Low rents, high expectations

The warehouse market has seen remarkable growth over the past two years, but despite growing demand, rents have hit an all-time low. WBJ Observer talked to Paweł Sapek, senior vice president & country manager Prologis for Poland, about the high demand – low rents paradox, about the most prospective markets, industries driving up demand for warehouse space, as well as the growing expectations of warehouse tenants Interview by Beata Socha WBJ Observer: The warehouse market is growing at an incredible speed. In the first quarter of the year alone an additional 400,000 sqm of new space was delivered, putting the entire stock over the 10 million sqm threshold. Do you think the market will continue to expand at this rate? Paweł Sapek: Indeed, the market has been growing rapidly over the past two years. However, Poland still has a lot of potential for growth compared to its Western European neighbors. The current growth rate is dictated by high activity of investment funds that are buying industrial properties in Poland. Western European properties have simply become too expensive for them at their current yield levels, compared to Poland. However, the future pipeline of industrial real estate could be limited because of the scarcity of investment land. Still, we expect the market to continue to grow, even if less rapidly than over the past two years. Most industrial development is currently taking place in Silesia and near Warsaw (altogether almost half of the new supply delivered in Q1 2016). Which markets do you consider the most promising? Silesia’s large share in new warehouse space was mainly due to two big-scale projects on new investment plots. Unfortunately, the increase in supply in Silesia has also brought extreme rent cuts – they have reached a historic low in the region. We consider Warsaw to be the most promising market right now, particularly close to the newly completed S8 expressway, as well as Poznań and Łódź. These will be our key markets in the near future. Demand for warehouse space stood at 683,000 sqm and was 10 percent higher than in the same period of 2015, according to AXI Immo. Yet, despite demand exceeding new supply, rents remain low. Analysts from Colliers International say we can expect rents to inch up this year. Do you agree with this forecast? There is something of a paradox in the Polish market. On the one hand we have a very low vacancy rate, but on the other – historically low rent rates. The Polish economy is growing steadily and is outperforming other European economies. Economic growth is clearly fueling the development of the logistics industry. In a mature market with such low vacancies and limited supply, rents should go up. Unfortunately, it is not happening in Poland yet. We do expect rents to increase slightly next year, though. Since May of this year, a new law on land trading has been in place. Analysts say it could make acquiring land for investment difficult. Many developers have long been purchasing land for future projects. Has Prologis secured its own land bank? The new law will not influence decisions for plots that are covered by a local zoning plan. Companies with foreign capital have always faced stringent restrictions when acquiring land. I hope that the new law will urge local authorities to adopt zoning plans more efficiently. The new law may have a negative impact on smaller projects that used to be built without a zoning plan, but based only on an individual planning permit. Prologis has a land bank in key locations, together with all the required building permits, which will allow us to expand over the next five years. Lately, developers have become increasingly confident about building speculatively. Do you think it may lead to higher vacancies this year? It’s true that developers have been aggressively taking up speculative projects in some areas, which may result in an overall increase in vacancies in these regions. Prologis is highly selective when it comes to speculative development. We plan and build our speculative projects only in areas where vacancies are pushed down by high demand and limited supply. This way we can count on finding tenants quickly and at stable rents. Currently, Poznań, Łódź and Szczecin offer such opportunities. In 2015 we delivered two speculative buildings – one in Szczecin and one in Wrocław. Our third investment, launched in 2014, is an SBU building in Chorzów. Nonetheless, all these projects were 40 percent pre-leased. Building without any pre-leases whatsoever, regardless of the region, is a very risky endeavor. Logistics firms and retailers have been the dominant forces in the market for years now (together these two sectors are responsible for a third of the entire demand). How long will these industries continue to fuel demand? Domestic consumption is one of the main growth factors in the Polish economy, and that’s why retailers will continue to increase their share among the biggest warehouse tenants – that also includes e-commerce. As far as the logistics sector is concerned, it is important which industries the logistics firms service. Right now it is mainly automotive and household appliance sectors that will continue to develop and look for new and bigger warehouse space. The e-commerce sector you mentioned has been growing at double-digit pace over the past years. How much of this growth has translated into demand for warehouse space? Undoubtedly, the e-commerce boom is generating demand for warehouse space. According to a report “Destination: Poland. Blazing a trail for e-commerce Logistics,” which we prepared together with JLL, new leases with e-commerce companies could reach as much as 700,000 sqm by 2020. The availability of workforce and attractive labor costs, as well as relatively low leasing costs, make Poland very attractive to new e-commerce players. Companies already present in Poland will also continue to grow organically. What sets e-commerce apart is the need for fast deliveries, the wide range of products they carry, a multitude of delivery points (it’s a B2C rather than a B2B market) as well as seasonal peaks in sales. This forces warehouse developers to deliver facilities in locations that are convenient for e-commerce and otherwise adjusted to the needs of the sector. As far as the location is concerned, the availability of workforce, suitable road infrastructure and the proximity to the end consumer are of great importance. The seasonal nature of the business means tenants need to lease more space, or use their space more efficiently, e.g. on mezzanines. Apart from that, e-commerce companies put emphasis on security, additional social areas, more power and more efficient HVAC systems, as well as plenty of parking for their employees. Put simply, the e-commerce business will have a significant impact on the supply chain and on the logistics property market. It will also continue to generate a lot of demand for modern warehouse space. Apart from e-commerce and its particular needs, how are tenant expectations changing and influencing the warehouse market? Today, warehouse buildings are judged by the same set of criteria as the retail or office segment. They are no longer simple constructions where goods are stored, but modern, functional facilities that should also be aesthetically pleasing. We make sure the landscape around our facilities is well designed and maintained: well-kept green areas are a major advantage not only for office and retail schemes, but also for warehouse facilities. They increase their market value. Besides, logistics parks are increasingly used as companies’ headquarters, and pleasant surroundings improve employee morale. A growing number of our clients want the finishing standard of their offices to be even higher, so we employ interior designers to implement interesting technological and aesthetic solutions. We make client service our top priority by also lowering their utility costs. Last year, Prologis created a purchasing group for all the group’s companies in the region, which allows us to secure the best possible unit prices for our clients in terms of electricity and gas supplies. The warehouse industry still lags behind the office sector as far as green solutions are concerned. Do you think green certificates will become the standard for the sector? The green trend, including BREEAM certificates, started with the office property sector, but retail and warehouse markets followed quickly in its footsteps. Tenants have realized what advantages eco-friendly solutions give them and today they are asking for them, proving that sustainable development is not a fad, it’s a simple market calculation. Prologis has been submitting all its newly built warehouses for BREEAM certification since 2008. Each of our new buildings is certified. Implementing green solutions and technologies at the design and building stage incurs an additional cost of approx. 3 percent compared to traditional buildings. The difference is more than made up for with lower maintenance costs. We strive to offer our clients green solutions that are efficient in economic terms. That’s why Prologis is frequently ranked as one of the leading developers promoting energy efficient solutions.