Industrial and logistics sector moves towards the top of the class

Changing consumer behaviour and population is fuelling demand for warehouse space in Dublin and beyond

The €100m off-market sale of the former Hewlett Packard campus in Leixlip, Co Kildare, to Stoneweg exceeded expectations

The €100m off-market sale of the former Hewlett Packard campus in Leixlip, Co Kildare, to Stoneweg exceeded expectations

 

The industrial and logistics sector has always been the “poor relation” of the office and retail sectors. However, in the past few years we have seen a change in attitude, particularly from the investment community.

While some canny investors had been focusing on the sector for considerably longer, over the past two years a host of international private equity companies have been competing for much of the available industrial and logistics stock in Dublin, both vacant and tenanted.

This competition has intensified in recent months, and looks set to continue with trends such as accelerated e-commerce uptake and population growth providing investors with confidence in the long-term future of the sector.

The off-market sale of the former Hewlett Packard campus in Leixlip, Co Kildare, last month, comprising 1.46m sq ft on 195 acres, is illustrative of this competition. The winning bid of close to €100 million from an international investor, Stoneweg, was far ahead of market expectations.

Following a three-week hiatus during March and April when a number of industrial sales were aborted, demand for warehousing rebounded strongly, driven by increased online retail sales, PPE storage requirements, and businesses holding higher inventory levels due to supply chain volatility.

Since then the shape of the supply chain has come into sharper focus, with companies planning their post-Brexit space requirements where traditional supply routes will be slowed by customs checks and new supply routes may be longer and less frequent.

Take-up in Dublin in 2020 is unlikely to reach the 3.5m sq ft achieved in 2019, but this will be as a result of supply levels being unable to meet the demand in the market.

To put this in context, there are currently just five modern, warehouse units of 20,000sq ft or greater for sale or to let and available for immediate occupation in the entire Dublin market.

With so few second-hand buildings available, the new-build pipeline is of critical importance. In 2019, there were only three new construction starts of speculative warehouses in Dublin totalling 151,000sq ft. All were pre-let prior to completion.

As expected, this increased dramatically in 2020 with eight new speculative starts comprising 979,000 sq ft, but none of these will be completed until 2021. Of these, two units totalling 105,000sq ft are reserved. This leaves 874,000sq ft of new supply pipeline in buildings ranging in size from 69,000sq ft to 284,000sq ft.

Given the supply/demand imbalance it is likely that tenants will be secured for some if not all of these units prior to completion.

The biggest warehouse build next year will be a 654,000 sq ft. e-fulfilment centre in Baldonnell Business Park for which planning permission has just been granted and which has been pre-let to Amazon. This represents the largest single “build-to-suit” pre-letting ever in the Irish market.

Data centre development also continues apace with 11 new buildings under construction and a further 29 with planning permission in place, the majority of which are in the greater Dublin area. Unlike traditional warehousing, these are mainly self-build projects rather than developer-led.

Rental growth

Unsurprisingly, prime warehouse rents have grown 5 per cent in the past 12 months and now range from €9.75 to €10.45 per sq ft. Given the level of demand and increased construction costs associated with sustainability and new fire office requirements, rents look set to rise further in 2021.

Prime warehouse yields have held firm at 5 per cent this year but look likely to strengthen in the coming months based on anecdotal evidence of unsolicited offers being made for prime investments.

By contrast, prime office yields are at 4 per cent and high street retail yields are at 4.25 per cent and trending weaker.

Looking to the long term, industrial and logistics may no longer be known as the “poor relation” as fundamental changes in consumer behaviour elevate the status of the sector.

Kevin McHugh is a director of Harvey industrial property specialists