly the larger multi-nationals) are looking for more sustainable properties, the lack of supply is exacerbated by the dearth in more modern, energy-efficient space. Recent research by Knight Frank has highlighted that around 60% of UK warehouse space is at risk of becoming unlettable by 2030 as it will fail to achieve an EPC ‘B’ rating. 

On the face of it, it can be much easier to point to the environmental credentials of a brand new BREEAM ‘excellent’ rated building than it can be with a property picked up from the secondary market. EPC ratings and energy consumption will most likely be better, and the likelihood of integrated sustainable infrastructure, such as PV panels or EV charging points etc. increases. Biodiversity is becoming an increasing concern, with rising interest in enhancing the natural capital of the space. In addition the ‘social’ aspect of ESG is falling much more within the focus of developers now – with trim trails promoting exercise and shared facilities included to enhance the social value of developments.

Landlords are getting onboard (whether willingly or not) with the fact that occupiers want to see the properties they take on having strong ESG credentials. Despite the potentially significant capex that may be required to improve their properties, they are recognising that taking such steps, at times with a particular tenant in mind, can make their properties more appealing – and with the impact of minimum energy efficiency standards, they are finding that they have to take steps in any event. With the lack of “green” space likely to take some time to remedy, it's likely that rents will rise for the more sustainable spaces, with growth of over 3% per annum forecast over the next five years.

While there may be a big cost to owners in retrofitting their properties to improve their ESG credentials, it's worth bearing in mind that demolishing an existing building just to erect something new in its place will have a substantial financial, and environmental, impact – given all of the lost embodied carbon from starting afresh – so refurbishing and improving the existing stock will be fundamental from a net zero perspective.

Green clauses in leases and encouraging collaboration when it comes to maintaining (or indeed improving) the environmental performance of a building and the wider estate are becoming business as usual across the board now – and this collaborative approach will no doubt continue. Both occupiers and landlords are coming under more pressure from stakeholders (investors, funders, customers and employees – among others) to take steps to minimise their carbon footprint, including where it isn’t the cheapest option, and it will be interesting to see what impact this has on the industrial market in the future.