The rise of speculation

As speculative investment soars above 50 percent, economic indicators continue to underwhelm, calling the optimism in the warehouse market into question By Beata Socha After two tremendously good years for the warehouse real estate market, developers have reached frenzy mode. A whopping 54 percent of warehouse space currently under development is being developed entirely speculatively, without binding lease agreements, according to JLL. “In comparison, by the end of Q1 2014 this total was a mere 5.5 percent. This clearly confirms investor trust and confidence in the growth potential of the Polish market,” said Tomasz Mika, head of the Industrial Department at Poland’s JLL office. The enthusiasm is justified by the low countrywide vacancy rate of 6.7 percent at the end of the first quarter. Still, this figure has increased by 0.5 of a percentage point since the end of 2015 and in some areas exceeds 10 percent (the highest vacancies can be found in the Warsaw Suburbs – 11.8 percent). “Today developers are optimistic, but their optimism is not limitless. You can see that clearly when we examine the speculative projects that are under construction. They are mainly being delivered in the most important markets, with low vacancies and stable, healthy demand,” said Joanna Sinkiewicz, director, head of Key Clients & Tenant Representation, Industrial & Logistics Agency, Cushman & Wakefield. Hiccup or trend? So far, the market has been quick to absorb whatever amounts of space come out of the pipeline. However, is the speculation frenzy really backed by hard data, or could we be looking at the peak in the current business cycle about to come crashing down on the overheated market? Figures seem to paint a less than rosy picture. The April reading of Poland’s PMI recorded the second-biggest monthly drop since 2008. It stood at 51 points, against the market consensus of 53 points. Granted, as long as the PMI indicator remains above 50 points, we are in an expansion phase of industrial activity in Poland. Analysts expect the figure to go up, riding on the back of improving PMI readings in Germany – Poland’s biggest industrial partner. Yet, there is more bad news: GDP growth fell significantly in the first quarter of the year. The Central Statistical Office’s (GUS) flash estimate puts it at 3.0 percent, the lowest level since the end of 2013. Meanwhile, market consensus put it at 3.5 percent. The news was particularly disappointing for the Ministry of Development, which expected Poland’s economy to grow at 3.8 percent. Bleak outlook? On top of that, there are numerous political and fiscal risks that investors have not been blind to. After Standard and Poor’s downgraded Poland’s rating from A minus to BBB plus in January, Moody’s cut Poland’s outlook from stable to negative, meaning it may well lower the country’s rating in the next 24 months. Granted, markets expected worse: that Moody’s would downgrade Poland’s rating, not only its outlook, which it refrained from doing, but the current outlook means that there could be rain clouds on the horizon. The most often cited risks include loose fiscal policy (including a costly child subsidy program) and concerns about securing finances for next year’s budget (possibly involving transferring of the remaining assets of private pension funds to the state-run social security system). Investors are also wary about the government making good on their promise to lower the retirement age which would raise age-related costs over time, as well as more immediate risks, like the ambiguity about the conversion of foreign-currency denominated mortgages that could place a substantial burden on banks, and the prolonged stalemate between the government and the country’s Constitutional Tribunal. But first and foremost, what is putting investments on hold is the overall uncertainty caused by the government’s unpredictable policies. Within reason All that put together could spell trouble for the warehouse industry, so closely linked to both manufacturing – the backbone of the economy, as well as to consumption. “The changes we have been observing regarding the economy will not go amiss with investors. It is very possible that when we sum up 2016, we will see the number of speculative projects drop,” admitted Sinkiewicz. She did, however, state that the current amount of speculative warehouse development did not seem unreasonable. Krzysztof Kienorow, senior associate, Industrial and Logistics Agency at Colliers International, agreed. “I would say that the investments we see in the market are semi-speculative. It means that after signing a lease for a specific space, developers build an extra 30-40 percent surplus. They do so in regions where warehouse space is scarce and predominantly in strategic locations transport-wise,” he said. Besides, what sets off as a speculative project often gets leased before the paint has even dried. “The construction process usually takes about six months to complete. Within that time the speculative space is already being offered to the market. In most cases it gets leased before the developer even obtains an occupancy permit,” he concluded. New markets, big opportunities Apart from the safe, mainstream markets, there are a few “up-and-coming” locations on Poland’s warehouse map that are attracting developers with improving infrastructure and very low, or even zero vacancies, as is the case with Szczecin and the Toruń/Bydgoszcz area. But are they attractive enough to build speculatively? The northwestern city of Szczecin has been gaining a lot of traction over the past few years. It currently has 158,200 sqm of warehouse space, which is still about a tenth of what the Poznań market has to offer, but it is definitely growing. “We were the first ones to build there and we could say we ‘created’ this location. We’ve built 77,000 sqm there and it is now our flagship location, which is 100 percent leased. This investment has inspired us to launch two more projects in Szczecin,” said Andrzej Rosiński, CEO of Waimea Holding, a developer active predominantly in new and niche markets across Poland. Szczecin’s location makes it a target for German and Scandinavian firms. “The main reason why Western investors are interested in the region is its high competitiveness in the quality of services and cost levels, which is far lower in Poland than in Germany or Scandinavia,” explained Kienorow. Another “rising star” among warehouse locations that developers are targeting is Bydgoszcz. It has only recently popped up on the warehouse map and offers only some 131,500 sqm of warehouse space, but developers have big plans. Panattoni alone intends to deliver over 120,000 sqm there within the year. Waimea has plans for a 90,000-sqm park. “The area around Toruń and Bydgoszcz is currently attracting firms to locate their distribution centers as well as manufacturing companies,” commented Kienorow. ‘Eastern wall’ Developers are also increasingly open to taking on projects in Poland’s eastern regions. Panattoni has already built warehouses in Rzeszów and Lublin and is still expanding its parks. The Lublin park is set to comprise 72,000 sqm, while the Rzeszów facility – close to 40,000 sqm. The developer has quite a lot of experience in the southeastern region of Podkarpackie, where it previously built industrial facilities for home appliances manufacturer Zelmer and for glass producer Pilkington. “The ‘eastern wall’ – Rzeszów and Lublin – is attracting tenants that need both warehouse and industrial space. In the case of Lublin, it is luring investors with the availability of qualified employees – Lublin is, after all, a university city with a lot of potential – as well as with lower costs compared to other regions,” said Robert Dobrzycki, CEO Europe at Panattoni Europe. Tread lightly Developers are well aware of the attractiveness of these new warehouse markets but approach them with much more caution and rarely decide to invest speculatively, according to Sinkiewicz. “New warehouses near Bydgodszcz, Szczecin and Lublin are built almost exclusively after securing pre-leases. Nonetheless, these markets are very interesting, mainly due to the local job market,” she added. Potential is something that these new rising locations have in spades, but without proper infrastructure they wouldn’t have become viable for any warehouse development, let alone speculative. “Infrastructure development is the natural first step for a warehouse to develop. Without a suitable road network it would be hard to convince retailers, e-commerce firms, or even manufacturers to locate their activity there,” Sinkiewicz explained, and added, “Rzeszów is a good example of the influence that infrastructure investment has on the warehouse market. The first multi-tenant park was constructed after the [east-west A4] highway was commissioned [connecting Rzeszów to Germany]. Now, almost at the same time as the A4 is being completed, a new park has been delivered next the Ukrainian border, Waimea Logistic Park Korczowa.” Although most developers prefer to play it safe and build speculative space only in well-established areas, there are some willing to take the endeavor one step further. Panattoni’s Dobrzycki believes there is room for speculative development not only in mainstream locations, but also in smaller regional cities that are in need of modern class-A warehouse space. “That is why Panattoni Park Rzeszów was built practically entirely speculatively. It was an unusual situation, because we still see very few projects that are purely speculative. Most have secured at least some pre-leases.”