Power on

To adapt a famous advertising slogan, data suggests that the UK labour market isn’t working. Unlike the seminal poster, this phenomenon is politically agnostic. ONS figures show that since Covid, and across different governments in office, the percentage of the working age population (16-64) that is economically active has declined. Competition for labour across much of the UK is high, whilst government figures show productivity growth as sluggish/deteriorating. This situation is compounded by recent increases in employers’ NI and the minimum wage.

So, what’s the solution for occupiers of logistics real estate?

One is higher levels of technology adoption, and given increased labour costs, payback timescales for this investment are radically improving.

Labour enhancing technologies such as automation are, however, energy intensive. A large-scale, fully automated warehouse might use five times the electricity of a traditional warehouse on a per square foot basis. Moreover, these increasing demands often sit within a broader drive towards electrification as occupiers look to phase out gas infrastructure to meet net zero ambitions, and trial fleet transition.

The net result is that for long-standing occupiers, current and potential grid energy requirements are likely to be far greater than when they initially took the building. For all occupiers, the pressure on power resilience is increasing significantly.

Enhancing power resilience is not easy but broadly takes two forms. The first is energy cost reduction or smarter procurement. This is largely occupier-led but could include onsite generation, where real estate owners can potentially provide off-grid (renewable) energy provision at scale. The second is demand reduction, such as through building features like insulation, natural daylighting (reducing artificial light) and intelligent building management systems.

Another solution is enhanced measures to attract (a changing mix of) labour to warehouse locations. Not only is labour constrained, but also occupiers need to attract/retain a different mix of people as increased technology adoption shifts workforce composition to include higher skilled labour, such as software and hardware engineers. Head office functions like HR, finance and IT are also increasingly onsite as companies consolidate properties.

Site features play an important role here, including in enhancing wellbeing, which drives both retention and productivity. As well as natural light, breakout space (in- and outside) and amenities like showers, changing rooms and canteens are more valued than ever. Free EV-charging, gyms and onsite recreational space, such as five-a-side football pitches, are next level.

So, where can this high-quality real estate be found?

Forty per cent of the UK logistics real estate market has been built in the last 10 years, helped significantly by a Covid-related development boom from 2021 to 2023, which saw nearly half of this stock complete.

During this period, high-quality developers have built with labour and power in mind. Despite significant advancement in base building specifications over this time, especially around energy efficiency, most of these buildings have the flexibility to accommodate significant future change.

The remaining 60% of the market should not be discounted but needs careful assessment by both occupiers and investors. Some buildings will not be fit for the future, but many are – evidenced by the high proportion of occupiers renewing or extending leases.

Retrofitting or upgrading for power resilience, for example, is rarely straightforward. It may necessitate (among other things) lease modifications; new private wires; negotiating additional substation capacity; agreements for excess solar to be fed back into the grid and shared with other estate/nearby users; insurance modifications. All of which involve multiple parties (e.g., occupier, building owner, power supplier) whose priorities or timings may not align. But, while certainly challenging, this also creates the scope for the best asset management teams to add significant value – for occupiers and investors alike.

What’s clear is that high-quality logistics real estate is critical UK infrastructure. It can play a significant role in helping to plug the labour gap by (1) providing power resilience for the adoption of ever more technology (2) enabling UK companies to offer attractive work environments in a constrained market, and for a shifting mix of people.

 This is a sponsored post.