This article is sponsored by Logistics Capital Partners.
Logistics Capital Partners raised the bar on ESG performance last Fall when it completed the first large-scale carbon neutral logistics warehouse in Europe. LCP immediately sold the 1.75 million-square-foot building at Cividate al Piano near Milan to Midas International Asset Management and Hana Financial Investors for nearly €200 million, marking Italy’s largest ever single warehouse transaction and comparable core pricing.
The development also reflects the growing importance attached to embodied carbon as well as operational energy efficiency in new-build facilities. Co-founders James Markby and Kristof Verstraeten discuss the significance of the scheme on the industry’s path to net zero.
ESG is high on the real estate agenda generally, but what is the driving force in logistics in particular?
James Markby: The drive in the sector is linked to the strong investment boom for logistics. We have a great performing asset class so, in theory, there is capacity to invest further into green and more energy-efficient and carbon footprint-reducing features. We have the largest building footprints and roof spaces to utilize, in particular solar panels and power generation.
Apart from tight urban infill locations, we typically have lower site and building densities that allow for features such as ground source heat wells, and additional planting and biodiversity contributions over a greater area. Of all the sectors, we believe there is the biggest opportunity to make the biggest gains in logistics.
What set LCP on its course to carbon neutrality at Cividate al Piano?
JM: What started to get us excited about what we could do, beyond a decent BREEAM rating, was our previous development, which was 1.8 million square feet across two adjoining buildings for Kering, the luxury global retailer brand, in Trecate, west of Milan. The project was not just driven by the landlord and not just by the occupier – but in collaboration. We extended the design of that building to incorporate a 12 megawatt peak solar installation, the maximum possible on this roof; that hasn’t been a typical feature of logistics beyond minimum local requirements under legislation.
It does, however, introduce extra complexity regarding who’s then responsible for which parts of the roof, who pays for what and who gets the benefits of what’s produced. That was a process we were able to get into with Kering.
Kristof Verstraeten: This was a large multinational group investing, together with us, in a new global distribution center. It was an opportunity to not only make the building itself energy neutral, but also to make it energy positive and to contribute to their wider range of real estate, which involves shops and offices where the technical constraints are more complicated. That was where we started seeing real leverage in the logistics sector.
JM: It is a fantastic thing to have buildings produce more power from clean energy than they consume. If you coupled that with a shift in operations, using gas or electric-powered or hybrid vehicles, then you’re shifting some of the older, negative dynamics of the sector toward making a positive environmental and an economic impact. We would hope this starts to move the perception of logistics to a more positive place, where it can now play a more positive role in urban planning, and doing its part as we move toward more sustainable business operations and local communities.
What issues did you face in addressing embodied carbon as much as operational efficiency at Cividate al Piano?
JM: We started looking at how much carbon was emitted to get the building constructed in the first place – the embodied carbon – and, from our assessment of logistics, this is typically the bigger producer of carbon than the operations within the lifecycle of the building. But there is still a lot of confusion around what is ‘carbon neutral,’ what is ‘net zero,’ and areas such as: which part of the building category in the lifecycle assessment holds what carbon – embodied or operational?
As the developer, we are only able to control the embodied carbon assessment up to the point of practical completion, and then it’s a question of what standards you hold it up to and who undertakes the assessment. On this project, we were not able to get any better accreditation than carbon neutral at the point of practical completion. Because it was a bespoke pre-let building, with existing design criteria, we didn’t have the full opportunity to redesign and mitigate areas of carbon content within the design.
The best we could do was volunteer to do the assessment and then make a suitably well researched and regarded carbon offset that was then also independently verified and accredited.
Why was the sub-4 percent yield sale price important in the context of carbon neutrality?
JM: There are other carbon neutral buildings but they’re all much smaller and, importantly, none of them have been traded. Therefore, there hasn’t been a commercial process and transparency over how you can link that [carbon neutrality] to value. This is a near €200 million building following a full-scale CBRE marketing process and with global institutional capital bidding.
If a private partnership company like us is able to demonstrate this link clearly and credibly, then this is a challenge to the rest of the industry and the institutional capital universe. Perhaps there’s actually more that they could be doing more immediately, that is within their capacity, than just having stated objectives to move to carbon neutrality in buildings and ratings in five or 10 years’ time.
Is there an issue around future-proofing new-build logistics in ESG terms?
KV: There is demand today, and the only thing you can do is try to be as advanced as you can reasonably be on ESG topics so that you’re in the front or in the top 20 percent of what gets developed. If buildings in 10 years are going to be even more ESG-friendly, then that shouldn’t stop us from going full steam ahead today. Obsolescence in real estate is usually much more driven by operational usage and so, on a pure ESG basis, I think the risk is fairly limited.
Is the prospect of greater regulation around ESG a help or a hindrance?
JM: Without regulation, you’re effectively marking your own homework, which for the environmental agenda and industry can’t be an ideal position. We wanted to be able to avoid any such accusations and took the extra step to have the project externally audited by a recognized third party.
As developers, we are creating new products and therefore can incorporate new standards, feasibility assessments and environmental features into the construction process, materials and operation. But the additional step of external audit and accreditation is critical to move the whole industry toward higher standards.
We have a massive advantage to be able to push that agenda and adhere to those standards. It’s one of the reasons why companies like us that are building the next generation of buildings should be much more open to increased regulation in whatever form that comes, because if we can have something that’s less voluntary in terms of what we need to incorporate, then it keeps a level playing field for all the competitors, who are still often required to make primarily cost-based proposals to win occupiers’ attention.
What are the other main challenges going forward?
KV: The next step will be carbon net-zero buildings, which effectively means the real embodied carbon itself gets reduced substantially through design and building material changes, so that whatever is left and needs to be off set – with a carbon off setting project – is a much smaller number. That next step is still a huge challenge because logistics buildings typically have lots of steel and concrete in them. Carbon offsets in themselves will probably get materially more expensive in the future, so you’ll have to fix the issues at the source, and there’s a whole series of technical challenges to go through.
The whole industry – tenants, developers, construction companies and also authorities handing out building permits – will need to work together over the next few years to start shifting the typical standard specification of a logistics warehouse to something that simply contains much less carbon. We’re not there yet.
JM: We’re undertaking carbon assessments on our speculative buildings at a much earlier stage so that we have the control and flexibility to design out and mitigate carbon content. That means we have a better chance of achieving net zero on the embodied carbon status accreditation of these buildings.
KV: The pandemic and other supply chain issues are making it difficult to get basic materials, let alone fancier materials that are even harder to get. It has been a perfect storm for us over the past 18 to 24 months.
The point here is not to get caught in some short-term squeeze and lose sight of the long-term ESG objectives. In the long run, higher construction and land costs will translate into higher and better specifications of buildings, which will filter through as higher rents, especially in logistics.
There is going to be undersupply for the next five to 10 years. A lot of logistics will still have to be built to accommodate continued e-commerce and changes in retailing and supply chains. We’re in a market that’s driven by new construction, and that is why the ESG upside potential in logistics is so significant.
How LCP achieved carbon-neutral status
For LCP’s latest scheme, independent assessor Construction Carbon verified the design and construction in accordance with the RICS Professional Statement “Whole Life Carbon Assessment for Built Environment” (2017).
This process calculated the embodied carbon emissions for the full lifecycle of the building. The upfront embodied carbon emissions for the materials and construction were then determined and offset via The Gold Standard, one of the recognized registries for acquiring offsets. The project also has a BREEAM ‘excellent’ rating. Importantly, Construction Carbon also independently verified the assessment process and the offset, and hold the carbon accreditation so that it lives with the building and the offset cannot be traded on.
“Everything we’ve done has been on a voluntary basis,” says Markby. “There are different standards, and knowing which standards to adhere to is a body of work in itself. We felt the RICS is at the highest end for the industry and globally recognized, and is leading the dialogue when it comes to future regulation. How European governments then adopt those standards and guidance statements that have been produced by recognized industry bodies, like the RICS, will be critical part of the regulation that could and should be coming.”