This article forms part of our ‘New How: Perspectives’ campaign: ‘The logistics industry is booming, but can our infrastructure keep up?’.
Here Choisanne Man, a real estate partner in Shoosmiths’ London office, speaks with David Proctor, Managing Director, Group Investment at Segro, to discuss the state of the logistics sector including the challenges it poses for our towns and cities.
1. Is land availability an issue for the sector and what can be done about it?
It is an interesting question and one we come across all the time. Let me start by explaining what a warehouse is – four walls and a roof on a bit of land. However, it is usually only ever sitting on half of that land, 50% density, which means in urban areas it is probably one of the most underutilised pieces of land. The challenge therefore is how we can create more utilisation of that land. What we’ve started to do in places such as Munich, Paris and London is to build two-storey warehouses, so you’re intensifying your use of the land. Yes, your construction costs go up, but you are able to create two-storey warehouses which function really well. A good example is Air2 in Paris, which we built between the first and second ring road, next to the Seine. It’s a 600,000 sqft warehouse. It’s huge. Two floors of 300,000 sqft and, if you were standing on the top deck yard, you would think you were just in any other warehouse. So, in reality, going up is probably the way to utilise land better. You need to go up in order to get the density.
What we are also finding though, is that rents are climbing in urban areas and there are more competing uses of land. So existing tenants are increasingly unable to afford the rent and are starting to move out, with the businesses that really need to be in those locations and can afford the rent moving in. An interesting example of that is at Electra Park in Canning Town, where we moved one of the tenants from the park down the road to Rainham, which is half the rental level that they were paying. They didn’t actually need to be so central, paying £20+ a sqft, and so could move further out. The space they exited was quickly backfilled by other tenants who actually needed to be there. So, there is a change in the dynamics of the tenants in inner cities now as well.
Then there is the repurposing of urban space and, with a lot of the parcel delivery sites, you don’t actually need that much floor area. For example, Amazon has recently taken what is essentially a container on London Wall and the parcels come in there, the bikes line up and off the parcels go. They don’t actually need that much space, it’s more about how you distribute. There is space available, but the type of space is changing and the users are changing.
2. Sustainability credentials can sometimes be a challenge with large industrial schemes - how are ESG requirements impacting investment and funding decisions?
We’ve launched a development in Tottenham, and it will be one of the greenest industrial developments in the UK. We will be going carbon neutral on it, getting energy from PV panels and renewable sources, we’ve got green walls on the site, we’re planting mature trees so that we are up and running right away and the site has biodiversity running through it. We are then working with the tenants to make sure they are utilising the buildings correctly and making it as efficient as it can be. On the governance side, we are working with local communities and funding local projects, which we do a lot of in the big cities. On another development in Paris, there was an old office building which we converted into a training facility for the local community. So, all of those ESG elements for us are really important. In fact, we have got beehives on nearly of our logistics sites now, even in the centre of Paris, and we’re making our own honey, which is important for the environment, in urban areas especially. At a site in Italy, we have sheep that graze the grass, so it doesn’t need to be mowed. We have geese to help with extra security because of the noise they make. So, we’re doing different things to try to add to the green credentials of our sites. It’s not just green wash, it’s all the other elements behind it. We’re looking at PV on the roofs of our buildings and recently did the largest installation of PV on a roof of a building in Europe in The Netherlands, on the Tesla warehouse.
At the other end, we are working really closely with our customers on how they monitor the energy use of the buildings, how they make the buildings efficient and how they conserve energy. But the real challenge is when you are buying second-hand buildings, because they don’t have these green credentials. We recently refurbished a building in Park Royal in London, and we put the green in it. You can take an old building and knock it down but your carbon footprint from that is quite high, because you then have demolition, rubbish etc. So, we just refurbished it, repurposing the space and lifting up its green credentials. Another interesting example is on the Slough Trading Estate, where we put a bridge in a while ago over the train line and, in order to do that, we needed to take a building down. So, we took a warehouse down and moved it to another part of the estate and put it back up again, so we are always thinking about what we can do. And every time a development comes up to the investment committee for approval, it needs to tick a lot of boxes for the green credentials. That’s the direction of travel, not just for us and the shareholders who invest in us, but also for the tenants. They want green. It will definitely be a differentiator over the coming years, and we will see more green buildings come up and more PV on roofs, as energy consumption is hugely important as well. As we move towards a world of electric vehicles, they will need to be charged and that electricity will need to come from somewhere, and we lucky as we have a large amount of roof space so we can utilise that as best we can.
3. Last mile delivery is pushing up demand for more urban sites in sometimes densely populated areas – what do you see as the key challenges around urban development and brownfield repurposing?
Brownfield development is always challenging. You are dealing with past uses and past contamination, and every site we remediate. The thing about the big industrial sites in the cities is that they’ve been there forever. If you look at London and its industrial areas on a map and then overlay the canal network, you’ll see that they are located on the canals, so you are looking at really historic industrial areas. And it wasn’t until the 1990s that you had to do proper remediation when you redevelop a site. So, with most of the properties we own, we are comfortable with what is under the ground but whenever we buy a new asset that is older than 1990, we have to do a lot of work on the ground.
It is also important with brownfield sites to get buy-in from local stakeholders of what a scheme should look like. There is always concern about noise, so it is about constructing in a way that reduces noise from nearby houses, as well as factoring in hours of use restrictions. So, there are other challenges with urban environments, which require you to really have to think about the impact of your design on the urban area. Most of the time we are fortunate because we are already in industrial areas, but you can still be on the edge of an industrial area and next to residential, and that’s when you need to think carefully about it. We also have good inroads into the local authorities to make sure that we are doing something that is acceptable to them and the local communities.
The good thing though is that you are creating jobs, and the warehouses of today have more people in them than a warehouse from ten years ago, urban warehouses especially. So, a lot of the time it is about job creation, keeping a workforce there and creating a vibrancy in the local community. One of the things we do a lot of is data centres, which don’t have a lot of people in them, which is a challenge. A lot of the old manufacturing industries with lots of employees are going and often data centres are replacing them, so we try to make sure we offset that and allow other businesses to come in to create jobs in other areas. We’re always looking at how to balance that, and with data centres the opportunity is again to go more vertical. We are now designing data centres with two or three mezzanines in them so you can intensify the land use for the data centre operator, and that means we have other land that can be used for production or creative industries, such as film for example, which is a huge industry in West London.
So, there are a number of challenges with developing in urban areas but none of them are unsurmountable. You just have to layer them all together and work your way through them, but that is the exciting bit of it. There is no ‘one size fits all’.
4. Looking forward, what do you see as the biggest threat to the sector?
Very interesting question, and one of my jobs as Managing Director is looking out a little bit further than this year to three, five, ten years forward. We have the growth of e-commerce, which is huge in the UK, but some areas of Europe are further behind. In fact, Poland has only just got its first Amazon website, despite Amazon having been one of the largest takers of space in Poland over the last five years, as they’ve used Poland as a place from which to supply Germany, so e-commerce penetration there is much lower and the opportunity for growth is huge. But we are seeing that everywhere. Here we are seeing more delivery lorries than ever on our roads, and there is still more growth to go. The e-commerce penetration for the supermarkets, for example, is still low and a big challenge for them is how they can grow that sustainably.
Another thing we’ve seen with the pandemic is nearshoring, so production that was done in China, for example, is now coming closer to Europe. The likes of Poland, Ukraine, Romania etc will likely benefit from this with slightly cheaper labour pools but with great accessibility into Europe.
On Brexit, yes there are some issues there but the benefit with warehousing is that people are keeping more stock, and we’ve seen that across Europe due to supply chain issues, so that isn’t a massive risk at the moment.
The conversion to electric vehicles is perhaps a challenge for our sector, but with logistics largely centred around the middle of the country, I’m not sure whether the move to electric vehicles will change that. In Europe most of our concentration of logistics sites is around the big cities anyway and we are already seeing a move to electric vehicles. In Lyon, for example, in the next couple of years you won’t be allowed to take petrol or diesel cars inside the ring road, so you’ll need electric delivery vans. But this is still very much a benefit not a threat.
But in truth I struggle to see where the real threats are. In our sector, there are some strong tailwinds of growth and we are seeing more investors coming into the market, as well as new entrants to the sector. I’m hearing new names all of the time on bidding lists, which is fascinating. Interesting times ahead.