Supplying the city

Rafał Ostrowski, ‘Eurobuild Central & Eastern Europe’: What types of city logistics projects are you currently working on?

Agnieszka Góźdź, sales director for Poland and Romania, MLP Group: In Poland we have started two pilot projects. One is in the MLP Poznań West park, and the other is in MLP Pruszków II. We are completing their design and intend to start construction work this year. Each of the warehouses will have 10,000 sqm. The project in Poznań will offer modules of 1,600 sqm, while in Warsaw they will each have 1,000 sqm. The completion of their construction has been scheduled for H1 2019. Projects are also to be built in the future in Cologne and Mönchengladbach.

Is this the first time MLP’s has ventured into this sector – or do you have previous experience in it?

In fact, city logistics modules started to be constructed prior to the 4,000 sqm project in MLP Pruszków II. This project is already under construction and should be ready for tenants in December. The decision to carry out this project was made because one of our long-term tenants needed additional space. We didn’t have any such small modules in MLP Pruszków I, so we decided to build a small facility with three modules in MLP Pruszków II. Although this was a bit different, as there was no superior-standard office in it, the project showed how great the demand for city logistics is. We could lease a lot more of such space if we already had it. So we decided to build more projects.

So how is the leasing of your pilot projects going?

As I said before, we have started the construction of buildings in Poznań and Warsaw – and we are seeing a great deal of interest from potential tenants, so we are currently negotiating the first few contracts. The first stage should be fully leased in a few months.

Who is interested in this kind of space?

There are two main groups of potential city logistics clients: the first includes e-commerce tenants and courier companies, while the other includes medium-sized Polish and foreign enterprises, production companies and distributors – they have an increasing need for modern warehouse space together with a high class office. The functionality and size are not the only criteria for choosing such space, because it should be borne in mind that big box warehouses are too deep and large for them, and added to that the appearance of the space and the quality of the offices are also important to them. For many of our clients, the project will be their headquarters and a showpiece for their suppliers, banks and, above all, their employees – whom they will provide with modern and high-quality work space. In our city logistics, this office space constitutes around 20 pct, while in big boxes it is around 5 pct or – less often – 10 pct. Let’s not forget that these medium-sized businesses and distributors generate most of the economy’s jobs – and they often employ a similar number of employees in city logistics modules as in large big boxes.

What is MLP’s main concept for this kind of building? What’s the recipe for success that you’re following?

These projects are unique because they will have very elegant offices. The façades at the front are completely glazed and more typical for modern space located in office buildings in city centres than for warehouse complexes. The entrances are also elegant and the offices themselves are comfortable, with a high standard of finishing, air conditioning and good lighting.

So the offices are key. What else?

Well, the warehouse itself has the same technical specifications as big boxes i.e. they are 10m in height. This is important because companies often use high storage racks as well as installing mezzanines or automation. Here they will be able to use the full height. For example, they can have three levels of storage and thus increase the efficiency of the usage of the space

There are many warehouse developers currently who are embracing city logistics. Are you not worried about the competition?

No, we are not – because there are simply no such modules in Pruszków or in the Poznań area. We are competitive for these typically urban locations located just a few kilometres from city centres. Our city logistics projects are situated several kilometres further away, but as a result the rents are much lower.

What kind of rent levels might they be?

We generally offer rent of app. EUR 3–3.5 for warehouse space, while rents in locations such as Warsaw amount to app. EUR 5–6.5.

And what is going to happen next – after these two pilot projects?

MLP Group’s strategic goal is the introduction of city logistics facilities to the main Polish and German cities – we are present in all the main logistics hubs and can build such buildings in virtually all of our parks.

And will you be fighting it out in the typical urban locations in Warsaw, such as Okęcie, Żerań and Ursus?

At the moment we have a large land bank, so we will stay in the locations where we are already present. Our parks are really well located and we will be developing there. Especially since we don’t get embroiled in amount of square metres leased – we don’t care about quantity, only about quality, so we will focus on long term clients. The main parameter for us are the returns from the project, i.e. from the capital invested.

Where will city logistics projects be developed in Poland?

The most intensive development of such projects will be around the major cities. The vast majority of the population lives in urban areas and this proportion is expected to grow. Companies need to ensure that their warehouses are much closer to the densely populated urban areas which their end-customers live in. Logistics serves not only their individual clients, but also the many shops, restaurants and recreational facilities visited by the local populace. This means that supply chains are under increasing pressure to deliver fast moving products and commodities to cities – often within a very short time frame.

What kind of pressure is this putting on the warehouse sector?

Traditional warehouse models don’t make any sense to internet retailers trying to keep up with the demands of their customers in terms of transport. The possibility of offering inexpensive two-day delivery, same-day delivery and inexpensive goods returns requires a great deal of inventiveness from e-commerce companies. In the past, many have tried to remain competitive by having a single central warehouse located right in the middle of the country. But this kind of strategy doesn’t work anymore because customers often expect delivery on the same or the next day. In order to offer increasingly short delivery times – which is a must in today’s highly competitive environment – companies will have to significantly increase the number of warehouses in their chains. Online retailers are starting to add smaller urban warehouses to their supply chains, as the pace of purchases and deliveries changes the way the distributions are made. The expectations of online customers regarding deliveries are constantly changing and becoming more and more difficult to fulfil. In Europe, the number of online buyers has almost doubled in the last ten years. Interestingly, the Polish market is the fastest growing e-commerce market.

How do you go about looking for plots? Do you have a special way of doing this?

We often use local real estate agencies that are very knowledgeable in a given area, so they are able to find us the best plots.

What are the main challenges related to the construction of such projects?

We don’t really see there being any special challenges. We’ve been on the market for twenty years, so we’re experienced in building logistics facilities. The increase in the costs of construction of such facilities and, generally speaking, construction production will of course have an impact on the rent levels for our space. The construction costs of such facilities alone are higher due to the costs of the walls and of dividing the utilities. We have an excellent investment department managed by Tomek Zabost, who has supervised the construction of several million square metres in Poland. He is responsible for building all our parks and I think that city logistics projects are not so complicated as to be a challenge for his team.

And what about the management?

This is also our strong point. MLP Group’s strategy involves managing all our facilities ourselves and not building warehouses to sell them on – we always keep them in our portfolio. This gives our tenants the comfort and confidence that in five or ten years’ time they will be talking to the same MLP Group team rather than a manager who changes every year, as is the case in buildings owned by funds. Our warehouses are also of a better quality because we build them for ourselves. At the same time, as a manager we have an impact on the operational costs. This is also important because these costs are ultimately paid by the client. We also care about the environmental impact and aim to have our city logistics facilities BREEAM-certified. In line with our standards we already employ many eco-friendly approaches that reduce the cost of operations, such as LED lighting – and the green stripe on the façade of our buildings obliges us to do so.

Are these small modules, which are currently so fashionable among developers, really so profitable? Leasing a 10,000 sqm or 20,000 sqm warehouse ​​to a single client must be different from leasing 1,000 or 2,000 sqm – and certainly more labour-intensive.

The construction of city logistics is in line with our long term development strategy. We are striving to provide the full spectrum of formats for our clients. Undoubtedly, rents in city logistics buildings are higher than in traditional warehouses. Since we are listed on the stock exchange, the main parameter for us is the growth rate of the project, i.e. on the capital invested. Higher rents in SBU projects will certainly translate into an increase in the value of the MLP Group and, eventually, an increase in the valuation of our stock.

When will the city logistics market in Poland begin to saturate?

I think it will take at least a few years. City logistics is a new kind of format in Poland, largely determined by the growth in e-commerce. The demand for so-called urban warehouses across Europe has been growing because the number of e-commerce orders has been growing. I would currently assess the demand at several thousand square metres a year in Poland and about one million square metres in Germany. The increase in online shopping means that online retailers are increasingly investing in last-mile infrastructure, which makes it possible to deliver online orders to the customer within just a few hours.

Is it with such buildings that you are also thinking of expanding into Germany?

Yes, it is. We are already planning such facilities in Mönchengladbach and Cologne, also of 10,000 sqm. They are in the design phase now, but we should be able to launch construction at the beginning of next year. The German market is ultimately the main target for us. In the future we want to have as much warehouse space there as in Poland or more.

What will MLP Group’s city logistics portfolio be like a year from now?

I think we will have four completed projects – two in Poland and two in Germany – and at the beginning of next year we will decide which other cities we will be developing in. Our large land bank, close to the main cities, enables us to respond quickly to the changes on the market and to the ever-changing requirements of tenants. ν