50%+ of warehouses unlettable by 2030

By Liza Helps, Property Editor Logistics Matters

MINIMUM ENERGY Efficiency Standards (MEES) energy efficiency regulation changes, which applies to all privately rented property, makes it an offence to continue to let a commercial space with an Energy Performance Certificate (EPC) worse than an E, even in the middle of a lease term. By 2027  the minimum EPC  needs to be rated C or above and by 2030 this needs to be a B or above.

Approximately 128 million ft2 of UK warehouse space, 18% of all units above 50,000 sq ft, will fail to meet minimum EPC requirements by 2027 and this number triples to 404 million ft2, or 60% of warehouse space, when considering the minimum EPC B requirement by 2030.

The prevalence of older, underperforming stock and its potential for obsolescence could further exacerbate the ongoing undersupply of logistics space, with development activity slowing and large multinational occupiers increasingly seeking more modern, energy-efficient facilities enabling them to meet ESG goals, reduce operational costs and embed technological solutions.

Knight Frank Head of Logistics and Industrial Charles Binks, said: “Occupier demand is becoming increasingly focused on high-quality facilities that can offer ESG credentials. Operators are increasingly discounting facilities that do not fit with their, or their customers’, sustainability strategies..”

This is borne out by CoStar research that highlights the fact that Warehouse occupiers gravitating to newer facilities – net absorption in the year to June 2023 was positive by 40m ft2 in sheds built since the year 2000 but negative by 13m ft2 in sheds built last century.

Binks continued: “While newly constructed warehouses generally meet top sustainability standards, 82% of the UK’s existing stock built before the year 2000, do not meet minimum EPC requirements. It is obvious that significant capital expenditure is required to retrofit these warehouses and mitigate obsolescence risk, however just 6% have undergone upgrades in the past five years. The prospects for rental growth should offer incentive. However, investors must accelerate the rate at which older facilities are upgraded or they will become unlettable.”

With online retail set to grow by 29.1% over the next five years, reaching £146.9 billion in spending by 2027, ecommerce alone is set to create 45 million ft2 of warehousing space requirements during this period. 

Right now, vacancy rates have risen slightly over the past six months, but they remain very low relative to historic levels and much of the space currently available is in older, second-hand stock. This shortage of energy-efficient stock is expected to see UK industrial rents increase, with growth of 3.1% per annum forecast over the next five years.