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The Warsaw Voice » Real Estate » May 14, 2008
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Rapid Warehouse Growth
May 14, 2008 By Michal Jeziorski   
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The warehouse space market in Poland is developing faster than in other Central and Eastern European countries. The main drivers of increased demand are Poland's continued good economic situation, growing foreign investment and attractive location.

Thanks to the development of the retail sector and new investments in production, Poland is becoming very attractive for logistics projects. Greater developer activity is anticipated in this sector, and with continued demand for warehouse space and growing land prices, a growth trend in rents should also be expected. With more than 3.6 million sq m of modern warehouse space for rent, Poland is the largest market for warehouse and logistics facilities in Central and Eastern Europe. The fastest growth in absolute terms remains in the Warsaw region, where about 280,000 sq m has been completed.

A report by Knight Frank Research suggests that Poland's largest cities are in a phase of dynamic growth, with a 50-percent rise in the supply of new space in 2007. For the first time, space in other regions exceeded the supply in the capital. In 2007 just 16 percent of new warehouse space was built in and around Warsaw. The most was built in Poznań (22.5 percent), Upper Silesia (20 percent), central Poland (over 19 percent) and Wrocław (14 percent). Another 1.43 million sq m is under construction, of which just 31 percent is in the Warsaw region.

Total modern warehouse space in Warsaw is estimated at about 1.75 million sq m, whereas there is over 1.8 million sq m in the regions. Warsaw's decreasing share is not the effect of the Polish capital's dropping popularity as a location of new warehouse projects, but rather of the growing attractiveness of other regions and increased total supply of space. The greatest increase in supply of warehouse space is observed in Upper and Lower Silesia, central Poland (Łódź, Stryków, Piotrków Trybunalski), the Tricity area of Gdańsk, Sopot and Gdynia, and Poznań. In coming months, more warehouse space can also be expected in previously underdeveloped markets-around Szczecin, Bydgoszcz, Toruń and Cracow. As the road infrastructure improves, the sector's attractiveness is expected to rise in new locations such as the regions of Przemyśl, Rzeszów and Lublin.

Regions of importance
According to Cushman & Wakefield, the global real estate consulting company, forecasts for the development of the market for modern space in 2008 are still optimistic both for developers and for clients seeking warehouses. Competition for clients will become tougher in regions where land for projects is more readily available, whereas in cities with a weak supply of plots for development (Wrocław, Upper Silesia), the terms will be dictated by developers. Decentralization of warehouse space resources is the result of improving road infrastructure, among other factors. Convenient links to the pan-European road network have contributed to the development of the Upper Silesia region. Central Poland, and especially the cities of Stryków, Łódź and Piotrków Trybunalski, is also benefiting from existing or planned freeways. Supply at the end of 2007 in this region stood at 477,000 sq m.

The biggest market players are the developers ProLogis, Panattoni and Segro. Together they account for 48 percent of existing warehouse space (ProLogis 36 percent, Panattoni 7 percent, Segro 5 percent). Further consolidation of these companies' positions is expected in 2008, as they account for 80 percent of warehouses under construction. In 2007 ProLogis rented out the most space, a total of 31 percent of all transactions excluding renegotiations and previously signed contracts. Panattoni, a developer active on the Polish market since 2005, has a 29-percent share in terms of concluded transactions. In third place is Segro with an 8-percent share. The offered standard of all modern warehouses is similar, so developers are competing in terms of accessibility and location. Continuing demand and lack of oversupply of modern facilities allows developers to build speculative projects and rent out the space before completion. Considering the relatively short completion time for this kind of facility (about six months), however, and the growing requirements of tenants, more and more "built-to-suit" projects are being constructed with specific tenants in mind.

The Warsaw region continues to dominate on the market, but its share in total supply in Poland is decreasing and today stands at about 50 percent. Warehouse parks in the Warsaw zone are located in communes south and west of Warsaw, such as Piaseczno, Błonie, Ożarów Mazowiecki, Nadarzyn, Pruszków, Mszczonów, Sochaczew and Teresin. Most completed facilities were built in zone 2 of the Warsaw market, namely 10 to 30 km from the city center. Zone 1 (up to 10 km from the city center) offers just 3.1 percent of existing space, while 6.6 percent is located in zone 2.

Immediate availability of space is still an important criterion for many logistics operators. However, in 2007 zone 3 saw several large lease transactions for facilities yet to be built. This means that three or four large developers may still start operating on the growing Polish market for logistics space. The construction of freeways near Warsaw and a beltway for the capital should stimulate the construction of logistics centers to the east of the city. Plans for new logistics centers have already been announced for Marki (Orco) and Garwolin (Panattoni).

New projects
Speaking of the warehouse market in Poland, one cannot fail to mention Central and Eastern Europe's largest logistics park, currently under construction near Piotrków Trybunalski. The park was established by a company called Poland Central and the well-known European real estate giant, Europolis, known in Poland mainly as the manager of five A-class office buildings in Warsaw (Warsaw Towers, Saski Point, Saski Crescent, Sienna Center and Bitwy Warszawskiej). Over six years, a total of 20 warehouses will be built, offering half a million square meters of space. The planned cost is 172 million euros. The land where the facilities will stand is the property of the Bieleckis, a married couple who used to run one of the largest orchards in Poland. It was their idea to make better use of their plot near the Warsaw-Katowice route, so they set up Poland Central and subsequently tapped Europolis to have on board an experienced partner. The first tenants are already moving into the complex. Swedish group Ikea plans to store some of its furniture at Piotrków Trybunalski instead of its warehouse in Jarosty. From here, the products will be dispatched to 15 Ikea stores in Poland, the Czech Republic, Romania, Slovakia and Hungary. Another huge hall has been leased by Rossmann, one of Europe's largest cosmetics chains with almost 2,000 stores, including nearly 300 in Poland.

Słubice has been chosen as the location for the BMW group's new logistics and warehouse center. It will be used for storing spare parts and accessories for the needs of the group's Polish and German companies. The general contractor is Immo Industry Group (IIG) of Belgium, a company specializing in industrial real estate projects. The center will stand on a 3.5-hectare plot within the Kostrzyn-Słubice Special Economic Zone. A modern, 15,000-sq-m warehouse plus office facilities will be completed within the next few months. The project's location in Słubice results from BMW's search for a strategic location on the E-30 international highway, the main transport route between Poland and Germany. Unofficial reports suggest the Słubice project will cost about zl.30 million.

Another gigantic warehouse is being built in Ostaszewo, near Toruń. This project deserves special attention by virtue of its investor, Japanese logistics operator Nissin, which has 281 offices in 23 countries and operates in Asia, the United States and Europe. Nissin needed a new warehouse to handle storage and forwarding services for the company's international clients in Poland. Construction is under way, and the contractor is developer company Goodman. The 25,300-sq-m warehouse is located on a 5-hectare plot and will rise more than 11 meters, with 26 loading docks for TIR trucks. Additional facilities include 500 sq m of office space on two stories and an outdoor parking lot for 13 trucks and 58 passenger cars.

Record transactions
Last year was a record one in terms of the volume of lease transactions. According to Cushman & Wakefield, 1.4 million sq m of modern warehouse space was rented in 2007. The greatest demand for the past few years has invariably been generated by logistics operators, since more and more companies are outsourcing their services involving storage and distribution. The share of logistics companies in the market in 2007 was 38 percent. Demand from retail companies was also on the rise, with as much as 12 percent of transactions involving retail chains. Depending on the region, demand was also generated by electronics, foodstuffs, and cosmetic and manufacturing companies.

All regions apart from Wrocław reported growth of several dozen percent in total leased space compared with 2006. In 2007 the most space was leased in the region of Warsaw (a total of 426,000 sq m), Upper Silesia (358,000 sq m), central Poland (222,000 sq m) and Poznań (217,000 sq m). For many projects, demand exceeded the supply of space. At the same time, some owners were unable to rent out their empty buildings. Compared with 2006, there were no transactions covering more than 50,000 sq m in one deal. However, demand for large spaces was strong, as proved by 16 transactions involving more than 10,000 sq m each in the region of Warsaw and 47 nationwide.

The main tenants in the Warsaw region are logistics operators, courier companies, manufacturers and distributors of fast-moving consumer goods. Other active tenants include automotive, pharmaceutical and electronics companies. Since rents increase as the distance from the city center decreases, demand for large warehouses is concentrated in zones 2 and 3. Zone 1, meanwhile, reported growing demand for very small warehouses of 400-600 sq m with a very high standard. Typical tenants in zone 2 looked for facilities ranging from 2,000 to 15,000 sq m, while the greatest demand in zone 3 was for modules from 10,000 to 25,000 sq m. One important consideration for tenants was convenient access to the airport and easy access to main exit roads from the city and planned freeways.

In Warsaw's zone 1, typical monthly rents range from 4 to 5.25 euros per sq m. Logistics parks in zones 2 and 3 charge rents from 3.10 to 4 euros per sq m. Further rent growth is expected due to growing land prices and increasing construction costs. The price of a warehouse property depends mainly on the cost of the plot on which it stands. This is because warehouses are by their nature single-story and vast. Added to that is the requirement to build parking lots, driveways, and maneuvering and parking yards for trucks. Compared to an office high-rise, for example, utilization of the plot is less economical.

The rent for a warehouse property depends mainly on the offered standard and less on the location. Facilities representing a similar standard in the same city reach practically the same rate throughout the metropolitan area. The only exception is a location right next to an expressway. Such a location can jack up the rent regardless of whether the property is 5 or 25 km from the city center, and even low-standard warehouses situated on a busy road will quickly find tenants.

Warehouse operating costs include the cost of utilities such as heating, water, gas, electricity and telephones as well as any required taxes. Utilities sometimes have separate meters but other times are shared by several tenants. Lease contracts specify when the landlord will be responsible for breakdowns or interrupted supply, and what type of breakdown or outage will entitle the tenant to terminate the contract or suspend rent payments. Added to these costs are fees for extra services such as management and administration of the facility, waste removal, outside surface maintenance (roofs, sidewalks, driveways), cleaning, removing snow, replacing lighting, road and safety signs, painting of walls and security services.

Such costs are settled in one of two ways. One option is to include them in the rent; then the landlord pays for all services from rent received. In the case of large distribution centers, on the other hand, a more popular method is for a tenant to pay a monthly lump sum for services, about $0.60 to $0.90 per sq m. Actual costs are then accounted for at the end of the year. The lease contract can also state that the tenant will pay all real estate taxes in a share proportionate to the space occupied. The tenant is solely responsible for taking out and maintaining an insurance policy providing standard insurance "against all risks" throughout the lease period.

The building owners are waging an all-out war to obtain the largest possible number of long-term contracts. Apart from the now-standard incentives such as rent vacations, interior decoration and finishing at the owner's cost, also collateral is being reduced. Instead of long-term and costly bank guarantees, there has been a return to the practice of short-term deposits to cover any due rent and fees for using shared spaces. Large companies also offer to cover the costs of moving to a different building, and if a previous contract is terminated, they may even partially cover the cost of any contractual penalties or cover all or part of the rent for the period left until termination. Other incentives for prospective tenants can include free parking and the owner's readiness to cover the cost of structural wiring in the rented space or renovations adjusting the space to the tenant's needs.

Impact of technology
Poland is the largest country in the region and also the largest sales market-strong attractions for new investors. Within a radius of 500 km from Wrocław lies not only Warsaw but also Berlin, Prague, Bratislava, Budapest and Vienna, guaranteeing prompt distribution. Moreover, labor costs and the costs of renting space are noticeably lower in Poland than in neighboring countries to the west. From central locations in Poland it is just as easy to handle distribution to Germany as it is to the Baltic states and further away to Russia. Markets across the eastern border are becoming much closer to Europe than they were before EU enlargement, and that defines the direction in which logistics will develop in the coming years. A shortage of modern space in Russia, leading to much higher prices for warehouses, tempered by labor costs similar to Poland's, prompts investors to open warehouses in Poland for transit of goods beyond its eastern border.

To conclude, it is worth pointing out that a state-of-the-art warehouse is not just a place to store goods. Comprehensive warehousing includes taking in goods and packing them for retail distribution, storing goods, organizing and coordinating warehouse supply and distribution of outgoing goods, monitoring the stored goods, preparing goods for dispatch according to the client's specifications, storing and handling returned goods, handling returnable packaging, stock-taking, and handling urgent and warehouse orders.

One last factor that should be considered is technological development in warehousing. Warehouse systems offered to clients in Poland today are often of the highest standard. RFDT (Radio Frequency Design and Technology), in which information is sent via radio waves, is becoming widespread. A warehouse employee with a portable computer transmitting data using radio waves is able to handle most administrative tasks. Increased automation and exchange of information reduces administrative costs and the number of jobs in administration. Office space in warehouses will soon shrink significantly, it not disappear altogether. The qualifications of warehouse workers already need upgrading. Automation of warehouse jobs will limit the scope of work for people even further. For several years the greatest technological progress in warehousing has been linked to the development of information and data transmission technology. It seems rather obvious that warehouse processes will be fundamentally affected by changes based on this technology.

The appearance of warehouses is changing, too. This is manifested particularly in the growing number of loading fronts. This tendency is related to the growing number of small orders and increased rotation of goods in warehouses. The elimination of artificial barriers, namely borders, and better and quicker exchange of information allows smaller batches of goods to be delivered more often and with high efficiency. The amount of space companies need will start shrinking. Its use will be made more efficient through increased movement of goods thanks to ever-improving tools for planning, shortening the chain and increasingly better exchange of information.
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