Warehousing Property Crunch in Ireland with Nigel Healy, Director Industrial, JLL

Patrick Daly:

Hello, this is Patrick Daly, and welcome to Interlinks. Interlinks is a program about connections, international business, supply chains, and globalization. And the effects these developments have had in our life, our work and our travel over recent times.

Patrick Daly:

Today in the show, we will be talking to Nigel Healy, Director at estate agents, Jones Lang LaSalle here in Ireland, specializing in the industrial property side of the business. For some years now in Ireland, we have been experiencing lots of challenges on the supply side in relation to warehousing property in particular for the manufacturing, distribution and logistic services sectors. And prices have been rising and lead times for the delivery of new stock have been pushed out by supply chain disruptions arising from COVID and the war in Ukraine.

Patrick Daly:

So today I hope Nigel is going to help us to make some sense of what is going on now and what we can expect in the sector over the next couple of years and beyond. So delighted to have you with us here today, Nigel, very welcome.

Nigel Healy:

Thank you for having me, delighted to be here.

Patrick Daly:

Nigel, could you tell us to kick off maybe an overview about your background and career to date. So how did you become Director at Jones Lang LaSalle on the industrial side of property?

Nigel Healy:

Oh, we’re going back a long time now, Patrick. I suppose I actually started, would you believe, life in this industry on the residential side. Going back when Moses was a young boy. I did that for a number of years. Then I moved onto the commercial side of life. Then I went to the UK for a short while. And I came back to Dublin to work at Jones Lang LaSalle in September, 1989 on the industrial side where I have lived ever since.

Patrick Daly:

Very good. So tell me about that current role then at JLL. What kind of services does JLL provide to industry? Typically who are the clients? And how are they better off after they’ve dealt with you guys?

Nigel Healy:

Well, the firm itself was established in Ireland as a wholly owned Irish partnership in 1965. So, that’s 50 something years ago. It’s obviously a full service delivery firm across all parts of the property market, not just industrial, but through the retail, offices, capital markets and so forth.

Nigel Healy:

In our particular field of it, we’ve a small but completely dedicated team of five people who do nothing but everything around the logistics there. So that would include the standard transactional stuff you’d see in terms of sales, leasing, acquisition advice and so forth. And unusual, like some of the other firms, we do a lot of landlord and tenant work, lease advisory stuff, lease renewals, forward funding and all that type of thing. So, once it’s a shed, we do everything relating to it, short of actually building it.

Patrick Daly:

Okay. So as I said in the intro, for a few years now, we’ve had this shortage of warehousing space in Ireland, showing up with manufacturers, with distributors and logistics service providers, so all across the board. So what are the contributing causes and factors involved here that you can see?

Nigel Healy:

I think there’s a number. The one that jumps out to mind, I suppose, is if we go back to 2006 and ’07, at that stage, there were about 35 individual developers of industrial property in the greater Dublin region. Some big, some medium, some small. And there’s now about seven or eight. Most of those are not what I would call indigenous industrial. I mean, they’re bigger firms or they’d be Irish spinoffs of bigger firms. Although there will be some domestic guys.

Nigel Healy:

So as a result, the industry really hasn’t had the capacity to churn out vast numbers of industrial buildings. Equally and traditionally, developers had tended to build one or two units at a time. When they finished that, then go on the next one. So they drip fed the market very unlike, for example, the housing sector where very large schemes are built on that. The industrial sector is much smaller in terms of developer numbers, and obviously supply is controlled accordingly.

Nigel Healy:

Equally our funding model has changed. So again, you go back to the heady days of the Celtic tiger and development funding was readily available. That’s now not the case. You can’t walk into a high street bank and borrow whatever it is to build developments, it’s just not happening like that anymore. So there are, again, we have foreign based funds coming in, providing some of that funding.

Nigel Healy:

Equally we’re doing things like, when we have our permission, we’ll almost simultaneously line up the tenant and the funder at the same time for the developers. There’s almost three transactions happening at that one time in order to get one. So, that again takes a bit of time. It’s completely different to where it was. And does slow if you like the capacity to turn over the stock as quickly.

Nigel Healy:

There’s no doubt, certainly planning is an issue. It seems to be much slower. And where you have a market that doesn’t have a lot of standing product, the ability to create the product, I mean, it takes a period of time to build a building. And if you’re having to spend 12 months going through a planning process, then suddenly it’s 24 months before a building is available for occupation.

Nigel Healy:

So between the reduction in the number of developers, what appears to be a slowing down of the planning process, and a different funding model, it’s just become a different world to where it was seven/eight/nine years ago.

Patrick Daly:

So how then are the users of warehouse space, manufacturers and distributors, logistic service providers, how are they actually coping? Because our economy, since the financial crash back in, what, 2008 or so, the economy recovered quite strongly from about 2014. And then we had the milk quotas were taken away, and then we had Brexit. Then we had COVID and now we have the war. And all of that seems to be contributing towards more emphasis on security and safety, which means normally holding more inventory and having more warehouses. So how have they all coped in this period over the last number of years?

Nigel Healy:

With difficulty I think in reality. I think you’re right when you say that holding more inventory has become a thing. Certainly that would translate as we would see into requirements for larger warehouses, simply because they’re holding more stock. So we have noticed the trend towards larger warehouses has become more prevalent.

Nigel Healy:

I mean, again, going back to the mid noughties, if we got a requirement for a hundred plus thousand square feet, if we got two of them in a month, you’d be getting excited. There’s now nearly two a week. And in fact, you can see a lot of development around the place heading in that direction.

Nigel Healy:

I think the manufacturers are slightly different, Patrick, insofar as they tend to be larger lead in times. When you’re constructing a manufacturing facility, it’s a bigger asset. I think it’s very obvious within the logistics and the warehousing sector, that it has become a challenge.

Nigel Healy:

And certainly for occupiers coming from outside of the country, there is a perception that, well, look, product can be easily found, and I can set up my warehouse of 20/30/40,000 square feet very quickly. And they’re quite surprised when the availability of that stock is virtually zero.

Nigel Healy:

So it is a huge challenge. And equally try to address it through the 3PL route has been a problem because the 3PLs don’t have the capacity either. So yeah, it’s absolutely a difficulty.

Patrick Daly:

So, is it becoming a problem for the likes of the IDA trying to get people in here for foreign direct investment, is it becoming an issue?

Nigel Healy:

Look, I suppose the IDA will probably answer that better. But my sense of it is, and that’s why I differentiate between the manufacturer and the logistics, they’re swimming in the manufacturing space. And their brief, and they’re particularly good at it, is in terms of directing that degree of investment in probably not necessarily the markets that we will be operating in. And typically they’re bigger scale projects which require in many instances specialty construction.

Nigel Healy:

But where they are looking to adapt existing buildings, they will struggle, and they are going to struggle. And it’s the whole speed of, I mean, you can remember back in the days of the advanced factory, that’s certainly a thing of the past and would’ve been able to address those matters.

Patrick Daly:

So the confluence of all of these factors, and now the supply chain challenges and extended lead times and inflation, what’s happening with prices in terms of building and in terms of renting warehousing facilities?

Nigel Healy:

Well, construction costs, my clients are telling me, are accelerating exponentially. We have seen week on week increases in steel costs, which feed into cladding and so forth. Much longer lead in times in terms of steel. And a lot of these are obviously built with steel. So it is a problem to the extent that, and if you go back to my earlier comments regarding a slowness of planning, if you agree commercial terms to lease a particular facility, and it becomes a subject to planning deal, clearly that planning process is long. The construction process is long. But the contractor can’t order the steel work and get price certainty with a six or a 12 month lead in on the planning. And that then is resulting in many contractors either not being prepared to stand over prices for only a couple of weeks. And that gives greater uncertainty to the occupier market, which naturally means we’re going to be less competitive internationally.

Patrick Daly:

Yeah. In fact, I had a conversation today with somebody about, not so much the warehouse building, but some equipment to go inside the building actually, automated equipment. But the structural part of that, the racking and shelving. And literally saying, when I give you a price today, that’s today’s price. If you ask me tomorrow, it’s a different price. Next week, it’s a different price. Whereas we used to have 90 day validity or whatever on racking and shelving and so on. So, it’s got to that point where it’s almost …

Nigel Healy:

Yeah, it’s a huge challenge. And there isn’t an easy fix. And the other side of the coin of course is how does that impact on rents? But I think rents, they’ve certainly grown, but they’re not quite back to the levels they were in 2006. And I know I reference 2006 regularly, but I think that’s a benchmark in where we were and where we felt and where we’re going to. So, we’re getting there. We’re not quite there.

Nigel Healy:

Construction costs have obviously become considerably more expensive. But fortunately, what hasn’t moved is land values. I mean, land values in certain instances are still probably only a third of what they were. And that’s the one thing that won’t move. Obviously if your construction costs move and your rents aren’t moving at the same pace, the raw land is going to have to remain at a low level.

Nigel Healy:

I think the relatively benign interest rate environment has also helped. That may come under some pressure. But certainly it’s an uncertain time and a difficult time. And I can certainly understand why contractors won’t and can’t stand over prices indefinitely.

Patrick Daly:

You mentioned earlier some of the changes that are happening, that the specifications are coming through for bigger facilities than in times past. So now hundred thousand square foot plus is fairly common. Whereas in the past it was quite rare. So apart from say the size, how else have requirements been changing on the part of occupiers in terms of location, scale, features, quality and so on?

Nigel Healy:

Well, taking quality and features, I suppose, first, I mean, it comes as no surprise that the big one is all on ESG side. Occupiers are now very focused on all things environmental as should be. Obviously so too are investors and investor funds. A lot of investors will say that unless you tick certain boxes around the sustainability sphere, they won’t touch the product.

Nigel Healy:

And all of that has been driven obviously in fairness by regulation, we’ve [inaudible 00:13:27] regulations. And certainly the quality of the buildings now would be far better than the quality of them 10 years ago. No doubt. And I’ve no doubt that the quality of Irish buildings will hold up very well when benchmarked with anything else. So, that’s one very noticeable feature of the market. And it’s here to stay.

Nigel Healy:

I mean, you’ll consistently see things like rainwater harvesting, no fossil fuel heating and stuff like that going into buildings. And that’s where that particular one is. So, that’s a big factor. I think you asked me what other changes were there in the marketplace.

Patrick Daly:

What about heights?

Nigel Healy:

Well, look, height and location. Yeah. Yeah. Look, the buildings have got taller. But the issue when you’re building them speculatively is how high do you go? You’ll be more of an expert. But obviously there comes a tipping point where the cost of the materials handling equipment over a certain optimum level becomes exponentially more expensive.

Nigel Healy:

So most developers will be building them to a standard 12 meter height. With the isolated one above that. But it becomes more costly because you have greater floor tolerances, you have more steel, you have more cladding and so forth. But your rent doesn’t move. So there’s obviously a point at which you’ve got to stop.

Nigel Healy:

Location wise, traditionally we would’ve been looking at southwest of the city, north of the city. I think southwest of the city, we’re seeing less available land. I think we’re probably going to see a little bit more pressure and growth in the Naas area. Because if you think a development is right up to the county boundary in Dublin, and there’s not a vast amount of additional zoned land that’s readily available in the marketplace, so your occupier has a choice, north side or further down the Naas road.

Nigel Healy:

And I can certainly see the area of Naas, Newbridge growing. There’s been a couple of big transactions announced recently which I think support that. North side of the city, there’s still a fair chunk of land available, which is well positioned around all the key infrastructural pieces, M50, airport, port, tunnel. So I think there will be sufficient volume of land available in the north of the city to cater for requirements going forward.

Speaker 3:

93.9 Dublin South FM.

Patrick Daly:

The developers are picky about where they want to put these things, isn’t that right? I remember we were involved with some projects that were outside the main Dublin or Cork, and they were doubtful about developing in some other places.

Nigel Healy:

Yes, I think certainly you mentioned Cork, I mean, going back 24 months ago, 36 months ago, investors might have been a bit shy about Cork. But Cork is suffering the same constraint on supply issues that arise in Dublin. And certainly I’ve noticed a willingness on behalf of more and more investors to look at Cork as a growing market.

Nigel Healy:

It equally has a total absence of standing product. And I know certainly I have a number of client requirements in the corporation that just can’t be fulfilled outside of the design and build approach. So there’s the same issues.

Nigel Healy:

The whole Limerick/Shannon area, probably not too far behind. Galway is less of a market. But those locations are, they are locations that have demand, but again can’t be satisfied.

Patrick Daly:

I know it’s unfair to ask people to predict the future, but it doesn’t stop me asking. Although, I guess, if we’re talking about the next 12 to 24 months, it’s really probably not a prediction because of the lead times that are involved here. I think you can probably see what really is going to happen over the next 12 to 24 months. So what do you think in terms of availability and costs, what’s already baked in right now?

Nigel Healy:

Yeah, I think it’s clear, over the next 12, 24 months, Patrick, we’re going to struggle with supply for the reasons you’ve articulated. I don’t think there’s an easy solution.

Nigel Healy:

I think to a certain degree with all that’s going along in the world at the moment, there is a bit of pause for thought. So, whether the day to day demand would be executed on as quickly is a debatable point.

Nigel Healy:

We simply can’t create the product, so that fixes what we have. I think we’ve got to find a way to get through planning a little bit more quickly. No one is for a moment suggesting there should be any compromises in the quality of planning. It’s just the speed with which it’s been turned around is the issue. And that then causes problems around growth of businesses and so forth.

Patrick Daly:

And are refurbs or lifting the height of existing buildings, are those types of things going on, are they a thing?

Nigel Healy:

We haven’t seen it actually happening. We have had several conversations with property owners about doing that. But how do you lift the height of a building? You’re effectively cutting the steel and adding a bit in, and the issues presumably around structure integrity. And actually then you’re back to getting the steel, which is a problem. Then if you lift the height, the floor tolerances if it’s an older building.

Nigel Healy:

If you look where a lot of those older industrial buildings are, a lot of them are knocking on towards 40 years old. So, there’s issues about obsolescence there that are not going to be readily fixed. Also some of them are going get caught in the City Edge project, which is the view that Dublin city and South Dublin County Council have around developing those key locations. That will be residential in future, where there’s a lot of older, industrial buildings.

Nigel Healy:

And indeed even going back a number of years ago, there was a drive on behalf of a lot of the occupiers up in what was Coolock Industrial Estate to have that rezoned for residential use. Now, for that to happen, there has to be space for those occupiers to decant into.

Nigel Healy:

Per my earlier observation. That’s less of a problem on the north side of the city and a much greater problem outside of the city. And you can’t simply say to an occupier, well, I know you’re on the Naas road and I know you’ve been there for 30 years and I know you have all the staff, I’m sorry, you have to go to Ballycoolin with 6% unemployment. That’s a [inaudible 00:20:04] sure way of losing all your staff. So I think in that sense it’s a much bigger question.

Patrick Daly:

So on that then, in a strategic sense over the longer term, what would or what should property development and warehousing ideally look like to provide Ireland Inc, if you like, what it really needs? And what would be the key ingredients, say finance, planning, scale and so on? And who would be the key players, developers, planners, investors in that ideal solution? So you say, where are we going? Well, we wouldn’t start where we are, but where would we like to be, say, in five years or 10 years?

Nigel Healy:

From a location perspective, we’re seeing the opening, not so much the opening, but locations such as Ashbourne, such as [Cooknee 00:20:55] becoming much more acceptable in the marketplace. They would’ve 10 years ago been viewed as somewhat peripheral. I think that’s less of an issue because the road infrastructure to those locations, which in reality are only at the edge of the city, so that’s giving opportunities for additional land. And I mentioned Naas and Newbridge before. So I think we’re going to see a further spread out in those locations which will help.

Nigel Healy:

Again, we’re back to planning. We have to have a system that is fit for purpose in terms of being able to plan our future well. Not necessarily compromise on that. But do it more efficiently. And I think that will certainly help.

Patrick Daly:

Yeah, I think perhaps sometimes logistics activity is seen by the powers that be somehow as not being sexy. So they like to talk about maybe bio, pharma or chemicals, R&D, high tech, all of this type of stuff. But I think what a lot maybe don’t appreciate is that all of those industries need logistics in order to function. So it’s almost like they need to be thinking ahead in terms of almost pre-planning maybe large locations in strategic places around the country to cater for that. So that these industries can come and can develop and their logistics service providers can follow them.

Nigel Healy:

I’d agree. I mean, I think certainly COVID was a real eye opener for people in terms of stuff not getting delivered. We all think that when we go to the supermarket, we can buy whatever’s on the shelf and go away and consume it. No one ever thinks for a moment where it was made, where it came from, how it got there and how quickly can it be replenished. And there’s nothing like an absence of loo roll to focus the mind. And that’s the reality. I mean, all this stuff actually gets on our supermarket shelves because some chap or girl has actually delivered it. It’s vital. And I think you’re right. I think everyone suddenly woke up, gosh, I can’t get X, Y or Z. And how did that happen? Well, it happened. And it could happen again.

Patrick Daly:

Yeah. Yeah. We’re in an even potentially more challenging situation now. So we’ll see how the supply chain repercussions reverberate from this war into the food supply chain and others. So, we’ll see that over the coming months I guess.

Nigel Healy:

Absolutely.

Patrick Daly:

And maybe talking about that in a general question for you. I know you’re a guy who pays attention to the news and what’s going on in the world. So this is not a question about your specialty, but it’s a question I like to ask everybody who comes on here. In terms of the economic globalization that we all grew up with over our professional lives. And has enabled us to have this economy that we have and has enabled us to have free movement in certain countries and has abled us to travel, things we take for granted. So, where do you think we are with the process of globalization? So it grew very quickly, say, from 1990 to 2010. Then it slowed, then it flattened. And I think now, even with this war in Europe, and COVID, it’s probably going backwards. So, where do you think we are? Where do you think we’re headed with this?

Nigel Healy:

Oh, that’s a tough one. It is a bit looking into the future really, isn’t it?

Patrick Daly:

Speculating, yeah.

Nigel Healy:

It is. Yeah. And I think it’s different things to different people. If you are manufacturing a product that can be distributed worldwide, you’re going to want a global logistics supplier. You’re not going to want Patrick Daly one man and a truck to be delivering your product to every corner of Ireland. And there’s lots of reasons for that.

Nigel Healy:

On the other hand, I think a lot of people are going, well, we tried that, did it work? But the human condition is, at one level, when things flatten out, it returns to type. So, my personal sense of it is that it may be slightly different. In a way that we don’t quite understand. But I don’t think the world will get a smaller place and maybe a different place, but I don’t think it will be a smaller place.

Patrick Daly:

Yeah. So more like it’s not so much de-globalization, it’s maybe a different form of globalization we’re heading for?

Nigel Healy:

Yeah, yeah. Will be my sense of it.

Patrick Daly:

Yeah. Okay. So as we come into the last few minutes then, we’ll change tack again, and maybe leave work behind altogether. So when you are not working and thinking about the ways of the world, what do you like to do with your spare time?

Nigel Healy:

Oh, not that I have an awful lot of it. A lot of family time obviously. I get out on the bike quite a bit actually. I don’t play golf. I tried that, I was absolutely rubbish at it. And I decided I’m way too old to go back to try that. I’m very fortunate, I have three kids at various different ages, so they keep me busy doing various different things. So yeah, not a lot of spare time, Patrick, unfortunately. I’m hoping for a bit more over the next couple years to be honest.

Patrick Daly:

And are you reading or listening to anything currently, books, e-books, podcasts or so on that you’d recommend particularly?

Nigel Healy:

I love a good history read. So I currently have beside my bed a book by Max Hastings on the whole first world war, which I suppose given what we’re seeing at the moment is comparing and contrasting, actually horrible stuff hasn’t changed unfortunately. And I certainly wouldn’t be without my Spotify. Absolutely not. I’ll take that to the desert island.

Patrick Daly:

There’s a good history podcast that I listen to called actually The Rest is History, and it’s by John Holland, he’s an English historian. And he’s got a lot of BBC documentaries made and books about Christianity and the Middle Ages and so on. But himself and a buddy of his, whose name escapes me, have this podcast, The Rest is History, and it’s on Spotify. But it’s very good because they do it with a bit of humor.

Nigel Healy:

It will be added to my listening list.

Patrick Daly:

Okay. So to finish up then, Jones Lang LaSalle, where can people find out more about your services and activities and what you can do for them in terms of industrial property and warehousing?

Nigel Healy:

Well, they can certainly contact us in the office, which is in Styne House in Hatch Street in Dublin 02. 673 1600. Or they can contact us via the website, jll.ie. And we will quite happily deal with whatever queries, questions, problems or conundrums are posed. We’ve seen a lot of them.

Patrick Daly:

Excellent. Thanks for very much. Pleasure talking to you today, Nigel. And wish you every success personally and professionally in the future.

Nigel Healy:

And you, Patrick. Thanks for your time, I’ve enjoyed it.

Patrick Daly:

All the best. Thanks to listeners for tuning in. And any comments or questions, just drop me a line on pdaly, P. Daly, @albalogistics, all one word. That’s A-L-B-A logistics.com. And keep well and stay safe until next time.