Trend or hype

No one doubts that the warehouse segment is where the money is right now. With record high pipeline and investment deal volume outstripping office and retail, the sector continues to attract attention. Tenant demand is also nearing pre-crisis levels. Is the growth trend sustainable, though, or has it reached its peak? by Beata Socha At €218 million, the investment transaction volume in the warehouse segment in Q2 2014 was for the first time higher than the total deal volume in the office and retail segments combined. That may sound impressive, but is largely the result of lower deal volume in the other two segments, as recorded in the second quarter of the year. Altogether, real estate transactions in the second quarter, totaled €409 million in Poland. This was significantly lower than in the first quarter of the year, when close to €1 billion in real estate deals was recorded, according to CBRE. Still, it does put the logistics segment in the spotlight for major investment funds and for developers. Western Poland remains the hottest location for new warehouse developments. At the end of June, there were 853,000 sqm of logistics space under construction across Poland, the highest volume since 2008, with the majority being built near Poznań (316,100 sqm) and Wrocław (314,600 sqm). The stock currently under construction will increase Poland’s warehouse supply by 10 percent (it now stands at a little over 8 million sqm) and the pipeline might get even bigger in the future. [negative]“We’ve seen artificially pent-up demand for SEZ investments before July 1 of this year.[/negative] “Developers are increasingly eager to buy land for warehouse development. A year ago, they would buy land only after they had secured a tenant,” said Tomasz Olszewski, head of the Industrial Department at JLL. There is also more speculative space being built. At the end of H1 2014, 77,500 sqm of warehouse space under construction (10 percent of the entire pipeline) was not secured by pre-leases, according to JLL data. West-bound The two western cities of Poznań and Wrocław are definitely the hot zone, mainly due to greatly improved transport infrastructure and their proximity to the German border, as a lot of goods are being distributed to and from Germany. Out of the total net demand for warehouse space of 527,000 sqm recorded in the first six months of 2014, Poznań accounted for 103,000 sqm and Wrocław for 88,500 sqm, according to JLL. Warsaw suburbs also continue to attract tenants, with 89,000 sqm of space leased in H1 2014. “Poznań and Wrocław have been experiencing a real boom over the past year and a half. It started even before Amazon came in,” Olszewski said. Last year, the e-commerce giant leased 300,000 sqm in built-to-suit centers, scheduled to be completed this year near the two cities. Change in demand The demand figures for the first half of the year may be quite impressive, with gross take-up reaching 912,000 sqm in H1 2014, 17.2 percent more than in the same period last year and 62 percent more than in H1 2012, according to JLL. But what some would color as a long-term boom, may in fact turn out to be rather incidental. The spike in demand for warehouse space seen over the past months is at least partially the product of changes in public support for investments announced in late 2013. Starting July 1, 2014, investors applying for permits in any of Poland’s 14 special economic zones can count on far less favorable tax incentives. For example, the maximum level of tax relief in the areas around Poznań and Wrocław fell from some 40 percent to about 25 percent. No wonder then that the changes prompted investors to storm Special Economic Zones and apply for permits en masse before July 1. “We’ve seen artificially pent-up demand for SEZ investments before July 1 of this year,” said Olszewski. Over the first six months of 2014, investors pledged to invest PLN 21 billion, 40 percent more in year-on-year terms. They obtained 438 permits and said they would create 20,500 new jobs. The figures are expected to drop in the second half of the year. “Now there is little activity in SEZs, new investors are no longer lining up in front of SEZ offices,” he added. However, developers remain convinced there is still a lot of potential in the warehouse segment. “Poland’s internal demand is at 1 sqm of warehouse space per person, which translates into 40 million sqm in total,” said Robert Dobrzycki, managing partner of Panattoni Europe. He added that, “A lot of demand is also generated by companies shipping goods outside Poland, like Amazon, which will service Western Europe from its Polish centers, as well as production facilities delivering spare parts to German automotive manufacturers.” Outsource it Even though industrial space may be less in demand in the coming months, logistics firms and retail chains will likely make up for the loss. Nine out of the ten largest new leases in H1 2014 were signed by logistics operators and retail chains, according to JLL data. These two sectors have been leasing more and more space over the past years, and nothing indicates the trend is going to stop. “The dynamic development of logistics centers built for logistics and retail companies, which have traditionally generated the highest demand for warehouse space, is proof that these assets are in demand,” said Magdalena Szulc, head of SEGRO for the Central European market. “Logistics centers in Poland serve both the domestic market and the entire Central European market. Many Poland-based logistics firms also operate in more remote locations, including Scandinavian and eastern markets,” she added. Logistics operators’ demand for warehouse space is definitely increasing. “In the first six months of 2014, logistics firms signed new leases for 254,000 sqm of space (48 percent of the net demand). Meanwhile, their demand in all of 2013 stood at 295,000 sqm,” said Kamil Szymański from Industrial Agency at JLL. “A lot of firms decide against running their own warehouses. Instead they outsource to companies specializing in warehousing and logistics services, which offer not only space but also machines, people and even specialist computer software,” JLL’s Olszewski explained Retailers gear up Meanwhile, retail chains took up 19.3 percent of all new space leased in H1 2014, which is some 102,000 sqm. The figures are consistent with a long-term growth trend in the amount of warehouse space leased by retail firms. In H1 2013, retail chains leased approximately 72,000 sqm of new space (15 percent of total net take-up), while in the first half of 2012 and their share in total net demand was a mere 5 percent. “The increased activity among retail tenants is the product of growing consumer demand for FMCGs as well as the rapidly developing e-commerce sector, which has been fueling changes in the logistics and retail segment for the past few years. We expect that internet shopping will increasingly stimulate demand for modern warehouse space in Poland,” Szulc said. Olszewski explained the trend saying that “the number of new stores being opened is no longer that high, so retailers are looking for a competitive edge in operational efficiency, delivery times and low costs. We can see that retail chains are gearing up to compete also in this area.” About 15 percent of all demand came from the e-commerce sector, JLL estimates. The exact size of the sector’s demand is difficult to asses, as some of this demand is included in the retail chains category and some falls under logistics operators.  

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   Record breaking H2 [caption id="attachment_58965" align="alignleft" width="150"] Robert Dobrzycki, managing partner of Panattoni Europe[/caption]   The beginning of 2014 saw high volumes of supply, as signified by the 270,000 sqm of space delivered in the first quarter of the year. Built-to-suit schemes dominated in H1 2014, particularly those built for the manufacturing industry. In the warehouse sub-segment, logistics firms were the most active tenants. Panattoni Europe delivered 100,000 sqm of space during that period. We still have 307,170 sqm under construction, including two BTS projects for Amazon totaling 201,300 sqm. Their completion will make the second half of 2014 a record-breaking period in terms of new space delivered. Additionally, we launched the expansion of five logistics parks. The warehouse market in Poland is relatively balanced at present. Good road infrastructure is helping the industry. We can see that the newly delivered sections of highway have spurred new demand. Companies that until now have leased smaller units in different locations are consolidating their facilities. The good condition of the warehouse market should continue throughout the second half of the year. We can see an overall macroeconomic recovery in Europe, which should improve both business and consumer sentiment. The better availability of financing for warehouse projects, which is usually a major challenge both to developers and tenants, also bodes well for the industry. Investor activity in the warehouse segment is also evidence that the market is getting stronger. The sector’s yields stood at 7.25 percent for the first six months of the year.