Meds And Beds (But Not Enough Sheds) As Logistics Occupiers Hunt Space

The office sector might be facing a tough 2023, but Ireland’s insatiable thirst for industrial and logistics space remains unchecked. As a result, speculative space is disappearing fast as most of the current development pipeline is already pre-let and many occupiers are not vacating their existing sites when they relocate.

Rents are already heading upward because of both demand and soaring and unpredictable building and energy costs, leaving the sector increasingly concerned about just how the pipeline can be brought up to speed.

With the ongoing focus on housing Dublin’s growing population, and big pharma and data centres also inhaling available space for growth, sheds look set to stay in short supply, at the very least for the remainder of 2023.

Although the forecast for completions for 2023 is at an all-time high of 2.6M SF, the challenge facing the industry now is whether rising debt costs and the resultant impact on yields could hit the delivery of speculative units, and whether the key to unlocking Dublin’s logistics sector in the short term is to focus on upgrading older units.

In fact, logistics is dominating industrial real estate demand in Ireland and pre-lets are dominating the asset class, with occupiers battling for large and modern units. That quest has seen modern buildings of 50K SF and above increasingly hard to find, while vacancy rates for legacy stock were on the rise — but may not be for much longer.

Near Record Development
Despite near record levels of development, supply is struggling to keep up and currently 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.

Indeed, competition for limited modern stock has not only resulted in more pre-lets but a highly attractive market for landlords, with tenants willing to accept longer-term leases to secure the right assets. As a result, prime rents increased by 6.7% in 2022, going from €11.25 per SF to €12 per SF. Savills 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 it said that if the trend in pre-letting new stock persists, some firms will eventually turn to legacy stock to redevelop or retrofit. Savills said that 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.

Rohan Holding Director John Casey echoed that view and said that rents have increased because of rising costs, especially in the sub-40K SF sector. The developer is working on several transactions with rents in the €13-€15 per SF range for new buildings while smaller, older buildings in the sub-20K SF category are already achieving these levels, he said.

The lack of speculative space coming online is a consequence of rising inflation, higher debt costs and unpredictable building costs, according to industrial and logistics leasing specialist Harvey.

“Based on discussions with engineers and developers, overall warehouse construction costs have increased by approximately 60% over the past three years. As a result, a lot of developers are sitting on their hands right now,” Harvey Director Kevin McHugh said.

“We have already seen rents moving towards €15 per SF for a smaller, well-located building of 25K SF and if supply remains restricted then it seems inevitable we will see rents move upwards during the year. Given strong demand and the fact that rent is only one cost factor for many occupiers, it may well be that they just decide to live with higher rents to get the right properties,” he added.

The mismatch between available stock and consumer demand hit take-up hard at the end of the year. Industrial and logistics take-up totalled just 338K SF in Q4, Savills said, the lowest quarterly figure on record due to the shortage of available units. The average deal size was 22.5K SF, a significant decline from the 54K SF recorded in Q3 2022.

Weak Deal Levels in Q4
In all, 15 deals occurred in the quarter, the weakest on record, with only one deal greater than 50K SF, which was a substantial drop from the 10 recorded in Q3. Nevertheless, annual take-up reached a cumulative 2.9M SF — just over the five-year average — with 73 deals at an average of 40.35K SF, the largest average annual deal size since Savills began tracking activity.

“In terms of the pipeline, it’s almost completely pre-let," Savills Director of Industrial & Logistics Jarlath Lynn said. "Given the level of demand, for the past few years the Irish industrial and logistics sector has been playing catch-up, and now rising building costs have caused a little bit of havoc in the market. So the approach now is likely to be more measured, while developers try to get more predictability about the output yield.” 

“One of the things we are seeing is that when occupiers take up new space, they often keep their old site too. Normally that would come to market, but many users are instead simply retaining their old properties, which often have optimum locations. Undoubtedly there is going to be some work required for international and blue-chip occupiers, which may have higher ESG level expectations to achieve and so may need to refurbish their older stock, but they seem happy to take that on,” he added.

Deals for big-box units of 50K SF or more accounted for 1.83M SF, or 62%, of take-up in 2022. This compares with a five-year average of 55%, reflecting the gradual increase in demand for larger space. Units built over the past decade accounted for 59% of take-up in 2022, compared with 51% and 28% in 2021 and 2020, respectively.

This reflects a growing demand for large, high-spec units, with 2022 recording 1.75M SF of completed space, the highest amount delivered annually on record.

North East Dominates New Space
Dublin’s North-East accounted for 45% of take-up in Q4 and 38% of total space taken in 2022. New developments in the region, such as Dublin Airport Logistics Park Quantum Distribution Park and Horizon Logistics Park, combined with the undersupply of modern stock in other parts of the city, explain the North-East's popularity.

Seven units totalling 429.1K SF reached practical completion in Q4 2022. The largest of these was Iput’s Unit 2, Quantum Distribution Park, totalling 95.7K SF and pre-let to retailer Harvey Norman. The second-largest was Sandymark's Unit F, Greenogue Logistics Park, totalling 95K SF and pre-let to Zeus Logistics. In September, Iput Real Estate also signed Maersk for 252K SF and DHL pre-let 206K SF in summer 2022 at Quantum.

The completion of the three deals brought the north Dublin scheme to full occupancy in advance of its ultimate completion by the second quarter of 2023.

Iput currently has a portfolio of 2.6M SF of logistics assets, the largest in Ireland. The company’s active logistics pipeline extends to over 1.4M SF and will increase the total portfolio to around 4M SF, while the developer’s acquisition of 118 acres of land adjacent to Nexus Logistics Park near Dublin Airport has the potential to add a further 1.6M SF, bringing its overall holding to 5M SF.

“Our ambition for Quantum Logistics Park was to set a new sustainability standard for logistics in Ireland and attract global occupiers to our developments. In particular, we are pleased to work with Maersk to deliver Ireland’s first net-zero logistics building, which will support their 2040 net-zero ambition,” Iput CEO Niall Gaffney said of the Maersk signing.

Rohan Holdings has also secured two lettings at its South West Business Park, ahead of the delivery of its first phase. With formal completion expected to take place in H1 2023, the company is understood to have agreed deals for a total of 80K SF with international tool and hardware distributor Toolbank and an equipment provider for the healthcare sector. Both lettings have reportedly been agreed for in excess of €12 per SF for fixed terms of at least 15 years.

The remaining buildings available within the first phase at South West Business Park consist of two units of 60K SF and 20K SF respectively, plus a single HQ-style building of 162K SF, including 15K SF of office space, alongside a 147K SF warehouse.

If Dublin is to bolster supply then planning needs to prioritise finding locations and zoning for distribution and manufacturing according to Harvey’s McHugh, who is concerned that this is acting as a roadblock to development.

“The unfathomable decision of South Dublin County Council not to zone more land along the Naas Road corridor for traditional industrial and logistics means there will be few options in south Dublin going forward. Traditionally, this would account for roughly half the industrial and logistics development in Dublin in any given year,” he said.

“Right now any new development space seems to be earmarked for data centres or pharmaceuticals companies and we are effectively seeing little new land being made available for logistics. If the authorities want more logistics moved to the southern corridor, then we need more zoning.”