In 2020, we questioned whether in a post-Covid world industrial occupiers & landlords may become more cost-sensitive, forgoing ESG commitments, keeping the status quo, or even increasing their commitment.
The answer is becoming increasingly clear, with occupiers and landlords going above and beyond the forthcoming requirements of the 2027 EPC changes. Despite the consulted changes likely requiring all commercial buildings to reach a minimum EPC – C, previously EPC – E, a significant number of landlords are pushing beyond this.
For example, the joint venture between KSP & Patrizia (GLi) has been heavily focused on delivering highly sustainable buildings within their urban target locations. Additionally, their commitment to 100% electric units with maximum PV coverage is well ahead of the 10-15% roof coverage that many others deliver. Their successful pre-let of their first Park Royal development provides an early indicator that this type of development is meeting occupiers' demands.
As well as new build developments driving sustainability improvements, the heightened awareness of embodied carbon has broadened the focus to include and increasingly prioritise improvements to existing stock. In most instances, it is far more sustainable than developing a new building. On this issue, one of the more established names leading the way, SEGRO, remains ambitious in their commitment to delivering sustainable buildings. Evidence of this is best seen in their refurbishment plans. In 2020 they received a BREEAM 'Excellent' for a refurbishment in Park Royal, and this year they are aiming higher with 'Outstanding' targeted at Greenford Park, pictured within. If achieved, this will be ahead of many new builds and will further raise the expectations for both occupiers and investors.
Whilst it is essential that the largest institutional landlords improve their sustainability credentials on their larger mid-box units, it is important that demand for sustainable buildings comes from SMEs. Last time we questioned whether these more cost-sensitive SME occupiers could afford the higher rents typically associated with more sustainable buildings. However, this has not been borne out in truth, as this same cost sensitivity has seen many SMEs remain committed to occupying more sustainable buildings. They seek to benefit from more efficient use of their building in terms of volumetric space and energy efficiency, as well as the cheaper, more cost-stable energy that onsite PV panels can provide.
As the aforementioned expected EPC changes get closer, there will be an increased risk of sustainability-related regulatory obsolescence for landlords and functional obsolescence for occupiers as they look for buildings that serve their needs for the next 10-15 years. The landlords, either with the most sustainable portfolios or those upgrading their estates beyond the minimum requirements, stand to benefit most through lower void rates and higher quality tenants. Those landlords that remain only just compliant face the prospect of losing out to others, offering tenants more significant savings from energy efficiency and the long-term certainty that the building will meet sustainability criteria headed in only one direction.
Photo credit: SEGRO