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The Warsaw Voice » Real Estate » March 5, 2008
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Warehouse Market Grows but More Supply Still Needed
March 5, 2008   
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The investment market for industrial and warehouse properties can be described as very active and quickly expanding, with growing rents and a continuing lack of liquidity because of a limited supply of high-quality investment products. It is expected that the probable further increase in rents-connected with high GDP growth, a faster development of infrastructure and a very active rental market-will be the main factor attracting investors in 2008. However, the volume of transactions may still be modest because of a limited supply of high-quality properties.

Potential demand is considerable, but due to insufficient supply, investors are turning to older properties to let to multiple tenants. These offer the prospect of higher yields through active management. Others are joining investment projects at an early stage of implementation by funding them and through advance purchases. In 2007, EU investors were still the main players on the Polish investment market for industrial and warehouse properties. Among them, investors from Britain, Austria, France and Poland led the way.

The investment market for industrial properties is still less active than in the other commercial sectors. In 2007, investor activity on this market was lower than in the previous year. The total value of transactions was around 149 million euros, which represented a year-on-year drop of some 25 percent. This is partly attributable to the credit crunch hitting the financial markets and the consequent postponement of some transactions until 2008. If products from leading developers do not appear on the market, investment activity may be stimulated to a larger extent by sale and leaseback transactions. Capitalization rates for prime industrial properties are below 7 percent and are expected to remain stable in 2008.

Over the past few years, Poland has become a location of choice in Central and Eastern Europe for logistics centers. The continued favorable business climate, high levels of foreign investment and the country's attractive location were the key factors behind the growing demand for modern warehouse space. Supply more than tripled in the period from January 2005 to December 2007. Demand also increased steadily, which was reflected in the volume of rental transactions. It is expected that in 2008 the situation on the demand side will stabilize and that growth will be slower than last year. On the supply side, the warehouse market is stable. At the beginning of 2008, more than 1.4 million sq m of space, part of it pre-let, was under construction. At the end of 2007, total modern warehouse space in Poland exceeded 3.8 million sq m.

The Warsaw area remains the dominant market, but its share in total warehouse space has already declined to 46 percent from 76 percent in 2004, 67 percent in 2005 and 59 percent in 2006. New warehouse areas have popped up with the development of road infrastructure. In 2005, these included Upper Silesia, Poznań, Wrocław and ŁódĽ. These markets are now in full bloom. In 2006, the first modern warehouse premises appeared in Cracow and the Gdańsk-Gdynia-Sopot Tricity. At the beginning of 2008, the construction of modern warehouses started in Szczecin, while Bydgoszcz and Toruń are to come next.

It is expected that in 2009 the market for modern warehouse space will also develop in smaller cities, especially in the eastern part of the country-in Lublin and Rzeszów-owing to the planned road-building projects. Newly built premises tend to have similar standards, so developers compete on accessibility and location.

The largest players on the market are ProLogis, Panattoni and Segro. These developers hold between them 48 percent of existing warehouse space (ProLogis 36 percent, Panattoni 7 percent and Segro 5 percent). In 2008, their position is expected to strengthen further because 80 percent of warehouses now under construction are their projects. In 2007, ProLogis let the largest amount of space and was involved in 31 percent of all deals, excluding renegotiations of earlier contracts. Panattoni, which has operated on the Polish market since 2005, had a 29-percent share in 2007 rental transactions. Segro came third with an 8-percent share.

Last year, land prices and construction costs were on the rise and this was reflected in growing rents. In December 2007, the cost of leasing 1 sq m of modern warehouse space was on average 10-15 percent higher than at the beginning of the year. Prices were highest in the Warsaw area-up to 6 euros per sq m in nominal terms.

The number of new projects is on the increase, particularly in regional cities. Over 1.4 million sq m of warehouse space was under construction at the beginning of 2008. Of this amount, as much as 31 percent was in the Warsaw area. Only 16 percent of new warehouse space was built in this area in 2007. The largest amounts of new space were in Poznań (22.5 percent), Upper Silesia (20 percent), central Poland (over 19 percent) and Wrocław (14 percent).

In some regions, investor activity is constrained by the shortage of suitable land for development. Speculative developments account for as much as 70 percent of all space under construction. Built-to-suit schemes, in which facilities are built for specific clients to their individual order and on sites they themselves have chosen in advance, account for 10 percent of all space. The remaining 20 percent lies somewhere between speculative and built-to-suit schemes. Speculative space-space that is not pre-let-is in demand from companies that want to rent up to 10,000 sq m and cannot wait long to move in. They are ready to pay a small premium of 5-10 percent of the regular rent for the opportunity to rent the premises right away.

Most of the demand for built-to-suit premises is generated by companies looking for spaces larger than 10,000 sq m. They plan their strategies well in advance so it is of less concern to them when construction will be completed. The factors these companies take into account are location, which enables them to reduce transport costs, suitable technical parameters and low rent. A built-to-suit project usually takes around 18 months to complete. The construction process itself is generally quite short-around six months. The rest of the time is spent looking for a suitable site, checking its legal status and building conditions, and waiting for the required permits.

In 2007, rental contracts were signed for over 1.4 million sq m of modern warehouse space, almost 500,000 sq m more than in 2006. For several years now, logistics operators have been the ones to rent the largest amount of space because the outsourcing of storage and distribution services is increasingly popular. In 2007, logistics operators had a 38-percent share in the market. Demand from retailers was on the rise and shopping chains had a 12-percent share in all rental transactions in Poland. Demand was also generated by companies operating in the electronics, food, cosmetics and manufacturing sectors.

Apart from Wrocław, all areas recorded a two-digit rise in total leased space compared with 2006. The fall in the volume of transactions in Wrocław-from 167,000 sq m in 2006 to 133,000 sq m in 2007-resulted from limited supply. In 2007, the largest amount of space was let in Warsaw (426,000 sq m), Upper Silesia (358,000 sq m), central Poland (222,000 sq m) and Poznań (217,000 sq m).

The capital city is still the dominant market in terms of warehouse space in Poland. At the end of 2007, supply in the area reached almost 1.8 million sq m. The planned completion of the A2 freeway, scheduled for 2010, and upgrades on national roads within the city are factors that influence the distribution of warehouse space here.

Warsaw is the most varied market of all. Until 2007, three zones had been distinguished in this area. Depending on the distance from the city center, they differed in terms of rent, average size of space let and sectors represented by tenant companies. In 2007, the difference between the second and third zone disappeared. Access to road infrastructure does not differ much between the zones and companies present here operate on both the national and local markets.

The Warsaw warehouse market is now divided into two zones. One, known as Warsaw City, is located within the administrative boundaries of Warsaw. The other, called Warsaw Surroundings, is located within a radius of 12-50 kilometers from the city center. Most of the warehouse parks in the Warsaw City zone are located in southwestern (Okęcie and Służewiec) and northern districts (Targówek and Żerań). Total space in this zone is 486,000 sq m, or 27 percent of all warehouse space in the Warsaw area. In Warsaw City in 2007, rental contracts were signed for 54,000 sq m of space, which represented 13 percent of all deals in the Warsaw area. Demand was higher, but there was not enough vacant space to rent.

Most of the companies that choose this location sell high-value products on the local consumer market. Apart from logistics operators, who had a 36-percent share in rental deals, space is rented here mainly by shopping chains and companies operating in the electronics, pharmaceutical, food and cosmetics sectors. Owing to its location, land prices in the Warsaw City zone are very high-usually above 100 euros per sq m. Spaces let to tenants range from 1,000 to 3,000 sq m.

The majority of the warehouse parks in the Warsaw Surroundings zone are located in communes to the south and west of the city: Piaseczno, Błonie, Ożarów Mazowiecki, Nadarzyn, Pruszków, Mszczonów, Sochaczew and Teresin. There is nearly 1.3 million sq m of space in this zone, or 73 percent of the total supply in the Warsaw area. In 2007, the zone had the largest share of rental deals in Poland-over 26 percent-and some 372,000 sq m were let. The zone has a good road infrastructure and is an attractive location for logistics centers, which last year generated 48 percent of overall demand there. The average rent per sq m is 3.2 euros in nominal terms.

Poznań, in west-central Poland, has the second largest amount of modern warehouse space in the country. At the end of 2007, supply amounted to 619,000 sq m and some 145,000 sq m of space was under construction. The development of the area is determined by its road infrastructure. Warehouse space in the Poznań area is concentrated along the A2 freeway and the E30 road from Warsaw to Berlin. Logistics operators are particularly interested in sites close to the freeway, while companies supplying the local market tend to choose locations along the E30. The main developers present on the Poznań market are Panattoni, ProLogis and Segro. Between them, they have an almost 60-percent share of existing space and an 80-percent share of space under construction.

Until recently, the warehouse market in this area was characterized by a relatively large percentage of premises held by owner-occupiers. However, for two years now, these proportions have been changing due to the rapid expansion of the rental market. Some 217,000 sq m of warehouse space was let in Poznań in 2007. As the supply of modern warehouse space close to the freeway increased, demand from logistics operators also grew. Last year, they signed 34 percent of all rental contracts in the Poznań area, compared with 17 percent in 2006. Most of the remaining tenants were shopping chains and food companies.

Upper Silesia
Upper Silesia, in southern Poland, was second after Warsaw in the amount of warehouse space let in 2007. The development of the region is influenced by its large consumer market of 4.7 million people. Easy access to a well-qualified labor force is a factor that attracts more industrial investment to the area, particularly in the light manufacturing sector. It is an excellent location for logistics centers because it contains the intersection of two important European transport routes. Additionally, the construction of the A1 freeway and the interchange that will link it to the existing A4 freeway in Gliwice will strengthen the position of Upper Silesia as a logistics location and will boost the region's development.

Owing to Upper Silesia's specific urban structure, warehouse parks are distributed evenly within the area. As a result, rents for warehouse space are comparable throughout the region, which is also the case with land prices. The legal status of the plot and its proximity to an A4 freeway exit ultimately determine the price. At the end of 2007, there were 564,000 sq m of modern warehouse space in the area and another 350,000 sq m under construction. In 2007, 358,000 sq m of space were rented out. Most of the new tenants are logistics operators and shopping chains.

Central Poland
In central Poland, warehouses are concentrated in three places: ŁódĽ, Piotrków Trybunalski and Stryków. The last of these locations is the most favorable in terms of road infrastructure. Total modern warehouse space in the area amounts to 477,000 sq m. There is enough suitable land in central Poland to allow for a more than ten-fold increase in supply. In 2007, some 222,000 sq m of space were rented out, most of it to electronics companies and logistics operators. The latter choose the area because of its excellent location for national distribution centers. Most of the electronics companies are suppliers for manufacturers who have plants in central Poland.

In terms of price, the most attractive location is Piotrków Trybunalski. As supply in the city is high and demand low, the location mainly attracts tenants seeking spaces larger than 10,000 sq m. The central Poland area, and especially Stryków, is developing quickly due to the planned interchange that will link the A1 and A2 freeways. Some 51,000 sq m, which represented 23 percent of all rental contracts in the area, were let in Stryków in 2007. Total space available in Stryków was 127,000 sq m, 27 percent of all space available in Central Poland.

A convenient location close to Upper Silesia and Poland's southern border, coupled with a large consumer market, means that demand for warehouse space in the Cracow area is on the increase. Thanks to the A4 freeway, Cracow is very well connected with Silesia, Wrocław and Germany. The low supply of commercial plots is the main barrier to development here. Due to a lack of available warehouse space, only 3,500 sq m were rented out in 2007. No new premises were under construction. Since December 2006, supply did not change and amounted to a mere 18,400 sq m. The situation will probably change in 2008 in connection with a project planned by Goodman. The developer bought a 31.5-hectare site in Modlniczka in 2007 and wants to build 158,000 sq m of modern warehouse space there. The logistics center will be located at a distance of 4 kilometers from Cracow's Balice airport and 1 kilometer from the interchange of the A4 freeway and the S7 national road.

The first modern warehouse premises will be built in the Szczecin area, in northwestern Poland, this year. The two projects to be carried out will provide a total of 190,000 sq m of space, of which over 20 percent is already under construction. The area is poorly connected to the rest of the country, something that considerably constrains its development. On the other hand, its proximity to the German border and good connection to the German freeway network means that demand for warehouse space should be generated by companies, especially logistics operators, that so far have operated on the German side of the border.
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