Are warehouse leases fit for the future?

posted by Tristan Wark
16 October 2020

Tristan Wark looks at recent trends in the industrial property sector, the changes that may be on the horizon, and what leases need to do to keep up.

A central theme of 2020 has been an accelerated pace of change. 

Existing trends expected to play out slowly over many years have taken hold rapidly, such as the move from workers being solely office-based to working more or even solely from home, the growth of home delivery and online retail, the spate of job losses and insolvencies – particularly affecting retail and leisure sectors – and the list goes on. 

The industrial property sector and properties occupied by those within the procurement and supply chain sector are no exception to this.

Keeping pace with change 

A chronic shortage of warehouse space is just one example of the impact of these changes. And the rising trend towards online deliveries this year will create new demand. 

Thankfully, most industrial businesses (with some obvious exceptions like those supplying restaurants, hotels and bars) have been less exposed to a slowdown from the coronavirus than other sectors, and most have been able to trade through the pandemic. 

Both mean there is likely to be less loss of demand for industrial properties compared to the retail and office sectors, and even more pressure on the shortage of available properties.

Another accelerated trend is the interest in shifting organisations to AI and automation of supply chain processes. Now added to the long list of purported benefits of AI – in addition to cost savings, efficiency and accuracy – is that robots and computers can’t catch the coronavirus.

Future-proofing leases

Some of these changes will have an impact upon leases, and may be hindered by the leases under which tenants occupy their property. Considering that some leases may have been completed over 20 years ago, or be in the strict and rigid ‘full repair and insuring’ (FRI) form required by institutional landlords, will they be able to keep up with accelerated change?

Take for example environmental concerns and improvements to buildings. UK Prime Minister Boris Johnson has already announced £350m is being made available to cut emissions in heavy industry and drive economic recovery from coronavirus, and the phrase ‘green recovery’ may take on greater emphasis in the coming months. 

For the purposes of leases, trying to anticipate and ‘future-proof’ a lease when it comes to environmental provisions isn’t easy given it’s an area that is continuously changing, as already mentioned, but also in the termination of the carbon reduction commitment (CRC) scheme in the past decade. 

Most leases are silent on environmental matters; however, a better starting point is to set out a positive obligation on both landlord and tenant to co-operate and try to improve the environmental performance of the premises and estate. This involves clearly setting out what both landlord and tenant will be obliged to do when it comes to environmental and green matters. 

Changing the terms 

Leases are often fairly rigid and narrow when it comes to what use the property can be put to. However, changes to the use and re-purposing of existing properties may become an emerging theme as we enter the post-pandemic world. 

Perhaps we could see empty retail space being re-purposed and used as logistics space. Highly populated areas or retail parks could be suitable as well and enable even faster deliveries. Larger retail parks are well located and could be used as delivery hubs. 

Dark kitchens may be another growth area as restaurants abandon the desolated high streets and focus on expanding their brand and operations from an industrial estate where rents are, for the most part, considerably cheaper than restaurant space. 

Looking further afield, perhaps we will see the serviced office trend - currently so hot in the office sector - cross over to the industrial sector. The benefits for occupiers would be vast: more flexible leases, the ability to try out different locations, simple, all-inclusive and fixed rents (where occupiers would be left with a large bill for repairing a roof which currently represents a risk to occupiers under FRI leases) to name but a few. 

Already we are starting to see trailblazers and indications of a growing movement in this direction. In a nutshell: watch this space.   

☛  Tristan Wark is a senior associate in the commercial real estate team at London law firm Goodman Derrick LLP.

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