Petite but perfect?

As Mateusz Iłowiecki, a senior consultant in the industrial agency at JLL explains, the three most important criteria for a building to be classified as an SBU is its location in a city or its suburbs with good access to urban transport, the possibility of dividing the warehouse space into small separate units of 500 to 1,000 sqm, and a relatively large office component with high class office space. The latter make up 10–30 pct of the amount of warehouse space. SBUs are eagerly rented by companies who like to place their headquarters close to their warehouses, production spaces or show-rooms. This makes SBUs a nice complementary offer for some existing logistics parks.

And this is also how Prologis views its latest SBU investment in Prologis Park Chorzów, the D5 building which the company opened at the beginning of September. “Adding an SBU building to our park in Chorzów has allowed us to use the land better. Instead of developing another 16,000 sqm big box with exactly the same kind of specifications as the other buildings in the 230,000 sqm park, we decided to build an SBU facility which allows us to service new types of tenants and satisfy some different kinds of requirements from our current customers,” says Paweł Sapek, the Poland country manager at Prologis. The 16,000 sqm facility includes app. 800 sqm warehouse units, which can be leased separately or joined into 1,600 sqm, 2,400 sqm or larger premises – and this space is complemented by offices. “The offices are of a somewhat higher standard than the ones we provide in our big box projects and the office ratio comes to app. 10 pct, which is twice as much as we normally offer. We even have one unit with an 800 sqm warehouse and 200 sqm of office space,” reveals Paweł Sapek. The facility in Chorzów is just Prologis’ second SBU project in the CEE region and Poland. The first was built two years ago in Prologis Park Wrocław III and provided over 18,100 sqm of space in 650 sqm modules.

One notable transaction this year was Aviva Investor’s sale of an SBU property in Łódź to Panattoni. Building ‘B’ in Łódź Business Park offers 2,900 sqm and 3.5 ha of development land. The project has recently been fully commercialised by the new owner. “We have quite a large number of SBU buildings in the United States, while in Europe the scale has been smaller up to now, but we have not ruled out building more of these kinds of property in the CEE region, especially in Poland, but also in the Czech Republic and maybe one day also Germany,” says Robert Dobrzycki, the CEO of Panattoni Europe.

Also keen to enter the SBU segment is Polish warehouse developer Waimea, which started its first project of this kind just two months ago. The scheduled opening date has been set for the first quarter of next year. “We chose Bydgoszcz because it is a place with a lot of micro-companies, especially from the IT sector, that might require this kind of space,” said a company representative. As she states, the 9,000 sqm building with ceilings 10m in height, offering 650 sqm modules and class ‘A’ offices, will look more like a retail park or even an office style building. “It will be more cosy and have a warmer ambiance compared to a regular big box,” Waimea’s press officer says.

The width of each unit should be at least 12m to accommodate a dock, a gate from the ground level and an emergency exit. A long and narrow unit would look like a train and would not be comfortable to use. To have units well-formed into comfortable rectangles requires buildings to be at least twice as shallow as standard big boxes. This is one of the reasons big boxes are not suitable for adapting into SBUs.

Unique investment product

According to Mateusz Iłowiecki of JLL, the tenant demand for this kind of product is good – and developers agree. “I have no doubt they are good. We leased out our project in Wrocław during its construction period, and our newly opened building in Chorzów is now 50 pct leased. For the rest of the space we are in advanced negotiations. The unique specifics of SBUs also allow us to benefit from higher rents. I don’t think the rents could come under such a downward pressure as the rest of the warehouse market,” says Paweł Sapek.

According to JLL, in Warsaw SBU headline rents amount to app. EUR 4.50 to 4.90 per sqm a month and are not more than EUR 0.80 higher for a big box Warsaw location. Ideal Idea, a developer specialising in SBUs, is currently developing the fourth stage of the 50,000 sqm complex near Warsaw’s main airport. This stage will comprise four buildings of app. 4,000 sqm, each offering 500 sqm warehouse modules together with 100 sqm class ‘A’ office modules. The project has proved to be a magnet for investors so far, since all the previous three stages developed since 2008 have been commercialised and then sold. Currently the owner of the majority of the buildings is CBRE Global Investors. “The main advantage of such a product is the diversification of risk. It works as a complementary product for large single tenant investments where the allocation risk to the tenant is typically significant. If the building specification as well as the location of an SBU is appropriate, it is a good investment opportunity,” claims Karel Zeman, the head of asset management for Poland at CBRE Global investors.

One of the tenants of the Ideal Idea complex is Tadmar, a company from the Saint-Gobain group, a French multinational producer of construction materials. “We chose SBUs because they offer relatively small warehouse units combined with an office section, which makes it a different to most of the market offer, where you have a large warehouse with scant office space. This combination in the Ideal Idea Park allows us to use the space effectively, thus reducing some operational costs,” says the company representative.

As Robert Dobrzycki points out, SBUs uniqueness in terms of location and standard engenders more loyalty from the tenants and attachment to the buildings and therefore they tend to move out less. Therefore SBUs are not dependent on the overall supply of product on the warehouse market. According to JLL, 5-year leases are the most common, which makes SBUs very similar to big boxes in this respect. Karel Zeman adds, however, that there is also demand for 3–5 year leases and more flexibility, and that the main difference is that with a larger number of smaller leases the weighted average lease term becomes shorter and more spread out over time compared to new big box developments. He points out that leases do not necessarily have to be long, but they should not have any peaks and concentrations. “In general, as with any other acquisition, we evaluate the potential income, its risk, the costs and the projected returns. If this all makes sense, we then consider the acquisition of such a building,” Karel Zeman adds.

Slow and steady growth

CBRE Global Investors, which is one of the largest players in the industrial and logistics field in the EMEA, has a portfolio of SBU properties in the UK and France. Karel Zeman characterises the company’s expansion in this sector as “slow and steady”, but he also says that the company is selective when it comes to the locations, since good locations are much easier to lease. Good ones, however, are also not so easy to find and developers also are not supplying much of this kind of product. “Developers are focusing on the big box segment, where the tenant activity is strong and the market is big. Right now they don’t feel that there are good enough reasons to engage in projects that are a bit more difficult,” admits Mateusz Iłowiecki. And this is not only about the availability of development land in good urban locations, but also about land prices, since a developer has to see the economic sense in taking on such a project. “If a developer solves all these problems, a very interesting investment product can then created. I would be very happy if we could develop 30,000–40,000 sqm of this space per year,” says Robert Dobrzycki.

Prologis, on the other hand, has no further plans for SBU development in Poland besides the two projects it has already completed. “In theory wencould develop something like this on our Poznań site, which is another urban location, but we currently do not have such plans. As for land purchases, we are going to focus on our core product – that is, large warehouses and production space. We are certainly not aiming to become the number one SBU developer in the country,” says Paweł Sapek. Other developers such as Goodman, P3 and MLP have yet to even express any interest in the segment.

Segro, for which urban logistics properties make up 50 pct of its investment in its European portfolio, sees the opportunity to develop more. The majority of this business (which includes smaller and medium sized warehouses in urban locations) is currently concentrated in the UK, while in continental Europe they account for less than 25 pct of the portfolio. “This urban distribution market is desperately underserved and a great opportunity exists to develop more of it to service businesses with ‘last mile’ delivery needs,” insists David Sleath, Segro’s CEO. So far the company’s Polish urban logistics portfolio comprises only three locations – Żerań, Ożarów and Łódź. Each offers some SBU type space. The company is not ruling out further expansion in Warsaw. “We are analysing the current market trends and assessing the investment opportunities,” reveals Magdalena Szulc, Segro’s business unit director in Central Europe.

In Poland there is 205,000 sqm of SBU space, making up app. 2.5 pct of the entire class ‘A’ warehouse market. This year’s new supply is expected to amount to 20,900 sqm in two projects: a new hall in Prologis Park Chorzów (14,900 sqm) and two buildings in Ideal Idea Park IV (6,000 sqm in total). Mateusz Iłowiecki considers it unlikely that the growth of the sector will accelerate, forecasting that it will stabilise at around two projects per year. The country head of Prologis in Poland agrees with this prognosis: “There will be new projects and more will appear, but we are certainly not going to see the same growth dynamics as those of the entire warehouse market,” predicts Paweł Sapek.