Zoning Constraints And Slow Pipeline Sees Industrial Leasing Slow

The industrial and logistics sector has been among Ireland’s best-performing asset classes over recent years, with strong demand and scarce availability driving consistent rental growth and historically low vacancy levels.

Yet at the start of the year, leasing transactions in the sector were less than a quarter of the five-year average, and with many developers sitting on their construction pipelines and zoning problems persisting, a buoyant sector seems to have stalled, judging by the first-quarter transactional market.

The market now faces a challenge to develop space for a diverse occupier market at an affordable cost without relying on online retail to prop up demand.

“The recent growth of the e-commerce sector has experienced a marginal deceleration over the past year,” Colliers Director and Head of Research Kate Ryan said. “Nevertheless, the announcement of a deal for a 280K SF storage and distribution facility for Sports Direct at Dublin Airport Logistics Park underscores continued demand.

“More recently, JYSK announced plans to establish a circa 500K SF distribution centre in Ireland and is seeking a development partner.”

With a total of just 160K SF leased across 14 transactions in the first quarter, according to the latest report from Colliers, deals were significantly below the five-year Q1 average of approximately 694K SF. By contrast, 920K SF was leased in Q1 2023, with online retail demand helping fuel growth.

“There is a connection between both the logistics and retail markets. They’re no longer two separate markets, which is continuing to push demand for logistics facilities,” Cushman & Wakefield Associate Director of Industrial and Logistics Nicola Gilleece said.

“Lots of companies have moved towards nearshoring to improve delivery times and offer quicker fulfilment to their bricks-and-mortar stores. We have also seen retailers moving towards having their own distribution hubs. However, there is a continued lack of available industrial-zoned lands for industrial development.”

BNP Paribas Real Estate Director and Head of Research John McCartney said that despite its prominence, the role of online retail in the overall market may have been overstated.

“Although it is widely perceived to be the case, I’m not sure the growth of online was ever really the biggest driver of demand for warehousing,” McCartney said. “In my opinion, the main influences have been rapid population growth, which has increased the amount of goods flowing through supply chains because of people’s needs, and Brexit, which has led to supply chain reconfigurations.”

In a positive indicator for real estate investors, Ryan pointed to signs of market diversification, with several new entities in the construction, retail, medical, marketing and events, food service and car rental sectors entering the market.

Key deals in Q1 include building solutions provider Laydex leasing more than 45K SF at John F. Kennedy Park in Dublin 12 and UK construction materials supplier Hermeq taking 17K SF at Ballyboggan Industrial Estate in County Dublin.

Colliers reported an ongoing preference for Dublin north and south-west locations, with Dublin south-west accounting for 52% of the overall takeup in Q1. Dublin north accounted for 27%, followed by Dublin north-west with 15%, while Dublin south represented just 6%.

“Generally speaking, global and bigger occupiers focus on pre-let agreements and build-to-suit developments, which are typically associated with larger units exceeding 50K SF,” Ryan said. “The market also features several smaller secondhand or speculatively built units, usually suitable for smaller tenants.”

Secondhand logistics units along key transportation routes such as the M50, M2 and N7 corridors are gaining traction due to their strategic locations and the growing emphasis on sustainability, Ryan said. The renovation and retrofitting of these units play an essential role in meeting evolving environmental standards, and these often achieve even more than prime rents due to a lack of availability.

Gilleece agreed but warned of a lack of suitably zoned land in the Greater Dublin Area.

“Large banks are held by a small pool of developers, with some industrial lands inside the M50 being earmarked for future residential development,” she said. “It’s thought that such trends will put continued pressure on the supply of industrial land over the short to medium term, which will either result in developments being pushed further down the N7 corridor into Kildare or further into the north Dublin and Meath areas.”

Retrofitting older assets is becoming increasingly key for staying competitive, she said, citing M7 Real Estate as an example after it purchased The Cookstown Collection in Tallaght in 2021, representing approximately 150K SF of Grade C stock.

“They have spent significant time and capex refurbing the entire estate, leasing out to a mix of industrial occupiers while achieving significantly high rents across this scheme and their portfolio in general,” she said. “However, not all building owners have the financial resources to do this, which can hinder these necessary upgrades.”

While zoning constraints continue, new space is in the pipeline. Approximately 1.3M SF of new logistics space is under construction, with particularly strong activity in Dublin north and north-west, where Iput has permission to build 12 additional units at Nexus Logistics Park, bringing the overall scheme to 2.5M SF across 17 units.

Regionally, recently approved developments include circa 650K SF for timber frame manufacturing in Kildare by NUA Manufacturing and Glenveagh and 280K SF of warehousing in Mitchelstown, County Cork, by Sandymark/Jordanstown Properties. Primeline Group recently opened a 360K SF distribution hub in Ashbourne, County Meath.

However, Ryan doesn’t anticipate a huge swathe of new space in the pipeline even though there is a large amount of space with permission granted around Dublin.

“The number of developers active in this space remains relatively low, and they are unlikely to want to flood the market with new speculative space, particularly given wider economic challenges and higher construction costs,” she said.

“Most large deals are now being completed on a design-and-build basis. Designing fit-for-purpose units allows the developer to de-risk the new unit through having a lease agreement in place while also designing it to the specification required by the occupier. Supply constraints are driving rental growth, but I wouldn’t say they are necessarily holding the market back.”

To that end, prime industrial and logistics rents are now €13 per SF, representing an 8% increase compared with the same period in 2023. Further growth in prime rents is expected this year, and due to limited availability around the M50, smaller and secondhand units are approaching €18 per SF in certain cases. 

Despite a slight uptick in the vacancy rate, availability remains just below 2% and prime yields are 5%, while capital values for industrial and logistics assets have remained relatively stable, especially for those focusing on sustainability improvements.

“Take Phase 2 Vantage Business Park as an example,” Gilleece said. “This is Ireland’s first multi-unit mass timber frame logistics development and will be built to LEED Gold standard. Switching to timber frame has immediately reduced the embodied carbon emissions by up to 75% across the scheme. Occupiers are now looking for that good occupier experience while combining form with function.”

Occupiers will take low-carbon buildings by preference where they are available and affordable, McCartney said, “but there is limited stock of this type of product, and not all occupiers will pay a premium.”

“The majority of occupiers are seeking less than 10K SF, and city fringe locations with good access to Dublin Port and the arterial road network are in demand,” he said. “In a small city like Dublin, dedicated last-mile facilities are probably not a major requirement.”

Another trend that might develop over the next few quarters has come from left field, according to Ryan, with the use of older industrial space for emergency accommodation emerging as a profitable market.

“An increased number of inquiries have been made regarding the conversion of industrial spaces into emergency accommodation facilities,” Ryan said. “Despite the possibility that this could be a temporary trend, several entities are expressing interest.”