Following several years of steady uptick in construction levels in the Dublin industrial and logistics property market, completions in 2022 look set to reach close to 2 million sq ft, double the level of 2021 and the highest since 2008. Furthermore, 2023 looks set to easily surpass this figure with a current predicted pipeline of 2.5 million sq ft.
In a market with just 1.5 per cent vacancy, this is no bad thing. The supply of large, new-build warehousing is driving take-up which we expect to hit 4 million sq ft by year-end, making it one of the strongest years on record.
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The biggest transaction of the year was the pre-letting of 322,000 sq ft to Uniphar in Greenogue Logistics Park. In Quantum Logistics Park, Iput Real Estate Dublin pre-let the entire scheme of four units totalling 550,000 sq ft to DHL Supply Chain, Harvey Norman and Maersk (x 2). Based on pre-letting agreements in place, coupled with the build-up of unsatisfied occupier requirements, 2023 should be another strong year for take-up.
The combination of build-cost inflation and lower investment values will make some developers think twice before going on site in the short term
In 2024, we expect completion levels to drop back as some developers pause speculative commencements due to reduced viability and unstable market variables. In addition, the unfathomable decision of South Dublin County Council not to zone more land along the Naas Road (N7) corridor for traditional industrial and logistics use means there will be few options for this type of development in south Dublin going forward. Traditionally, this location would account for roughly half the industrial and logistics development in Dublin in any given year.
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Based on discussions with engineers and developers, overall warehouse construction costs have increased by approximately 60 per cent over the past three years. According to quantity surveyors Turner & Townsend, in the 12 months to Q3 2022, cost increases of core industrial construction materials in Ireland were as follows: reinforcement bar +35 per cent; structural steel +27 per cent; aluminium composite panel +15 per cent; and concrete +8 per cent. They also forecast these component costs to increase in the following 12 months, but at a slower pace. Apart from increases in materials and labour, there have been additional costs to comply with new fire regulations and the higher sustainability criteria demanded by occupiers and investors.
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Institutional developers will typically build, lease and hold logistics assets, but most other developers sell the completed, tenanted buildings to investors. The sharp increase in five-year swap rates during mid-year – the main source of funding for private equity investors – led to a slowdown in investment transactions and a period of price recalibration that is ongoing. While continued strong rental growth and tenant demand would normally be sufficient to make a speculative development viable, the combination of build-cost inflation and lower investment values will make some developers think twice before going on site in the short term.
The consequent reduction in speculative supply in 2024 may have the effect of bolstering rental growth, assuming tenant demand remains strong. Prime rents currently range from €11.25 to €11.75 per sq ft, which is a 10 per cent increase on last year. However, we expect dealing levels to be significantly higher in 2023, allowing for build-cost inflation, higher investment yields and the supply/demand mismatch.
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The Environmental, Social, and Governance (ESG) targets of corporate occupiers and investors has led to the continuous growth of sustainable design and certification of new warehousing over the past few years – Leadership in Energy and Environmental Design (LEED) and Building Research Establishment Environmental Assessment Method (BREEAM) certification being the most popular. But, in many cases, SME companies did not have the requirement or budget to decarbonise. Now, due to the energy crisis, it makes abundant financial sense to invest in building sustainability. According to KRA Renewables, the payback on PV panels has reduced to seven years and they are a simple installation for most industrial/logistics buildings. Businesses can now convert to LED lighting with zero up-front costs, whereby the energy-cost savings achieved are shared with the installer over a number of years. Another development has been the ability to certify the environmental performance of existing buildings through BREEAM In-Use. This is currently being looked at by both occupiers and investors as part of building refurbishment programmes.
Looking forward, investment in the environmental sustainability of industrial and logistics buildings will inevitably continue to rise but it is hoped that other aspects of build-cost inflation will moderate to avoid a significant downturn in speculative warehouse supply.
Kevin McHugh is a director of Harvey, industrial property specialists
