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  • Writer's pictureKaren Fletcher

The SectorScope Analysis: Warehousing & Logistics

Updated: Aug 1, 2023

The UK logistics and warehouse sector is one of the economy's most important areas. It employs 8% of the UK workforce while providing the backbone for retailers and online businesses.

During the pandemic, online retailing rose to record levels, and warehousing experienced a boom as retailers pivoted to deal with the rising demand of shoppers hitting the keyboard rather than the high street or retail park.

Since then, demand for warehouse space has fallen, but only slightly and it looks set to rise in the future. The trend is for manufacturers and retailers to use warehouse facilities to support resilience in their supply chains that geo-political disturbances have disrupted.

Property specialist CBRE predicts that the growing demand will see prime location warehouses occupied quickly, pushing potential occupiers to what are currently non-prime areas. Affordability of rents is also likely to be a ‘pull’ factor. In addition, CBRE predicts more demand for warehousing near rail hubs as tenants (and their customers) look to reduce their carbon footprints by reducing road haulage.

There are several trends and factors driving change in the warehouse sector. All of them will impact the type of products and services this sector seeks from construction and building services suppliers.

Sustainability in the warehouse sector The SectorScope’s coverage of the warehouse industry shows robust trends towards energy efficiency and carbon reduction, particularly in new-build projects. Examples include a multi-level logistics centre by British Land which is aiming for BREEAM Excellent and EPC A ratings. The Prime Park warehouse development near Birmingham is targeting energy efficiency to support its clients. And the new Mars and DHL logistics centre is designed to reduce Mars UK’s logistics carbon footprint by 7%.

The latest report from property consultants Savills shows that sustainability considerations are high for corporate warehouse tenants. In the London and South East region, 81% of the take-up of warehouse space was in new properties, which can offer better operational efficiencies and sustainability credentials.

A potential threat to the warehouse sector is updates to the Minimum Energy Efficiency Standards (MEES) rules. The government has proposed (but not confirmed) that by 2027 all commercial property will have to achieve a minimum EPC rating of C if it is to be leased. This could rise to a minimum B rating by 2030. According to figures reported in the logistics press, this could impact half of all UK warehouses.

Although the government has not confirmed these MEES changes, they are putting the need for energy efficiency upgrades high on the agenda in the warehouse sector. Perhaps the most significant driver is the rising cost of energy. Warehouses are energy-intensive buildings and becoming more so as they adopt more automation technology that uses more power.

Corporate clients with ESG (Environmental, Social, Governance) strategies are also actively seeking to reduce carbon emissions along their entire supply chains – including logistics and warehousing. As a result, warehouse developers and owners looking to the long-term future of their business must consider how they can demonstrate efficiency and low-carbon operation.

On-site renewables and storage Rising energy costs have hit the warehouse sector as much as any other. This is driving interest in energy efficiency as well as on-site renewable energy generation. Warehousing has the largest available roof space of any UK industry, so solar power is an important option for warehouse developers, owners and tenants. The UKWA (UK Warehouse Association) is launching a Solar Showcase in September 2023 to help its members ‘embark on the solar journey’.

The sector faces some hurdles to the adoption of renewables. For example, many warehouse buildings are occupied by tenants, so the question arises of who pays for and benefits from investments in on-site energy generation.

Lease durations for warehouses are usually around 10 to 15 years, and solar can give a relatively speedy payback of around 4 to 5 years. So the industry is exploring options for financial models such as leasing solar panels, so neither tenant nor landlord has to find investment capital.

Energy storage is another technology drawing interest in the warehouse and logistics sector. The ability to generate power from solar PVs can be supported by batteries to even out supply during peak demand.

Another option is on-site charging for electric vehicles. As the logistics industry aims to reduce its carbon footprint, the use of electric vehicles is growing, particularly for vehicles on shorter delivery routes. In its recent Best Practice guide, the UKWA recommends bi-directional EV chargers, allowing vehicles to supply power back to the building during peak demand.

Lighting – restrictions on mercury-containing products Lighting is a critical capital and operational expenditure for warehouses, and over the next 12 months, there are significant changes to regulations around the use of fluorescent lighting.

It contains hazardous mercury and so is impacted by the EU Restriction of Hazard Substances (RoHS) Directive. This regulation bans fluorescent tube lighting across the EU member states from the summer of 2023. The UK adopted the Directive into UK law, and the ban will begin here in September 2023 for T8 fluorescent lamps and February 20204 for T5s.

The impact of this change on warehouses will largely depend on the age of any fluorescent systems. Some fluorescent lamps can be swapped for an LED fitting. However, older luminaires may not allow this option which will require more capital investment.

The industry is therefore looking closely at its lighting options which provides an opportunity for manufacturers, designers and installers to help clients make the right choice of technology. There are significant benefits in moving to LEDs, including lower energy use and reduced operational costs.

Smart buildings – the warehouse of the future The logistics sector already uses advanced Warehouse Management Systems (WMS) to collect and collate detailed information about operations. This allows warehouse managers to optimise rack usage, that products are flowing in and out of the warehouse on time; and to spot any bottlenecks or problems quickly.

With the spotlight on energy costs and carbon reduction, it is not a great leap to see the warehouse sector adopting software to help track and manage energy use. Some warehouse facilities are already using PIRs to keep lighting off in unused parts of the warehouse, for example. But there is potential in this market for closer tracking of energy use to highlight potential savings. In addition, using on-site renewables would make energy management a critical factor in success – and help keep costs under control.

Conclusions The UK warehouse sector is riding out the ups and downs of the UK economy in 2023. It has the benefit of serving clients in many markets – not just high street retailers, but also online suppliers, and manufacturers across various sectors. This gives it some resilience.

If the government proceeds to introduce higher MEES rating requirements for leased commercial buildings, then we can expect to see increased demand from this sector for energy efficiency advice and low-energy products for lighting, cooling and heating.

Building integrated renewables, particularly PVs, also look set to be popular in the warehouse sector. In addition to sustainability goals, the industry has seen some challenges with grid connections.

Long wait times for connection impact new builds, putting off potential tenants. On-site power generation therefore solves several critical problems for warehouse owners, as long as this includes flexible financing approaches such as leasing the PV system.

Overall, this sector should interest manufacturers, consultants and installers with some significant business in the pipeline for systems that can meet these challenges over the next few years.

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