ESG ‘a must’ but logistics tenants may need convincing

While the cost of logistics buildings has increased recently, the product has evolved considerably and this is to the benefit of both the occupier and the investor, participants heard during Real Asset Media’s Future Trends: Demand, Supply Chains, ESG & Logistics Real Estate briefing. The event was part of the recent Transport Logistic show staged in Munich, Germany.

Jan Dietrich Hempel

“We are now delivering a different product which got more expensive to build because we need to build more into it,” said Jan Dietrich Hempel, CEO GARBE Industrial Real Estate.

He explained that the need to create ESG-compliant space requires additional features which reduce carbon emissions. “On one hand rent goes up, but the cost of running the building tends to go down, so it’s not all bad news for the tenant,” Hempel said.

But the tenant’s business model and their use of the building is critical too.

“If you play along, sign a green deal, make yourself a little bit more transparent and run an ethically correct business model, you will enjoy cheaper rents than somebody who doesn’t close the shed the doors and emits a lot of carbon dioxide,” he added.

Investors are forced to look at investments in a more holistic way. Not only are they increasingly compelled by the legal framework to be more ESG compliant, but also by popular demand: People want to put their savings into an ESG-compliant product.

“In a couple of years anything else will hardly sell any more,” Hempel said.

Tenants are increasingly driven not only by company ESG strategy, but also by the need to control energy costs. Increasingly, the “S” of ESG is becoming more important and buildings with, for example, better equipped social space are therefore preferred.

Occupiers are becoming much more selective. “If you have the right building in place the demand for that space is four or five times oversubscribed, so you can really place green leases on the market and that is to everybody’s benefit,” said Ingo Steves, managing partner, logistics Swiss Life Asset Managers.

Although much of the environmental focus is on the specification of the buildings themselves external factors are important in reducing the impact in terms of carbon of logistics activity.

André Banschus.

“It goes beyond the warehouse itself,” said André Banschus, executive director at Verdion Germany.

“Ten years ago, we started a big warehouse logistics scheme in Doncaster, in England, a 600,000 sq m of state-of-the-art product. We have included a container railport which saves a lot of carbon as you don’t have to ship the goods by truck.”

The company is planning a similar development in Germany where it is also considering locating a windfarm on adjacent land which will be operated by a partner company and there are proposals to make the power available to occupiers.

“We expect a lot more demand for electrical power as we won’t be using any gas heating any longer.” There will also be EV charging points for both cars and trucks. “So that changes the whole design of future schemes,” he said.

Such changes can also improve the acceptability of the logistics real estate sector, Hempel pointed out. “Logistics real estate developers have less access to greenfield sites and when a brownfield site becomes available there’s a lot of competition from other asset classes. Logistics will not always be first choice of local communities so logistics real estate needs to change.”

He said that if logistics developments become an infrastructure node rather than just a warehouse location – producing electricity, maybe hydrogen and including charging stations, it will smooth the way with local public as well as reducing carbon dioxide emissions.

However, he pointed out that newly developed buildings are not where the emissions battle will be won or lost. “Improving the carbon dioxide balance of existing real estate is far more important than the couple of buildings we add every year.”

He added that this is going to be an interesting discussion because the existing buildings which Garbe manages alone have about 6 million sq m as a potential platform for solar panels.

Raimund Paetzmann.

Zalando VP real estate and logistics network expansion Raimund Paetzmann said that, putting the regulations aside, reducing the carbon footprint of buildings is something that has to be done as the built environment accounts for 38% of the global carbon footprint.

“We rarely speak about embodied carbon,”he said. “This energy aspect, it should be normal. Everyone building a new building without solar panels on the roof should be punished.”

Furthermore, Banschus pointed out that anyway, comparing a normal older warehouse building with a gas-powered heating system and a new one with insulation and air-heat pump, “it costs more to build but analysing the cost over 10 to 15 years it is not that much more. So we have to not only look at the net rents but also at side costs you may have over the years.”

According to Sally Bruer, head of EMEA logistics and industrial research and insight at Cushman & Wakefield, it is important to look too at the “continuing commerciality” of existing assets and whether it is viable and effective to improve them.

“Not all buildings will be, but some still have commercial applications albeit with some upgrades and the ability to be able to create sustainable energy on site or capture energy in some other way.”

“There have to be solutions around existing assets because there are a lot more of them than there are new buildings,” she added.

There is a public relations job to do too.

CTP’s group client relationship director Bert Hesselink said that 12 months ago a survey revealed that only 20% of occupiers were prepared to pay more for ESG.

“The real estate industry needs to do a better job at explaining how ESG can help our clients to hit their KPIs.”

He said there are five things that are important to occupiers: building certification; reducing carbon footprint; reducing water consumption; e-mobility; and biodiversity.

“So now we go to market and say ‘this is what we can offer you, let’s talk about how we can help you to meet your KPIs related to ESG so then we can make it real’.”