There's a logic to the boom in logistics and distribution markets - take your pick from pandemics, online retailing, Brexit and economic recovery

Ireland's bustling industrial sector 'sheds' its dowdy shed image as property market's best performer

Wed, 12 Jan, 2022 - 18:00

Edward Hanfin of Lisney, Cork, reports

The industrial, warehouse and logistics market had a strong year, much better than what we might have expected at the start of 2021. The industrial market was the least affected property sector by the pandemic and it benefitted from changing occupier requirements due to Brexit, pandemic related demand and strong online retail sales. Supply chain reconfiguration has also contributed to demand. Some industrial occupiers now have higher stock levels in an effort to mitigate supply chain delays and in some cases this means that they have required more warehouse space.

Strong occupier demand in conjunction with extremely low vacancy rates have resulted in accelerated rental growth and increased new development activity. The vacancy rate for industrial property in the Cork metropolitan area peaked at around 20% in 2012 and there was a gradual reduction to 12% by Q4 2018. Since then the vacancy rate has fallen sharply year on year as existing stock was taken up and we estimate a current vacancy rate in the region of 2.6%.

While developers are active at Harbour Gate Business Park and Blarney Business Park many of the new warehouse buildings are being pre-let in advance of completion and there is a persistent shortage of available buildings in the second-hand market. The estimated take-up for the year is region 23,000 sq m and it could have been more if not for the tight supply levels. There were a number of transactions of new buildings at Blarney Business Park including lettings to Park Place Technologies (approx. 2,225 sq m) and to DHL (approx. 4,650 sq m).

There has been very little new speculative warehouse development in Cork over the last ten years and much of the existing stock is now inadequate for modern warehouse and logistics requirements. New warehouse buildings are bigger, higher and more sustainable as new builds must meet minimum standards under NZEB (nearly zero energy building) regulations. Developers are having to manage the increased construction costs associated with providing higher specification buildings. In addition, there has been significant inflation in construction costs during 2021.

A recent Linesight Report on commodity prices highlighted that steel prices escalated rapidly in the early part of the year and increased by up to 35% with aluminium costs up 55%. This translates into significant real construction cost increases for industrial buildings as they are constructed on steel frames with metal clad walls and roofs. Indications are that inflation levels are likely to level off and it is hoped that there will be more stability in 2022.

Over 400,000 sq ft is underway at Harbour Gate and Watergrasshill Business Parks

Lisney launched two new high bay warehouse developments during the year which combined will deliver just over 37,000 sq m (400,000 sq ft) of much needed new industrial accommodation. Harbour Gate Business Park in Little Island will have four new warehouse buildings ranging in size from 1,600 sq m up to 11,740 sq m. These are next generation state-of-the-art warehouse units and they will be the highest in Cork with internal eaves heights of 15m. They are sustainable buildings with an A-rated BER. There is strong occupier interest, one of the units is pre-let and another is at an advanced stage of negotiation.

The first building, Unit 2, comprising 3,160 sq m will be completed in February 2022. Watergrasshill Business Park situated approx. 20km north of Cork city just off the M8 has planning permission for four detached high bay warehouse buildings ranging in size from 1,955 sq m up to 6,733 sq m. Eaves height ranges from 10m up to 15m. These buildings will be constructed on the last remaining sites in the existing Watergrasshill Business Park development. Site works have commenced with the first building to be delivered by the end of 2022.

Progressive Commercial Construction Ltd have applied for planning permission for a 23,000 sq m new warehouse development at Wallingstown, Little Island on the former Corden Pharmachem site. These new developments are needed to satisfy occupier demands for more modern warehouse buildings.

Prime headline rents have risen to €102psm (€9.50psf) for new high bay warehouse accommodation.

Since the end of 2012 industrial rents have more than doubled in line with growing demand and falling supply. As rents have risen prime yields have fallen and have converged with office yields which is a new phenomenon. It was reported in November that German investor Union Investment had agreed to acquire Primark’s new distribution hub in Newbridge, Co Kildare for around €129m equating to a yield of sub 4%. We have not seen industrial yields as keen as that in the Cork market yet as there have been no investment sale transactions of new prime buildings. Recent investment sales in Cork of existing industrial stock have typically been at yields of region 6%.

There is a strong appetite for industrial property both from occupiers and investors and this looks likely to continue as new development activity increases and higher quality industrial stock becomes available in the Cork market. Prime headline rents for new buildings are back to the levels achieved in the mid 2000’s although buildings now are built to a much higher specification. Capital values are below the peak levels achieved at the height of the last cycle with further upward adjustment likely due to sound fundamentals and as investors continue to target the industrial market.