Why net zero is big news for Industrial & Logistics Real Estate

The industrial and logistics real estate sector needs to get to grips with the huge implications of the net zero agenda: that was a central theme in our real estate breakfast briefing on I&L assets,  presented to a packed house on 4 December 2019.  In my opening remarks as chair I commented that the pace of change comes with significant opportunities for those who can keep up, but that keeping up is a real challenge.  Our expert panel discussed the challenges of picking the right sites, the rise of modern methods of construction, the drive to better energy efficiency standards in both new build and existing stock, and the importance for the sector in being prepared for the hydrogen economy. 

Here are three key messages from the net zero debate:

1.  The legislative change to a net zero target by 2050, from the previous commitment to an 80% reduction, is really important for industrial and logistics businesses: the extra 20% requires action to address the really difficult emitters such as heavier industry and heavier transport (HGVs, rail, shipping).  The answer, according to the Committee on Climate Change, is a combination of carbon capture, use and storage (CCUS) and hydrogen fuel.  I&L asset owners and investors need to start planning for a demand for sites near CCUS facilities (we envisage clustering of industry around large CCUS schemes) and a requirement for hydrogen sources.
2.  There will be increasing focus, and a tightening of standards, around the energy efficiency of I&L assets.  Asset owners need to start planning now for a tightening of the Minimum Energy Efficiency Standard (MEES) regime (see our overview of MEES here), or there is a risk of stranded assets when the law prohibits the letting of inefficient building stock.  Expect a ratcheting up of the standard in a short space of time (the preferred option in the current government consultation on the trajectory to 2030 is for all non-domestic private rented properties to achieve EPC Band B by 2030).
3.  Modern methods of construction, designed to reduce the embedded carbon in construction projects and more efficient resource use, as well as other efficiencies, will change the way we procure construction projects.  You can read our special report on modern methods of construction here.

On the climate change agenda, net zero is not the only consideration: assessing the physical risk from climate change and investing in climate change adaptation is also critical to preserve value.  The c.£80m Avonmouth / Severnside Enterprise Area flood defence and ecological mitigation works announced this year to protect the burgeoning, and strategically important, industrial and logistics centre, is a good example of planning for the predicted impact of climate change over the next 60 years.

Clearly, climate change is not the only challenge for this sector, and in our packed seminar we also covered the importance of tracking the changes in automation and connectivity, rapidly changing consumer behaviour and an 'everything now' culture driving a shift to last mile logistics and strategically placed fulfilment centres, among other issues.  There is so much to think about for the I&L sector in the short term that talk of net zero by 2050 might sound a long way off, but it is not, because the changes are coming fast.  Failure to grapple with the issues now could be a costly mistake.