Leasing logistics in the UK

The logistics sector has long been a key part of our economy, ensuring that businesses and shoppers get what they need, when they need it. In recent years, we have seen the sector adapt to changes in demand, with the rise of last-mile logistics, particularly during the pandemic, and the increase in co-location spaces.

Asset types

First, what do we mean by logistics assets? The sector covers a range of property types, from traditional logistics assets such as warehouses and big “sheds”, spanning distribution centres and cold-storage warehouses, to smaller last-mile hub facilities located near urban centres which facilitate quick delivery of goods. It also includes co-location spaces, which combine logistics and industrial functions alongside other uses, such as residential.

Development considerations

Clearly, the requirements of a logistics site depend on the asset in question (a warehouse is likely to need much more space than a last-mile hub). However, there are some key points to consider:

• Location: assets must be located close to a transport network, whether a railway line, strategic road or waterway. This network must be easily accessible from the property.
• Access: often 24/7 access is required, with vehicles carrying goods to and from the property at all times of the day, seven days a week.
• Appearance: with warehouses getting larger and assets being constructed closer to homes, community impact and design is key.

Availability of land

The requirement for suitable land also leads to unique challenges in terms of availability. For example, land close to ports in England is limited, and spaces for last-mile hubs in cities are often constrained.

The new London Plan consultation, published last year, acknowledges that land in the capital is at a premium and talks of the potential to reassess industrial land designations. This could include, for example, releasing out-of-town sites which are designated as industrial land but which might be better suited, due to proximity to public transport, to being a retail park. New industrial designations could also be created in parts of green- or grey-belt land, which is often situated on the outskirts of towns near good transport links.

Use classes

When developing a logistics space, it is worth considering the applicable use class. Class B8 relates to storage and distribution and is the traditional class for logistics warehouses. Local planning authorities often link this use class to considerations, including conditions relating to noise and traffic impacts, as well as continuous hours of use.

The introduction of Use Class E, which includes E(g)(iii), was designed to invigorate the high street and could be particularly helpful for those co-located spaces on high streets or near homes. However, these spaces are potentially more likely to come with restrictions set by local planning authorities, including constraints on hours, noise and vehicle movements, to protect the amenity of nearby uses.

Leasing logistics space

While there is plenty of overlap with other asset classes, there are elements more specific to logistics deals, whether in pre-contract due diligence or in the deal documents. Carrying out appropriate checks is crucial in most transactions, but where logistics assets are large premises with long-term leases and high rent, diligence is key.

Access around the clock

A defining feature of logistics space is the ability to move goods efficiently. Occupiers are likely to have a greater requirement for heavy goods vehicles and a higher volume of traffic. It is crucial that access is properly dealt with and there are no roadblocks in the legals. From a diligence perspective, that could mean ensuring access to the highway across private roads, surveying to confirm routes are suitable for the vehicle size, or checking there are no traffic restrictions or charges that will raise transport costs. In a lease, an occupier might aim for unrestricted rights across common parts 24/7 and 365.

Who is responsible for what?

Due to the nature of these units, tenants are more likely to be responsible for the whole unit, consisting of the structural demise plus outdoor areas like service yards. While this gives a tenant greater repair responsibility, it allows them to manage their operations without interruption, reducing the risk of a lorry being unable to move because another occupier is using an access way. This is also an attractive proposition for a hands-off landlord.

It’s not unique to the logistics industry for occupiers to want a building in good condition, but if taking on a whole structural demise of substantial size, a tenant should be cautious and survey diligently to ensure they are not inheriting liability for costly repairs of the structure, roof or mechanical systems.

Security vs flexibility

A key theme with logistics occupiers is a desire for autonomy. Often, occupiers are dealing with slick, expensive machinery running 24-hour operations. With this has come typically longer lease terms, allowing the tenant to invest in a tailored fit-out which can run effectively for the long term, avoiding a need to shut down and move at a significant cost.

Again, this is beneficial to landlords seeking stability in securing high rents for a long time. Looking forward, however, the trend may be changing. With technologies driving efficiency, making machinery smaller and increasing the need for the best technology, will occupiers seek flexibility to protect themselves against being locked into a space that may not keep up?

Use and occupation

Parties should carefully consider what can and cannot be done on the premises. From an occupier’s perspective, it might not work to include rights for a landlord to enter subject to usual entry safeguards (such as those in the Modern Commercial Lease). Not many tenants openly invite their landlord in, but for logistics businesses, entry for any reason, especially to carry out works, can mean a complete shutdown, which can be hugely detrimental to business. So, tenants might want to limit those entry requirements.

For a landlord, depending on the occupier’s industry and the proximity to other units, attention may need to be paid to restrictions or use requirements. The practicalities should be considered carefully, and the lease should be tailored to deal with things like noise, waste disposal or contamination risks.

Separately, thought may need to be given to the alienation provisions in the lease. A logistics occupier may have a greater need for subletting or sharing, not just to group companies as is typical in other leases, but to other service providers or subcontractors. For example, an occupier in manufacturing may intend to share space with a subcontractor who is testing products onsite, and the lease needs to allow for that to happen without lengthy consent procedures.

The ESG spotlight

ESG is no longer optional, particularly in an industry where the biggest players are under significant pressure to meet sustainability targets. Often, the more a landlord is willing to commit to, the better. Tenants, more than ever, want grade-A space which can support the newest technology cost-effectively. This also ties in to avoiding a landlord carrying out upgrades during the lease term to comply with regulation.

From a landlord’s perspective, the highest-grade sustainable spaces are ultimately the most desirable and future-proof, attracting the best-quality tenants, willing to pay the best rents.

From a planning perspective, the biodiversity net gain requirements, which require most new developments to achieve at least 10% BNG, apply to logistics spaces, and developers are using innovative ways to increase biodiversity, including incorporating green roofs and introducing ponds into their logistics sites. The requirement itself is likely to be more significant when building on green-belt locations, where the baseline BNG score is likely to be higher than that of a brownfield industrial site.

Local planning authorities are also alive to the social aspects of ESG in relation to the logistics sector, as, although jobs are created across the supply chain, the number of local jobs created per square foot is often significantly lower than that of other uses of a similar size. This being the case, the local planning authority may impose requirements in the planning agreements to help mitigate these impacts.

Looking ahead

As demand for fast, reliable services grows, so do expectations around design, sustainability and community impact. For investors, developers and occupiers, logistics real estate is not just about supporting the movement of boxes, it is about building sustainable and efficient infrastructure for the future.

An earlier version of this article appeared in Estates Gazette.

Authored by Jocelyn Crockett and Rosie Shields.