The only way is up

Rafał Ostrowski, ‘Eurobuild CEE’: You have developed a multi-level warehouse in the Gennevilliers commune in the northwestern suburbs of Paris. How do you feel about the whole project?

Andrew Gulliford, COO, Segro: Very proud. This is our first development of a multi-storey building and I think we’ve been bold and not a little adventurous. We picked our location extremely well and have developed a great project – and when clients lease up the space so quickly you have to think you’ve got something pretty good. So I think it’s safe to say that it is pretty good.

This is the first time Segro has done this, but how common are two-level warehouses on this market?

In the Far East they are fairly common. Places like Shanghai, Hong Kong have got quite a few multi-level warehouses. But in Europe it’s rather a new concept. Funnily enough, in Paris itself in the seventies and eighties a couple of examples of multi-levels were built. We have also got the only one so far in the UK, which we have acquired as a standing investment.

Are your competitors also developing this kind of building?

Not at the moment. A couple of our rivals are talking about doing this, but nobody has done so yet. We are also looking at some of our own existing sites and at new sites as well for this kind of project. So I think it is just a matter of time before we will be seeing this product in London.

Why do you think more will be on their way?

Because in London and in Paris the land supply is very tight for urban logistics facilities. Ikea is our tenant in Paris, from where it will supply its new city centre store format and the west side of the city for internet home delivery. Multi-storey buildings are the answer because they intensify the use of land close to urban centres. Low density, single-storey development in these locations isn’t available close enough to the end-customer. So the only way is up.

Will we be seeing this kind of development in Poland?

Well, interestingly, in Warsaw we are looking to buy some sites much closer to the centre than we have traditionally done. I think you’ll see us do this in the next six to twelve months. It will be for urban logistics and it won’t be multi-level, because at the moment you can still serve the centre of Warsaw quite comfortably with single-level. It’s not such a congested city and so the time it takes to get from facilities to the centre of Warsaw is not so long that you need to go multi-level. We are not quite there yet in Warsaw.

When will we be there?

This is something for the future. But for the older, major urban cities, such as London and Paris, and I suspect also for Milan at some point and Barcelona because things there are so constrained, multi-level already makes sense. It won’t make sense everywhere.

You said at the beginning that Segro has been bold and adventurous. Why does it require such boldness to develop a two-storey warehouse?

Well, it’s a new product for the market. It’s a new format, but one that we can see coming. This development has been, in a way, a kind of research and development project for us, in terms of how we put it all together, its shape and its configuration. Clients have said to us that they will be very happy with multi-storey as long as the operational efficiency isn’t compromised, as long as they can get goods in and out quickly, the doors are good, and if it doesn’t come with a forest of columns on the ground floor, because you need more columns to support the upper level. So it has to be carefully designed to have a good width and distance between the columns. The ramps are very wide, so if one lorry breaks down on the ramp, other lorries can still manage to get past. So it all involves thinking about things like that. And we have got that here. We started construction in November 2017 and it was all leased out by spring 2018. So pretty much nine months before it was even finished Leroy Merlin and Ikea had signed up for the space. It seemed bold and adventurous at the time and it feels a lot more comfortable now when we have done it and got it leased.

So did you consider the risk of not being able to lease it?

We were very cautious with the leasing assumptions. We thought that it would need to be built first and people would need to see it before we could lease it. We also thought we would lease it in smaller areas than we eventually did and therefore that it would take a bit longer to lease. We thought that the first level rents might be a little less than the ground level, because these are a bit different. But none of that has proved to be the case. We leased it faster, in bigger blocks and at higher rental levels overall. So all of this has been a great confidence boost.

How do the rents compare to a regular building?

Here in Paris it’s about EUR 100 per sqm annually and that’s actually fairly typical of rents in this area. So obviously you have to set them a bit higher because it costs more to build the two levels. The overall construction cost would typically be about 30–40 pct more, but you are getting double the square metres on the same area of land. So when we look at the metrics, basically the profit, the development yield and the internal rate of return, then this scheme, although it costs more to build, works very well.

So why aren’t more of these buildings being developed?

I think what gets in the way of more schemes of this kind is not that we or occupiers don’t want them, but it’s rather more about the shortage of sites where it’s possible to actually build this type of facility. Because if you have a tight site that’s very difficult to build on, you need to have a circular ramp because you don’t have the space – and that takes out a lot of the area of the site. Then your cost dynamics really start to hurt the value of the project and the economics start to deteriorate. So you need the right shape and size of site to really make it work. You have to analyse the market and assess the location – and that for us means talking directly with our clients. So developing this project, and developing our thinking on multi-storey properties, has involved holding a lot of client forums, with a great deal of client interaction and presentations of prototype designs: How does this work for you? What do you think?... These are clearly projects of much greater complexity, so they require that volume of input. ν

Paris Air2 Logistique in Gennevilliers near Paris

Leasable space: 63,000 sqm

Date of completion: January 2019

Area of site: 8 ha

First level: 10m ceiling height, 48 lorry docks

Second level: 7m ceiling height, 23 lorry docks

Total building height: 20m

Tenants: Ikea France (50,000 sqm), Leroy Merlin (13,000 sqm)

Developer: Vailog (a subsidiary of Segro Group)