A booming market, an increase in occupier activity

‘Eurobuild CEE’: Tenants have for several months been wondering whether there is any end in sight to the current rental growth. How has the current economic situation in Poland and Europe been impacting the Polish industrial market?

Jakub Kurek, Newmark Polska: The market situation is very dynamic, with a number of factors at play – including rising inflation as well as the prices of building materials and construction services. Virtually all materials, such as steel, timber and gravel, have gone up in price over the last year or so. There are also problems with the supply of some materials from countries to the east of Poland, such as gravel from Belarus and steel from Ukraine. Supply chains have been disrupted again – this time, for building materials. And on top of all that, at the beginning of the second quarter there was another quite sharp rise in the prices of some materials, which went up by another 20 pct between March and June. For example, suppliers of accessories for electrical installations have raised their prices by almost 100 pct due to the lack of manufacturing components. These rises across the market were bound to push up rents, which had been stable at relatively low levels for many months despite the growth in construction costs – as a result, developers can no longer build and lease warehouse space at the previous rental rates. We estimate that rents in Poland have gone up by around 15-20 pct since the beginning of the year, depending on the location.

Fortunately, the prices of materials have returned to a state of relative equilibrium in recent weeks, with some even falling slightly. Does this mean that warehouse rents are also set to fall?

Rents are beginning to stabilise, and I think they will reach a generally acceptable level by the end of this year. Having said that, we have to remember that occupancy costs are impacted not only by construction costs, but also by other factors. Most leading developers in Poland rely on external financing, so the continual growth in the cost of capital is also a key component in the final price of a warehouse. While loan interest rates are rising, financing institutions are tightening their borrowing requirements. Banks financing construction projects now insist that developers secure pre-leases for up to 50 pct of the built space, compared to around 20 pct a year ago or so. All this together has ultimately impacted rental rates and the way project profitability is calculated.

Will the tightening of financing conditions and longer warehouse delivery times lead to an undersupply?

Indeed, there is such a risk, especially in markets with the lowest vacancy rates. There are indications that most tenants have already accepted higher rents as their businesses grow and the need for new warehouse or production facilities is part of their growth journey. That’s why demand has not weakened – on the contrary, take-up in the first half of this year reached 3.82 mln sqm, up by 12.7 pct y-o-y. Poland’s overall vacancy rate averaged 3.1 pct at the end of June 2022, which is indicative of shrinking warehouse availability or even a lack of vacant space. In some markets, this may be a sign of an undersupply. Vacancy rates have fallen to all-time lows in the TriCity, Poznań and Kraków. There is also a shortage of ready-to-occupy warehouse space in Subcarpathia, Podlaskie and Warmia-Masuria. It’s worth pointing out that a healthy and safe vacancy rate should be in the range of 5–7 pct.

Meanwhile, the warehouse stock under construction shrank by around 380,000 sqm in the last quarter…

Developers have become more cautious about commencing new projects for the reasons I’ve already given, such as disrupted global supply chains, as well as shortages and the high prices of construction materials. For the same reasons, completion times for new projects have become longer and are now around 12–14 months compared to just six months a year and a half ago. Tenants previously enjoyed a relatively comfortable time in this market and are now unwilling to wait for new space because their businesses are growing and they need warehouses right now.

What’s the alternative?

A tenant who is very pressed for time could choose an existing older warehouse that is likely to be slightly less expensive. However, not all companies will want or are able to use such alternative facilities, as some expect bespoke space tailored to their specific business requirements. This creates space for speculative construction. Projects without pre-leases are being started by developers who are ready to accept some degree of risk and see an opportunity for themselves. Such facilities should be easily rented out in the largest logistics markets, such as Masovia, Silesia, Central Poland, Lower Silesia, Wielkopolska and the TriCity. At the end of H1 2022, close to 30 pct of the warehouse space under construction was being built purely speculatively. The spec projects underway include Hillwood Łódź II, which will comprise over 97,000 sqm of new warehouse space, Hillwood Kutno (39,000 sqm), Prologis Park Wrocław III (49,000 sqm), 7R City Flex Wrocław Airport II (11,000 sqm), Panattoni Park Tuszyn (57,800 sqm), and another warehouse being developed by GLP in Lędziny, Upper Silesia, with an area of 18,000 sqm.

There’s still more than 4.3 mln sqm of warehouse space under construction. Which developers are the most active market players?

Panattoni has, as usual, led the way for new construction, accounting for 2.8 mln sqm of the logistics development pipeline at the end of June. Its largest projects underway are a BTS facility for Zalando in Bydgoszcz (146,000 sqm) and a BTS scheme in Gorzyczki (82,000 sqm). The largest projects in the pipelines of other developers include Hillwood Łódź II (97,000 sqm) and Exeter Park Świebodzin with an area of 100,000 sqm, which is being built by Kajima Poland on a BTS basis.

Predicting the future is exceptionally hard at the moment. But if you were to make some predictions for the next six to twelve months, what would they be?

The times are indeed surprising and are changing at a rapid pace. The shortages of building materials as well as the high inflation and price increases have knocked the market off course. We were at a crossroads for a moment. The largest developers are building, albeit not as much as before. The warehouse development pipeline has shrunk slightly, but occupier demand remains strong. This is set against the background of very low vacancy rates – if it continues to trend downwards, we are likely to see an undersupply in some regions. Some developers are, however, ready to fill the supply gap by taking the risk and building speculatively. I think the market has to adapt to all these changes. Rents are expected to reach a generally acceptable level by the end of this year. I suppose speculative construction will accelerate in the months ahead. The Polish industrial market continues to attract strong investor interest and has been cementing its strong position in Europe. We are still very competitive in the region, with relatively affordable land compared with the West, as well as reasonable construction costs and motivated workers.