Achieving Net Zero in Warehousing

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Achieving Net Zero in Warehousing

Autumn 2021 

Nicky Fairbairn, Industrial specialist and Real Estate partner at DAC Beachcroft explores how the sector is responding to the net zero challenge, with contributions from a range of experts. Existing innovative practices and cold commercial realities are putting the sector ahead of the curve. 

Warehousing investors, developers, constructors and occupiers alike are united in their commitment to net zero, with widespread acceptance within the sector that ‘net zero’ should not be taken in isolation.

“I would not separate net zero on its own, it’s part of a holistic strategy, a wider attention paid to ESG ethos going back several years,” reflects Simon Cox, First Vice President, Head of Sustainability at real estate behemoth Prologis UK. “It’s about how you do things better to move forward, to change the game. When you focus on carbon reduction in building, considering the whole life of the building, and in the operational phase as well, you start to create gains that then will happen automatically.” He cites DC10 at Prologis Apex Park, a project in Daventry, as an example.

The UK construction industry’s flagship BREEAM certification scheme, which rates new buildings according to their sustainability credentials, was founded as long ago as 1990 and has become a key benchmark for warehouse developers. Any new building not able to demonstrate a strong BREEAM rating is unlikely to attract the interest of either investors or potential occupiers. This knowledge has focused the minds of developers for several years. Add that to the Environmental, Social and Governance (ESG) factors that matter to investors and potential occupiers in the sector and you have a recipe for innovation and best practice in the net zero arena.

“People have talked about increasing ESG credentials for years, and in my view, the developers have been really good at it,” confirms Jack Farmer, Senior Director, Industrial & Logistics Capital Markets at CBRE. “It’s become a given that the buildings we’ve developed, let and sold, will have the right BREEAM rating and the EPC’s (Energy Performance Certificates) are all A’s.”

Accelerated Pace

Net zero has become a more vital part of the discussion than it was a year ago.

“It feels like in the past six to eight months, there has been a marked uptake in sentiment around it,” says Jack Farmer. “There are a lot of people trying to buy logistics properties, but where existing buildings are being traded, the EPC’s are being analysed, not just to the extent of improving F and G ratings, but looking to improve even an existing B rating. We’ve actually seen some transactions falter because the rating hasn’t been good enough.”

This is a clear departure, he adds. “In the past, when there were environmental, or tenant credit or location issues, people tended to just want to buy, not allowing impediments to get in the way. But what we’ve seen this year, even in very competitive bidding processes, is that a less attractive ESG and carbon-neutral factor has put people off.”

Demand and Yields

This commitment starts at the top, with the investors. Even institutional money, required to spend the capital that it has, is somewhat less likely to spend it on buildings that don’t meet the criteria,” says Farmer. “That’s been a massive change. Looking forward, we are seeing investors wanting to add ESG accreditation to a building to improve it, or to develop a fund of sustainable buildings. That is now starting to happen and investors are buying with that mandate in mind.”

This effectively limits the buildings available to buy, which is restrictive at a time when battles to secure warehouse space are fierce. It’s not limited to the investors. “It’s not just one-way traffic,” confirms Farmer. “The contracts and the occupiers are demanding that ESG is improved or has strong credentials. The bar is pretty high.”

Investment vehicles such as green bonds can provide significant impetus, which also helps the warehouse refit sector. “We have used green bonds as a mechanism to raise capital against our portfolio, and we have secured preferential rates as a result,” states Simon Cox. “The good news about a lot of the green bond frameworks is that the money raised is reinvested in the portfolio to make it even more sustainable.”

Rental increases are not necessarily following. “We haven’t seen rental increases being tangibly higher as a result of one warehouse being net carbon compared to another,” says Compton. In fact, a reverse logic applies. “I don’t think anyone is going to pay a premium for a very ESG-specific building – I just think they are less likely to buy one with no credentials,” remarks Jack Farmer. “The effect of not having carbon-neutral, ESG factors can harm the liquidity. So, in that sense, it does increase the value to have those characteristics.”

There are though rental wins potentially available at logistics facilities able to offer tangential carbon benefits via multimodal access. Compton cites the value of rail connectivity: “While rail has always been a nice to have, it’s never been tangibly proven that the rent payable on that warehouse would be higher than a similar one built nearby with good motorway access. But in just the last few months we’re starting to see the first few deals come through where there is a little rental uplift because it does benefit from rail."

Constructors and supply chain

Currently net carbon zero has not affected construction costs. There are no wins involved in opting to cut corners and choosing not to integrate net zero features, because not having them will result in longer void periods and longer vacancies. “Developers are taking the position that they do not want to be looking for excuses why the building has not let,” says Farmer. “You’ve got to have the right building for the occupier.”

For constructors, the UKGBC and the BRE are setting down formal guidelines, due in 2022. More focus on carbon reduction, rather than straight mitigation via offsetting, can be expected. Offsetting, usually via planting, will remain hugely important. Expect to see more green spaces and biodiversity around large warehouses than you may have seen in the past. The developers of the Magnitude site at Milton Keynes planted over 30,000 trees as part of their offsetting programme, for instance. 

There is an important role to play for constructors, too, with the required engagement of their own supply chain. “Over the past two years, we have run over 50 sustainability workshops and innovation forums to align the supply chain to meet the criteria of, firstly, reducing their own carbon footprint and then reducing their embodied carbon in what they install on our behalf,” says Tim Reeve, Technical Director of Winvic, the UK warehouse constructor.

Operational improvements during construction to benefit the carbon factor are also vital. “We are now changing how we set up site,” states his colleague Arun Thaneja, Technical Manager. “That means reducing red diesel, so using a lot of battery back up, PV on our cabins, green energy tariff deals, green diesel deals – there is a premium to be paid but it returns a positive impact on the embodied carbon delivered in the units. We’re also engaged in trials. For instance, cranes and diggers can’t use green diesel because it can damage engines, so we’re looking at compromises – do we trade red diesel for white diesel, then use green on the elements where it can be effective?”

Contractors such as Winvic now have to invest much more time in calculation and monitoring of site management. “Previously, when it came to site operations we would hand over to the site team for them to deliver,” explains Thaneja. “Now, we are involved to the end in making sure that what we’ve calculated at design stage in terms of embodied carbon is actually met throughout all processes. Because at the end we would be contractually bound to offset the residual value – and that offsetting comes at a big premium, with the cost of credits rising fast.”

Construction Technology

Technology has a role to play in warehouse construction with reference to carbon footprint, principally in the form of composite materials. “The recycled content in our steelwork has risen from under 10.6% last year up to 22.6% at this moment, and that uplift comes from the work with our supply chain,” says Thaneja.

Concrete additives, and looking at ways to reduce embodied carbon within it, are another option. “Concrete yards are very hungry on carbon, so we are looking at asphalt as an alternative,” reports Reeve. “We can offer 96% recycled content on aluminium frames and windows from a supply chain partner. As a contractor, we’re now looking at contributing to 26-27% reduction in the total carbon value before the client then has to offset the residual. Those are big numbers on million square foot sheds.”

Fears that recycled content of vital structural area might impair quality and safety should be discounted, says Thaneja. “Quality and integrity are still rigorously checked and the structural analysis process has not changed.”

Carbon Reduction Features

Inside the warehouse, optimising for net zero will depend in large part on the occupier and what they are using the warehouse for. Renewable energy has a huge role to play, for instance via solar power harnessed from roof panels. Low energy LED lighting, sequenced to operate only when necessary, is likely. Rainwater harvesting irrigates green areas and is used in cleaning and sanitation. Adding mezzanine floors in overhead space above racking reduces the physical footprint and spreads the energy spend more effectively. Insulation can be improved, particularly with high-quality sealing doors at loading docks and other entrance points. Brise-soleil shading features can deflect sunlight at windows and reduce heat gain. Forklift trucks and other warehouse vehicles are increasingly powered by battery, even for heavier-duty workloads. Automation and conveying systems are increasingly energy efficient.

The Refurbishment Sector

Retrofit projects to reduce carbon are attractive because investors are more than willing to support them. “An example of the way the investment market has shifted is that it is looking for ethical investments and is very happy to support those sorts of programs,” points out Simon Cox.

Such refurbishments and refits can be effective at surprisingly low cost. An EPC rating might be upgraded to a B, acceptable to investment institutions, simply by, for instance, taking out one hot-air blower from the warehouse or by attaching thermostats to the radiators at a cost of perhaps £5,000. Jack Farmer warns that it would however be easy to wreck that status with a couple of bad decisions.

Future Thinking

Future needs, both short and long-term, are also now front of mind for leaders in the warehousing sector. In the search for urban logistics competitiveness autonomous electric vehicles delivering direct to doorsteps are set to play a significant role. For warehouse developers and investors, that means more sites with the potential to park large fleets without detriment to the physical footprint or the carbon bill.

Biodiversity is another key area, with both national and local authorities set to demand improved ratios. As developers look for options to offset, nature reserves and ponds or leisure facilities may become a welcome part of the warehouse landscape.

The UK warehousing and logistics sector is not alone in pursuing this agenda - European countries, particularly the Nordics and Germany, are moving at a similar pace. “The big investors are global, they’re not UK specific, so the same criteria will likely apply globally to their requirements,” Compton points out.

As it stands, about 20% of buildings being completed in the UK sector are claimed by developers as net zero. Jack Farmer concludes, "At its core, the investment market is behind carbon reduction and as long as that continues, the push towards it will be much quicker. So as long as people are buying the asset class and the money is coming into it, it will continue.”

Our thanks to Paul Hamblin, Editor of Logistics Business, for his involvement in this article.

Authors

Nicola Fairbairn

Nicola Fairbairn

Newcastle

+44 (0)191 404 4019

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