The Subplot

The Subplot | Property’s carbon COP-out, Crazy BTR returns, Blackburn

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West’s analysis editor, David Thame.

THIS WEEK

  • Carbon COP-out: can you make concrete and steel buildings sustainable?
  • Elevator pitch: your weekly rundown of what’s going up, and what’s not

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PROPERTY’S CARBON COP-OUT

Sheds are literally a massive problem

Embodied carbon is the big stumbling block hitting the property industry’s sustainability goals. The North West’s shed scene hasn’t yet cracked this super-tough net zero nut. But expect that to change this year.

Everybody wants to be a good guy, or to look like one. Yet in the wake of the COP26 climate summit, property is now realising it has a problem. While it can – with occupier co-operation – create buildings that are more-or-less operationally net zero carbon, it hasn’t made any serious progress with the huge volumes of embodied carbon involved in construction. For warehousing developers the problem is particularly stark: a structure that depends on literally acres of concrete pad supporting literally tonnes of steelwork is a mighty, and very visible monument to embodied carbon. With pressure mounting from politicians, the public and their occupier and investor clients, what do developers do?

Brownie points

The first thing most have done is to seek forgiveness by conspicuous good-works in related fields. The logic is: (whisper) “OK, my building is in itself a carbon nightmare,” (shouting) “but hey, look at my rainwater harvesting and my green transport plan!” So far it’s been a fairly successful tactic, not least because rainwater harvesting, green transport plans, solar arrays on the roof and the occasional wind turbine are all good ideas. They amount to important steps toward net zero carbon operation. None of them, however, address the problem of embodied carbon.

Distractions

The second distraction from dealing with embodied carbon has been provided by occupiers – retailers, third-party logistics operators and parcel carriers – all of whom are thinking hard about the transition to electric vehicles. Developers want to be helpful. The result is rethinking yards, upgrading power supplies, and more solar arrays on the roof. Some of the solar arrays are very helpful. Others less so, because it’s hard to sell-on the surplus from sunny days, and even harder to retain it in batteries. Both these issues will be resolved soon but… This, too, does nothing for the problem of embodied carbon.

Lipstick meets pig

The disconnect between what most developers do for operational carbon outputs, and the (lack) of effect on their embodied carbon, is beginning to feel uncomfortable. “The property industry has focused on these quantifiable, business case-able issues like onsite power generation, but left the big question of embodied carbon. If we’re talking 40 acres of concrete supporting a considerable steel frame, isn’t rooftop solar power just lipstick on a pig,” says Tim Crighton, who leads the UK retail logistics team at Cushman & Wakefield. A reminder here, in case you doubt it, that Crighton is by no means hostile to developers – he works for them.

It’s a problem

Developers like Tritax Symmetry understand the dilemma. Manchester-based director Andrew Dickman says: “It’s clear the materials we use have significant embodied carbon, and we can’t hide from that or pretend it’s not a problem we have to fix.” Off-setting of some kind is one form of mitigation, modifying specifications to be less carbon-hungry is another, but a big fix feels out of reach. “We’ve looked at using timber frames, we did the research, but the reality is buildings have to work for what occupiers want,” Dickman says. Tritax has done some ground-breaking work with DPD in Bicester on net zero carbon warehouse operations, and more will come.

Timber!

And that’s the problem. While there is a handful of examples of timber-framed warehousing, they remain outliers and, crucially, fairly small. “Engineered timber for structural frames is possible, but not widely used, because there are restrictions on the clear spans you can get with timber, and steel can span further,” says Paul Morris, Manchester-based director at Civic Engineers. “But we’re going to see steel the frontrunner for the foreseeable future, because occupiers want clear roof spans. Though you could use lower carbon concrete which has less cement, because you replace the cement with by-products from other processes. You can even get cement-free concrete.” Morris says timber frames could work but only if occupiers re-think how they use warehousing. Will they?

The perils of success

The real trouble is that while the market is booming – Knight Frank reckons 66m sq ft was let in 2021, up 27% on 2020, attracting £14.3bn investment – nobody has much incentive to do anything dramatic about embodied carbon. Today’s logistics developers are highly efficient machines for producing steel-and-concrete big box warehousing in six to nine months, big boxes which occupiers are delighted to have, and investors are extremely pleased to fund. So long as everyone is getting what they want, and they pretty much are, why mess up the system by asking about embodied carbon?

And yet

Change is coming, albeit slowly. Developers like Tritax have a keen ear for what investors want to hear, and investors want green and sustainable. That produces pressure. At the same time brand-conscious occupiers, most of whom already have increasingly serious sustainability criteria for their warehousing, will begin to lift their eyes from the day-to-day hunt for floorspace, to exert much greater influence, especially on build-to-suit units.

Disruptions

There are also some new arrivals who will disrupt the North West scene. Keep a lookout for AXA Investment Managers’ Baytree platform, which has made green warehousing a speciality. It is expected to become more active in the North West. Meanwhile local operator Tungsten, in partnership with Blackrock and others, has been thinking green in Warrington. These are not the only developer names in the frame.

Yield gap

Today, the problem of embodied carbon is in the background, not the foreground. Minds are focused instead on basic supply and demand problems of the kind crazily rising markets generate. “Maybe it’s a question of timing,” says Nathan Khanverdi, associate director at Colliers. “But it’s difficult offsetting – buying more land to plant more trees so developers can off-site on site is expensive. There’s not much yield differential on a zero carbon warehouse and if there were it would change things.” Top yields in the North West today are 3.5-3.75% and might compress to 3.25% during 2022.

Just wait

Until the current supply crisis is over, there won’t be much progress. Indeed, a shortage of supply is making the net zero carbon problem worse, forcing occupiers into older less efficient buildings. But there will come a time when embodied carbon can’t be ignored or side-lined any longer – and that time could be very soon.


The Subplot Elevator Pitch 07.12.21ELEVATOR PITCH

Going up, or going down? This week’s movers

Blackburn and open storage are going up, but stand clear of the doors, please, because the restless search for super-strong build-to-rent returns is going rapidly down.

Open Storage

Crown Oil has big plans for 44-acre Heysham business park, capitalising on proximity to the port, the power station and the budding nationally-significant hydrogen production cluster. Already 115,000 sq ft at the 350,000 sq ft scheme is under refurbishment, and there are plans for 250,000 sq ft more. But the real story could be the under-regarded open storage sector, where Heysham has lots of potential. Open storage was one of the surprise winners of 2021. Research by Carter Jonas shows exponential growth in enquires, up by more than 70% in 2020, and twice as much in 2021, as retailers, importers and wholesalers sought to smooth out the bumps in the supply chain. Investors like Royal London have begun to move in (they bought 35 acres in Stoke on Trent) joining an increasingly crowded field of private buyers attracted by super-low risks, high residual values and rising rents, which could be pushed higher if EV charging points are added.

The hunt for unreal BTR returns

High Street GRP, the Newcastle-based private rental developer, was forced into administration just before the Christmas holiday. It wasn’t a surprise. The developer behind a string of North West build-to-rent schemes including Salford’s Middlewood Plaza and St George’s Place, a controversial 750-unit scheme in Hulme had well-advertised problems: Place North West editor Sarah Townsend’s long-read from November 2020 is well worth your time. The loss of not one, but two, auditors signalled something unhappy was unfolding. The problem is that in a rising market it is all too easy to oversell to (relatively) small-time investors expecting 12% per year interest over seven years, plus potential annual bonuses. Meanwhile, the group believed its own sales pitch to the extent of borrowing (from Korea, in the case of Middlewood Plaza) such that associated companies hit the buffers. Even a super-hot market couldn’t deliver. And hot it definitely still is: yesterday’s CBRE data suggests £4.1bn invested in UK BTR in 2021, more than half in the final dizzying quarter, up 14% on 2020. Another £1.95bn is under offer today. Rising markets can be one hell of a ride. But not for everyone.

Blackburn

2022 will be a big year for Blackburn. The borough’s local plan, which will govern development up to 2037, enjoys (or endures) its last public consultation early this year, ahead of submission to government inspectors and full adoption in 2023. In the meantime, the council’s partnership with Maple Grove is beginning to produce buds, if not yet fruit, in the form of a re-think of the 2018 Blackburn town centre strategy. The seven-acre Thwaites brewery site will accommodate Morrisons supermarket, in the process opening the door to 500 homes and a five-building commercial cluster including flexible workspace in the former St John’s Church. You will search the council website in vain for any kind of detail, but apparently, that’s coming very soon. It sounds good, but if it takes the full 10 years to deliver the economic impact will be seriously blunted. Maybe something to watch.

Get in touch with David Thame: david.thame@placenorthwest.co.uk | 01544 262127

The Subplot is brought to you in association with Oppidan Life.

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