As large occupiers and real estate owners aspire to have their properties one day reach net-zero emissions, they should look beyond their office space and buildings as places to reduce their carbon footprints.
They need to focus on their distribution and fulfillment centers, because the opportunity exists to make their industrial buildings green properties and to greatly reduce carbon emissions across their logistics networks, according to a report from Savills' Mark Russo, the brokerage's Rutherford, New Jersey-based director and head of industrial research for North America.
Savills released the report in a blog post from Russo this week in conjunction with Earth Day.
Companies that adopt or expand their commitments to environmental, social and governance, or ESG, goals help fuel demand for green logistics properties, Russo said.
"Both occupiers and owners are receiving pressure from both ends — meaning environmentally-conscious consumers and capital investors," he said in an email. "The first movers — Amazon and Prologis — are already way ahead on this, and others will likely follow suit."
Last month at an industry conference in San Diego, Henrik Holland, senior vice president and global head of electric vehicle charging at Prologis, said what the logistics property giant is "looking to do is spend more time with our customers and help them prepare for the transition to near-zero emissions."
Prologis is considering creating systems needed to power electric truck fleets that are expected to be used at its properties in coming years.
"Electric trucks will be a game-changer since transportation is a much larger contributor to carbon emissions than building," Russo said. "Currently, however, they represent a tiny fraction of vehicles on the road. And even with clean transportation, there is still something to be said for optimizing your distribution network to reduce the mileage that goods need to travel."
The potential of green warehousing to help lower emissions in the United States is large, Russo said in his report, because the U.S. has more than 16 billion square feet of industrial property, and another 750 million square feet is on the way. Buildings account for 13% of the logistics industry's carbon emissions and transportation represents the remaining 87%, Russo said, citing World Economic Forum data.
"Occupying buildings that are designed to be environmentally friendly is one action firms can take to transition to net zero, which means cutting greenhouse gas emissions to as close to zero as possible," Russo said.
One concrete way to make an impact is for developers of industrial space to embrace Leadership in Energy and Environmental Design, or LEED, building standards and certification, Russo said. He estimated that only 1 in 28 industrial properties of more than 100,000 square feet that have been built since 2000 is LEED certified.
Of course, while office developers and owners began adopting LEED building standards in the mid-1990s, it really wasn't a viable option for their industrial counterparts until nine years ago.
"Historically, there were no specific standards for industrial buildings until LEED v4 went into effect in late 2013," he said. "So, the sector got a late start and since then the challenge has been extremely low availability of space."
With lack of supply a big issue, developers needed to add new product as quickly as possible. And that often means there's not enough lead time to really consider making the buildings as green as possible, Russo said.
"Beggars can’t be choosers as they say, and occupiers are challenged to find functional space, period, in top markets," he said. "Adding additional green space requirements can be a nonstarter. In the current moment, functional and well-located space does not stay on the market long, regardless of its LEED status."
But investing the money and time to get LEED certification does pay off, according to Russo's report. On average, LEED-certified logistics properties command a rent premium of 38%, he said. Also, the vacancy rate for LEED-certified industrial buildings is 1.9%, which shows how strong demand is, he said.
Approximately 30% of LEED-certified industrial properties are located near city centers in the 30 largest U.S. metro areas, Russo said. These properties offer the greatest potential to reduce carbon emissions for logistics operations, partly because of their location in densely populated areas close to consumers who order goods online, he said.
"These are typically state-of-the-art new construction facilities which command a premium in the market," Russo said. "They also offer costs savings to the tenant in the form of lower utility bills."