Steep hills on logistics’ path to net zero

Disparate regulations, out of date electricity grids and costs are all challenges for the sector, writes Nicol Dynes.

There’s no doubt that logistics has had the wind in its sails over the past few years. But when it comes to the transition to net zero the sector still faces obstacles on the road.

“I would say we are mid-journey,” says Tobias Kassner, head of research at Garbe Industrial Real Estate. “It started three to five years ago, driven by EU regulations, but now we see more pressure from investors to do the right thing.”

Investors tend to be more interested in sustainability than tenants, adds Frank Pörschke, chief executive of P3 Logistic Parks. “Some tenants are very engaged, but others have a more short-term horizon,” he says.

Interest in putting photovoltaic panels on the roofs of logistics assets has increased substantially, driven by the desirability of generating green energy, given the increase in energy costs.

“We find the build-up of solar has been speeding up in the last three years,” says Hugo Willink, managing director of solar roof specialist Sunrock Germany. “Investors, developers and tenants are working together on this, because they all have sustainability targets.”

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Momentum has gathered pace this year due to the energy crisis sparked by Russia’s invasion of Ukraine.

“There’s a huge need for sustainable energy in Europe and globally and I believe that the logistics sector can become a net producer of energy,” says Pörschke. “We have these millions of square metres of roofs which we do not use properly. If we install solar panels, combined with batteries on site, in the long run this would make a significant contribution to the energy challenge.”

But it will take time because there are hurdles to jump. One is the fact that regulations are very different within Europe and sometimes even within the same country, as in the case of Germany.

“We have a pan-European approach and boots on the ground everywhere so we can compare and the pace is very different in different countries,” says Kassner. “In Germany, for example, we have 16 different building laws in place and the market is more complex. We really had to fight to persuade them that having photovoltaic panels on the roof is a good thing.”

Electricity grids need improvement

Another hurdle is electricity grids that are not prepared for the transition and need to be improved, and energy storage that still needs to be developed.

“I like to think that logistics assets will become part of the electrical grid, as they are decentralised and they produce energy,” says Kassner. “The grid definitely needs to be improved. We also develop data centres and we often find there is not enough power. In the Netherlands we’re even using a windmill to generate energy.”

‘We have these millions of square metres of roofs which we do not use properly. If we install solar panels, combined with batteries on site, in the long run this would make a significant contribution to the energy challenge..’

Frank Pörschke, P3 Logistic Parks

But technology can advance rapidly, especially when driven by need. So it is likely that grids will improve and that the issues with battery storage will be resolved. The price of batteries is likely to drop as well.

“Full electrification is possible,” says Willink. “We are building projects in the Netherlands and Germany with solar panels and battery storage and we generate sufficient energy for our needs. If you combine onsite energy generation with onsite storage then it’s absolutely possible.”

Costs are an important factor in the mix and can slow the adoption of sustainable solutions.

“Sometimes we move in circles rather than moving forward on the path,” says Alexander Hoff, founder and managing partner of Palmira Capital Partners. “People talk a lot about ESG, but there is little awareness of the need to tackle all the issues simultaneously. ESG is like a wave: if you don’t ride it, it will wash you away.” The reality, Hoff adds, is that people are happy to have ESG “as long as it doesn’t cost them anything”.

A short-term outlook is becoming more prevalent as cost saving becomes a higher priority and ESG issues are competing with many other factors for investors’ attention. 

“Everyone should make their assets ready for solar panels to be installed at some point in the future,” says Robert Jedrzejowski, chief executive of Pekabex Group. “It’s not a large investment and it makes sense. But there’s not enough awareness of the issue among investors. People prefer to save money now and then regret it later.”

‘The grid definitely needs to be improved. We also develop data centres and we often find there is not enough power. In the Netherlands we’re even using a windmill to generate energy.’

Tobias Kassner, Garbe Industrial Real Estate

Another challenge is getting used to new rules and new ways of doing things.

“The construction industry is very conservative,” adds Jedrzejowski. “For many it is difficult to get their heads around new solutions and change their habits. As a construction company we always calculate the CO2 footprint of every asset and we are reducing the use of steel and concrete, but we find not many investors are interested yet.”

It would help if valuation reflected a green premium and not just a brown discount, but the sector is not  there yet, experts agree. “At the moment having solar panels on the roof or other improvements is neutral, it doesn’t add to the value of the asset and I believe that needs to change,” says Kassner. “The Dutch market is much more advanced on this score, as well as being ahead on the social part of ESG.”

Repurposing vs building

It is, of course, easier for new-builds to be ESG-compliant, but more attention should be paid to existing assets, which are the vast majority. Logistics will not be sustainable until there is a comprehensive plan to improve warehouses and sheds that were built years ago.

“We have a blueprint on how to build a sustainable property, and our ESG team works closely with our development team to create future-proof assets,” explains Kassner. “But what we try to emphasise is that 96% of warehouses and sheds on the market are existing stock, and if we improve the shell and the installations that would make a huge change.”

“It is imperative to take care of existing assets, however hard it is,” adds P3’s Pörschke. “We issued a €1 billion green bond this year and have committed to having 75% of our assets certified by the end of 2022.”

There needs to be more awareness of ESG issues and more willingness to invest for the future, not just because it’s the right thing to do, but because there is a clear business case for doing so.

“The ambition is there, what is lacking is the execution,” says Willink. “If we can all work together to speed up the timeline we can reach the 2030 target. I am bullish because I see more people in our sector moving from plan to execution.”