Ireland’s Logistics Sector Struggles To Keep Pace With Demand In Dublin And Beyond

Ireland's manufacturing sector is having a purple patch, but the logistics sector is struggling to keep up, which may hinder one of the bright spots for the economy.

As the country's manufacturing base continues to grow following a spate of recent business expansion stories across the country’s key cities, Ireland’s logistics provision is being stretched at the seams.

Traditionally focused on the Dublin metropolitan area, in fact much of the recent high-end engineering, pharma and retail real estate growth is away from the capital, while spec build is becoming increasingly difficult to finance as construction, labour and debt costs soar.

The situation has left the industrial and logistics sector in the seemingly enviable position of operating at just 1%-2% vacancy rates, but that has created its own headaches for investors and occupiers. 

The situation has left a question over whether Ireland’s logistics real estate provision is fit for purpose. And that is particularly true given the recent resurgence in cities like Cork, Galway and Dundalk.

Given the growth in Dublin’s population over recent years, it is no surprise that logistics has been focused on meeting the needs of the capital’s burgeoning residential and commercial requirements, but job losses in the tech sector have altered the picture.

The government’s latest job figures showed employment jumped 4.1% in the 12 months to Q1 2023, reaching 2.6 million, driven by sectors outside of tech. 

Highlights included Boston Scientific announcing an €80M expansion of its manufacturing plant in Clonmel, with an increase in both office and manufacturing space planned there. It employs around 6,500 people across its sites in Clonmel, Galway and Cork.

Similarly, U.S. computer chip firm Analog Devices has announced that it will create 600 new roles as part of a €630M investment at its European headquarters in Limerick.

U.S. firm Dexcom confirmed it will build a manufacturing facility in Athenry, County Galway, creating up to 1,000 jobs in the region, while H&MV Engineering, a specialist in high-voltage electrical engineering, has pledged to create 700 jobs over the next five years at its new global headquarters in Castletroy, County Limerick.

But manufacturers need a logistics network to transport parts and products. And while Ireland's logistics sector is producing record numbers, it may not be enough to keep up with demand. 

Despite softer economic conditions, a total of just over 920K SF of industrial and logistics take-up was recorded in the opening quarter of the year, according to CBRE Ireland, up 44% quarter-on-quarter and 20% ahead of the 10-year Q1 average.

Prime rents for Dublin industrial and logistics stock increased by over 4% in Q1 to €12 per SF, with further rental growth forecast.

Two large-scale transactions completed in Q1, with four of the top six deals consisting of pre-lettings. The average deal size across 32 transactions was 28.7K SF, and the largest deal was at the 280K SF Building 2 at Greenogue Logistics Park, with Wincanton signing a 10-year lease for the building, which will be retailer Ikea’s new national distribution centre, with practical completion expected toward the end of September.

For KKR and Palm Capital, the sales of Building 1 and 2 at Greenogue Logistics Park represented the exit from their first logistics development in Ireland, with Building 1 attracting Tosca Services and Napier Couriers.

“The success follows our investment thesis of investing in core logistics in maturing and structurally undersupplied markets," Palm Capital Managing Partner and founder Reda Khatim said. "We witnessed pent-up demand for high-quality space in Ireland driven by Brexit disruptions, fast e-commerce penetration and much-needed market consolidation.” 

Palm is one of the largest industrial and logistics landlords in Ireland with more than 150 properties, 130 tenants and a total of more than 3M SF under management. 

CBRE said that at the end of Q1, the vacancy rate across the top 36 industrial and logistics parks in Dublin was just 1%, while investment volumes totalled €115M across two transactions, with spend 50% above the 10-year quarterly average of €75M. Prime yields softened by 25 basis points to 4.75%.

Cushman & Wakefield Director and Head of Land Development Brendan Smyth said that the standard of product in the market had “grown exponentially” but added that he does not think rents have reflected the changes in quality and demand. That could hinder future supply. 

“As a result, the biggest challenge is viability for spec build because construction, labour and debt costs have increased, as have the expectations for quality of the buildings and ESG and sustainability, but the rents have not kept pace,” Smyth said.

In terms of coverage, he said that the issue is not so much a switch of emphasis away from Dublin but ensuring that national coverage is achieved through strategic distribution points, something that the improved road system is helping to enable.

“The infrastructure connecting Ireland has improved dramatically, and the country has become smaller as travel time between the major cities is shorter," Smyth said. "That means that distribution bases in Dublin, Dundalk, Cork, Galway and Athlone really give you national coverage."

With e-commerce more popular and the desire for delivery times for Irish households to come down from the three to four days of the past to the next day, the real push is for real estate to help improve last-mile delivery. But hubs in urban locations are getting harder to acquire, so that might mean the city's edge. For example, in Dublin the council is increasingly looking to encourage residential within the M50 area, so industrial is being pushed outside the motorway, Smyth said.

“As a result, what we are seeing is more companies trying to combine buildings to create larger urban sites and to raise the roofs to include a mezzanine,” Smyth added. “Vacancy rates are only around 2%, which is too low to be functioning market, really. Ideally, we would need 5%-7% vacancy to get some liquidity and churn.”

There are few signs that things will change quickly.

Despite near-record levels of development, supply is struggling to keep up, and there is demand of over 2M SF for logistics buildings of 100K SF or larger, according to Savills Ireland. Of this demand, 63% is from retail-focused, first-party logistics firms and 20% is from third-party logistics firms, meaning the logistics sector accounts for 83% of total industrial demand.

Savills has predicted that prime rents will reach €13 per SF by the end of 2023 and €14.50 per SF by the end of 2024, and echoing Smyth’s view, it reported that if the trend in pre-letting new stock persists, some firms will switch to legacy stock to redevelop or retrofit. Savills said this trend has already begun, with secondary rental growth of 12.5% over the past 12 months, going from €8 per SF to €9 per SF.

Pipeline Bolstered, But Ireland Needs More

There is a significant pipeline of new development underway. At the end of Q1, approximately 1.7M SF was under construction and due to be delivered to the Dublin market over the next 12-15 months, according to CBRE Ireland. Of the new stock to be delivered in 2023, a significant proportion consists of build-to-suit developments or stock that is already pre-let or reserved.

Given that take-up in the Dublin market has averaged over 3.4M SF per annum over the last 10 years, any new speculative stock should be quickly absorbed, CBRE said.

For example, Mountpark Logistics confirmed that it had leased 97K SF at Mountpark Baldonnell II to Kellihers Electrical, completing the letting of the 1.3M SF campus, which includes Amazon, DB Schenker, DSV, Home Store + More and United Drug. CBRE and Cushman & Wakefield were joint agents.

A number of new developments were granted planning permission in Q1, including five new units at APEX Hub on Calmount Road, south-west Dublin. In north Dublin, five units were granted planning permission in May at Nexus on the N2/Cherryhound interchange, which is being developed by Iput. Another six new units have been granted permission at the new development Elipse, which will form the next phase of development at Northwest Logistics Park.

Some new planning applications came forward in Q1, including an application for 121K SF across several new units at Airport Trade Park, situated on Swords Road adjacent to Dublin Airport in north Dublin.

Iput’s current logistics portfolio comprises 3.2M SF across 32 buildings, the largest in Ireland. Its active logistics pipeline extends to over 1.4M SF, and the first phase at Nexus will comprise 795K SF across five buildings and will build upon the recent completion of the 550K SF logistics facilities at Quantum Logistics Park, which was pre-let to Maersk, DHL and Harvey Norman.

“Our intention is to deliver the next generation of logistics parks in Ireland to meet both the operational and sustainability requirements of today’s occupiers, including Ireland’s first-ever net-zero logistics building at Quantum Logistics Park,” Iput Real Estate CEO Niall Gaffney said.

Palm Logistics has also confirmed that it is to seek planning permission to develop a further 500K SF of logistics space at Naas Enterprise Park, the largest single asset in the industrial portfolio acquired with KKR for €195M in December 2021.

The proposed €100M expansion would bring logistics space at the site to more than 2M SF, and Palm has also decided to rebrand the development as Momentum Logistics Park.

All of this suggests the market needs more. While the stellar e-commerce growth of the pandemic may have slowed, the number of major retailers looking to ensure next-day delivery will inevitably increase as demand from manufacturing, pharma and 3PLs increases. 

Cushman & Wakefield's Smyth said that if occupiers want a healthy pipeline, they need to be realistic about rents.

"It is a price-senstive sector, but to encourage development, occupiers may need to be prepared to agree to higher rents to kick-start spec schemes," he said. "We need some more joined-up thinking to make sure Ireland does not become a victim of its own success."