Article
Does sustainability-driven obsolescence in logistics real estate lead to a potential value discount?
October 11, 2024 6 Minute Read
A period of high construction activity, coupled with a slowdown in take-up figures, has resulted in European logistics vacancy rates trending upwards in the past 18-24 months. The direct implication of this is that occupiers can start exercising choice when securing suitable real estate in the right location, allowing them to expand, reposition, and regroup their real estate portfolios.
However, the definition of what ‘suitable’ real estate entails has evolved, as occupiers now have more key considerations for their warehouse selection process than a year ago. In particular, ‘Sustainability rating’ and ‘Building’s power supply’ have grown in importance.
Figure 1: Growing factors in occupiers’ warehouse selection
The ripple effect
The occupier flight to quality, now being observed in the logistics segment, is a trend already visible in the office sector and is particularly linked to building sustainability features. This suggests that some vacant logistics premises may no longer be attractive to occupiers and, as such, are less likely to be leased out without significant improvement (provided there are no major changes to the current market fundamentals).
The risk of obsolescence of the current real estate footprint is a concern for European logistics occupiers, as 40% believe between 25% and 45% of their current portfolio will be obsolete by 2030 without significant investment. The low vacancy rates seen in the market in recent years have likely influenced occupiers’ decisions – forcing them to navigate and balance ‘what is available’ with ‘what is desired.’ However, now that occupiers have more choice, landlords and investors should take greater care to analyse and understand the risk that some of their units might no longer be attractive to occupiers.
Figure 2: Percentage of occupiers’ footprint that will become obsolete by 2030 without significant investment
Futureproofing is on the agenda – or is it?
Features that could affect how future-proof a warehouse is include (but are not limited to):
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Power availability |
To allow robotics and automation, but also to charge electric vehicles. Independence from the grid is also a plus. |
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Sustainability credentials |
Linked to tightening regulations and the zero carbon targets of occupiers. |
|
Clear height and column spacing |
Maximising use of GLA. |
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Floors |
Increasingly demanding specifications on flat and level flooring to optimise operations and eliminate rack impact. |
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Amenities |
To attract and retain talent. |
Landlords and investors are indeed willing to pay a premium for buildings that already have on-site renewable energy generation and/or smart technology that adjusts building operations to reduce environmental impact. Consequently, they expect cash flow parameters such as rental growth rate, occupancy ratio, depreciation, and yield to benefit.
Despite the growing emphasis on sustainability, logistics occupiers are increasingly unwilling to pay a rent premium for new green certified facilities over the prime market rent. Over a quarter of occupiers are now seeking brown discounts for non-compliant facilities. However, the companies surveyed maintained ambitious net zero commitments, with 64% of occupiers planning to be net zero across their property footprint before or during 2030.
Figure 3: Rent premium over prime market rent for a new green certified facility
The discrepancy between these results could be due to several different factors. It may be that while occupiers still value certification, our research shows an overall trend that certain sustainability features are now considered a standard market rather than a value-add. Therefore, particularly for prime warehouses, occupiers expect that market rents should already reflect a base level of sustainability performance. This view is supported by the year-on-year growth in the percentage of occupiers who would seek a discount for non-compliant facilities (26% in 2024 vs 16% in 2023).
In addition, whilst sustainability certifications are a helpful shorthand for building performance, they are typically an amalgamated metric, masking specific performance factors behind a general rating. As occupiers begin to focus more on specific considerations to support their corporate goals – energy efficiency, decarbonisation, and renewable energy availability – they tend to ask landlords more specific questions and place less importance on general sustainability certifications. This shift reflects a smarter approach to building selection.
So, how will the relationship between landlords/investors and occupiers be balanced?
The answer might lie in the perception of value, which can show up in better credit tenants, faster leasing, or lower vacancy – not just in rents. Therefore, understanding that sustainability-driven obsolescence in real estate leads to a potential value discount may prompt more significant action than the prospect of modest value premiums.
For the full analysis, explore our 2024 European Logistics Occupier Survey.
Related Insights
CBRE surveyed over 100 of Europe’s largest logistics occupiers from all sectors, with an estimated total footprint of 85-95 million sq m in Europe.
Contacts
Dragana Marina
Head of Research and Data Intelligence, Denmark & Sustainability Research Lead, Continental Europe
