The industrial market is transforming at high speed. Although development activity appears to have somewhat slowed down, occupier demand remains strong. This is set against the background of very low vacancy rates which are likely to result in a temporary undersupply in some regions. Meanwhile, some developers are ready to take the risk and build speculatively, says Jakub Kurek, Head of Industrial and Warehouse, Newmark Polska.
Tenants have for several months been wondering: Is there any end in sight to rental growth? How is the current economic situation in Poland and Europe impacting the Polish industrial market?
The market situation is very dynamic, with a number of factors at play, including rising inflation and prices of building materials and construction services. Virtually all materials such as steel, timber and gravel have gone up in price over the last year or so. There are also problems with supplies of some materials from countries to the east of Poland such as gravel from Belarus and steel from Ukraine. Supply chains have been disrupted again – of building materials this time. These rises across the market were bound to push up rents which remained at relatively low stable levels for many months despite rising construction costs – developers can no longer build and lease warehouse space at previous rental rates. We estimate that rents in Poland have gone up by around 15-20 percent since the beginning of the year, depending on the location.
Fortunately, prices of materials have returned to relative equilibrium in recent weeks, with some even falling slightly. Does it mean that warehouse rents will also go down?
Rents are beginning to stabilize and I think they will reach a broadly acceptable level by the end of this year. Having said that we must remember that occupancy costs are impacted not only by construction costs, but also by other factors. Most leading developers in Poland rely on external financing, so the continuously rising cost of capital is also a key component of the final price of a warehouse. While loan interest rates are rising, financing institutions are tightening borrowing requirements. Banks financing construction projects require that developers secure pre-lets for up to 50 percent of built space compared to around 20 percent a year ago or so. All this combined has ultimately impacted rental rates and the way project profitability is calculated.
Will the tightening of financing conditions and longer warehouse delivery times lead to an undersupply?
Indeed, there is such a risk, especially in markets with the lowest vacancy rates. There are indications that most tenants have already accepted higher rents as their businesses grow and a need for new warehouse or production facilities is part of their growth journey. That’s why demand did not weaken – on the contrary, take-up in the first half of this year reached 3.82 million sqm, up by 12.7% year-on-year. Poland’s overall vacancy rate averaged 3.1 percent at the end of June 2022, which is indicative of shrinking warehouse availability or even a lack of vacant space. In some markets, this may be a sign of an undersupply. Vacancy rates have fallen to all-time lows in Tricity, Poznań and Krakow. There is also a shortage of ready-to-occupy warehouse space in Subcarpathia, Podlaskie and Warmia-Masuria. It is worth noting that the healthy and safe vacancy rate should be in the range of 5–7 percent.
Meanwhile warehouse stock under construction shrank by around 380,000 sqm in the last quarter…
Developers have become more cautious about commencing new projects for the reasons I’ve already talked about such as disrupted global supply chains, as well as shortages and high prices of construction materials. For the same reasons, delivery times for new projects have become longer, even around 12 months compared to just six months a year and a half ago. Tenants previously enjoyed a relatively comfortable time in the market and today are unwilling to wait for new space because their businesses are growing and they need warehouses right now.
What’s the alternative?
A tenant who is very pressed for time may choose an existing older warehouse that is likely to be slightly less expensive. However, not all companies will want or be able to use such alternative facilities as some expect bespoke solutions tailored to their specific business requirements. This creates space for speculative construction.
Projects without pre-lets are commenced by developers who are ready to accept some degree of risk, secure financing and see an opportunity for themselves. Such facilities should be easily let in the largest logistics markets such as Masovia, Silesia, Central Poland, Lower Silesia, Greater Poland and Tricity. At the end of the first half of 2022, close to 30 percent of the warehouse space under construction was being built purely speculatively. Speculative projects underway include Hillwood Łódź II, which will provide over 97,000 sqm of new warehouse space, Hillwood Kutno (39,000 sqm), Prologis Park Wrocław III (49,000 sqm), 7R City Flex Wrocław Airport II (11,000 sqm), Panattoni Park Tuszyn (57,800 sqm) and another warehouse developed by GLP in Lędziny, Upper Silesia, with an area of 18,000 sqm. Additionally CTP is currently developing over 400,000 sqm of speculative space in such locations as Kobyłka, Zabrze, Katowice, Iłowa, Mszczonów and Sulechów.
There is still more than 4.3 million sqm of warehouse space under construction. Which developers are the most active market players?
Panattoni has traditionally led the way for new construction, accounting for 2.8 million sqm of the logistics development pipeline at the end of June. Its largest projects underway are a BTS facility for Zalando in Bydgoszcz (146,000 sqm) and a BTS scheme in Gorzyczki (82,000 sqm). The largest projects in the pipeline of other developers include Hillwood Łódź II (97,000 sqm) and Exeter Park Świebodzin with an area of 100,000 sqm built by Kajima Poland on a BTS basis.
Predicting the future is exceptionally hard today. But if you were to make some predictions for the next year or six months, what would you say?
The times are indeed surprising and are changing at a rapid pace. The shortages of building materials, high inflation and price increases have knocked the market off-course. Another challenge we are currently facing is soaring energy and gas costs. The largest developers are building, albeit not as much as before. The warehouse development pipeline has shrunk slightly but occupier demand remains strong. This is set against the background of a very low vacancy rate – if it continues to trend downwards, we are likely to see an undersupply in some regions. Some developers are, however, ready to fill the supply gap by taking the risk and building speculatively. I think the market has to adapt to all these changes. Rents are expected to reach a broadly acceptable level by the end of this year. I suppose speculative construction will accelerate in the months ahead. The Polish industrial market continues to attract strong investor interest and is cementing its strong position in Europe. We are still very competitive in the region, with relatively affordable land compared with the West, reasonable construction costs and motivated workers.