It’s a pretty unusual market situation and one the commercial investors might consider sacrificing a right arm for – but in the world of industrial property, demand for strong ESG performing “Big Sheds” has seen rents increase and landlords screening tenants.
- The Fifth Estate’s masterclass Buildings as Batteries will feature the massive changes in industrial logistics property – in person and online on 28 August, Dexus Place.
According to new research, regulatory pressures have driven up occupiers’ and landlords’ ESG ambitions so much that low-carbon industrial sheds are now in short supply.
Landlords who own low emission/high sustainability industrial warehouses – because the majority are distribution facilities – are raising rent prices and screening tenants.
Real estate agents JLL’s annual research report, Assessing demand for low carbon warehousing in Australia, found that of the top 100 industrial occupiers, 60 companies have now flagged they have net zero carbon target dates. That’s up from 56 per cent of occupiers last year last year.
Of those, 48 companies also have pre-2030 interim or net zero carbon target dates. These companies occupy 11.5 million square metres of land, accounting for 13 per cent of the national stock.
According to the report, the driver is the staged implementation of the Australian Sustainability Reporting Standards, which will kick into effect starting in 2025, meaning companies are racing to reduce supply chain emissions, which take up 60 per cent of global carbon emissions.
The report found that despite 18 out of 20 of the largest occupiers having net zero carbon target dates, smaller organisations are less likely to have these targets, with only 40 out of the remaining 80 committing to net zero carbon targets.
However, the new standards are expected to cascade down towards small to medium enterprises over the next three years, which will pressure smaller businesses to report on Scope 1 and 2 emissions in year 1 and Scope 3 in year 2.
Notably, occupiers of industrial warehouses that published quantifiable interim targets have doubled in the past year, from 27 to 54 out of the top 100.
The report finds that companies are also becoming increasingly transparent about specifying scope 1, 2, and 3 emissions. However, most near-term targets only cover Scope 1 and 2, meaning strategies to reduce scope 3 emissions “remains rare due to measurement challenges”. Regardless, more companies are now bringing forward their dates for achieving net zero carbon, with 80 per cent of commitments targeting 2030 or earlier.
JLL’s head of strategic research in Australia, Annabel McFarlane, said, “Industrial owners and occupiers are really stepping up their game regarding reducing emissions. They understand that leveraging sustainable real estate practices and optimising the supply chain and transportation are crucial in turning their commitments into tangible results.”
The report estimates that market capitalisation of future occupancy of current net zero carbon ready assets exceeds $46 billion. It also finds that low carbon asset rent is being driven up by the supply shortage and will continue to rise leading up to 2030.
Tenants under pressure from landlords
McFarlane said that industrial landlords are looking to tenants to reduce the bulk of their scope 3 emissions, and as lease expiries approach, industrial tenants are forced to focus on supply chain sustainability and sustainability credentials of their premises.
“Many landlords are already considering tenant screening, in which they will favour tenants with lower operational carbon intensities and a willingness to collaborate on emissions reduction activities and share data,” she said.
Further supply chain emissions reduction through transport
The report also finds that company boards and chief financial officers are increasingly involved in integrating sustainability into financial strategies, with 49 out of the top 100 tenants now having transport emission reduction strategies.
In particular, nine top performers have also gone further with a specified transport emission reduction target percentage by a specified year.
On the other hand, 43 per cent of transport and logistics occupiers have net zero or interim targets, with smaller companies less likely to have published sustainability strategies.
Peter Blade, JLL’s head of industrial and logistics in Australia, said, “The topic of sustainability is at the heart of virtually every occupier engagement we have currently. Crucial climate change policies have implications for every business.
“Scope 3 supply chains are becoming increasingly relevant with net zero targets and the nexus of renewables, ‘electrify everything’ and improving building performance, so there is value to leverage.”