Our resilient supply chains

Nathan North, Eurobuild CEE: How has the beginning of the year been for Prologis in Poland and the CEE region? Has the last quarter been less busy for you because of all the uncertainty, or are you seeing a more positive vibe emerging?

Paweł Sapek, senior vice-president, regional head CE & country manager, Prologis: Due to the fact that our operating results for 2022 were our best ever, everything we did in Q1 2023 was always going to be compared to the record results of the previous year. The last quarter was unique for us, but also, in the end, very good. In general, our CEE results reflected better-than-anticipated revenues, driven by healthy leasing activity and solid rent growth. As such, our focus will now be on our prime real estate portfolio, which is in very good shape and has an extremely low vacancy rate. We expect new supply to contract somewhat in 2023 across Europe – in Poland, in particular, it will be much reduced compared to previous years. Our financial strength helps us to continue to be active and to take a highly positive outlook. While we finished last year in the CEE region with historically high occupancy, above 98 pct across Europe, there was a change in the valuation of our assets. This correction in valuations should mature Central European markets further, more in line with Western European market pricing.

We continue to deliver record results driven by the unparalleled quality of our portfolio and our customer solutions. We expect market values to finally adjust and stabilise in Q3 2023. This could raise strong new dynamics in terms of investment opportunities or even some consolidations in the near future.

Did you go to the MIPIM fair in Cannes in March? If so, how did you gauge the mood there?

I did, and the atmosphere was as positive as the weather! Having said that, there was an air of ‘wait and see’, in terms of investment. There’s a lot of capital on the market, but people are still monitoring the situation closely.

And how do you see the present situation? Are the continuing high inflation and interest rates having an impact on the warehouse market in terms of leases, rents and new developments?

The general economic situation, which as you said is characterised by high inflation and high interest rates, has meant higher construction and development costs. The results of the latest Prologis Logistics Real Estate Rent Index report, published in February 2023, confirm that 2022 was an exceptional year for the logistics sector. Global nominal and real rent increases were the highest since Prologis started monitoring them in 2007. This growth was influenced by rising construction costs and real estate values, a shortage of attractive land, and mounting regulatory barriers slowing down the development of new properties in prime locations.

Significant increases in replacement costs (accelerated by the war in Ukraine) pushed rents upward, even in more land-rich locations. Take Poland, for example: this market has lagged in the past, but rents here increased by more than 20 pct. Rising construction costs, in combination with land acquired at peak pricing, has prompted developers to increase rents to support new development. The growing replacement costs underscored the rent growth across markets, but the relationship was strongest in land-rich locations where new supply can rise quickly to meet demand and where trader-developers build at low margins, such as Poland. Supply chain pressures are meanwhile starting to ease, which is reflected in material costs stabilising in some markets and falling in others. The expected declines in material costs and land values in 2023 are being offset by yield expansion, requiring higher rents to justify the risk of development. Rent growth of another 10–15 pct is still needed in Poland to make new supply feasible. Construction costs are showing signs of stabilisation, even of decreasing slightly. There’s still a positive upward growth trend for industrial rents in Poland, but they remain among the lowest in Europe. While development costs elsewhere in the EU are between 15– 20 pct higher than in Poland, rents tend to be double those on the Polish market. So there is still room in Poland for a correction in rent levels. The restricted supply in Q1 is a positive factor given that demand, while softening a little, has remained strong. All of this gives us every reason to expect a good 2023.

Has the war in Ukraine also been having an impact on your business? And is it possible that when the war is over, the CEE warehousing sector could benefit from the reconstruction effort?

The war did have an impact on inflation, and it could have led to an energy crisis, but thankfully that didn’t happen. Of course, we hope that the war will come to an end soon, but this is unlikely to provide any kind of boost for the CEE industrial real estate sector. The construction sector is the area most likely to benefit from the future reconstruction of Ukraine.

There has been one other ‘black swan’ event recently – the difficulties certain banks have found themselves in. How worried are you about this in terms of what it might mean for the economy, and how could it affect your own business strategy?

I wouldn’t say that we have a banking crisis on our hands. What happened with Silicon Valley Bank and Credit Suisse was completely unexpected, and I think the only relevance it may have for our business is the addition of another factor to our risk assessment. But Prologis has a very healthy balance sheet and good financial strength, and we are still focused on development and acquisitions. Poland is a market where we are still planning further activity.

Coming back to your earlier remarks about revaluations. How substantial have they been in this part of the world, compared to, say, Western Europe?

There have been significant changes in asset valuations across Europe due to the cap rate expansion, with the biggest taking place in the UK and Western Europe. In Poland and the CEE region, the shift in yields has been offset by continuous rent growth, while the revaluations over the last two quarters have been in single digits.

Is the CEE region, then, still a better place to operate?

Well, this depends on your business model. For the owners of long-term portfolios, the answer is definitely yes. But we are still waiting for the final adjustments to the cap rates so that we can establish the long-term value of portfolios. The market is much more difficult for trader-developers who need to secure financing for individual projects, and for those seeking a quick exit from their investments.

Is it still the case that the boom in e-commerce is driving the whole sector? Or has it finally peaked? And what about the much-discussed potential demand from near-shoring?

Over the last 2–3 years, e-commerce really heated up the warehousing market, and this trend was greatly accelerated by the pandemic. But since then, inflation has impacted the level of online spending and this has dampened the demand for space from e-commerce companies. However, the big e-commerce players made long-term plans 2–3 years ago and they still have a lot of space reserved from back then. So it’s still too early to judge whether the e-commerce boom is over. As for near-shoring, when we first started talking about this phenomenon, we expected it to come to Poland much faster than it actually did, with companies relocating operations from places like China. But, as it turned out, near-shoring is rather complicated and these projects require a lot of due diligence. So the demand from near-shoring has not been as big as was expected. There is still some movement from markets like Germany, but not so much from Asia.

Another big topic at the moment is the coming into force of EU sustainability reporting. How much does this apply to you and your customers? Is a big landlord like Prologis ideally placed to support them in this regard?

From the landlord’s perspective, the new EU taxonomy has created some additional administrative requirements. A lot of people have been talking about ESG for years, but now there are real obligations. At Prologis 4.5m, we have had ESG policies in place for decades, coordinated within EU and global frameworks. We support our customers as well, in meeting their own requirements and are significantly committed in this regard – after all, we share common targets. In our 2021/2022 ESG Report, Prologis committed to being net-zero by 2040 across its entire value chain. Among other drivers, we will provide 1 GW of solar photovoltaic generation capacity supported by energy storage, the widespread deployment of carbon-neutral construction by 2025, and the achievement of net-zero emissions from our own operations by 2030.

How does ESG manifest itself in terms of the development of your warehouse parks? Are employee well-being and the trend for campus-style parks now playing a big part in this?

Yes, they are. Our Parklife mindset demonstrates to communities and local authorities that logistics developments can be positive drivers of change and that they provide much more than just four walls and a roof. We have been working with our customers to help them retain their workforce by creating friendly places that people are even happy to spend time in after work. Some of our parks, for example, have football pitches where customers hold regular tournaments. Parklife will already be familiar to Prologis park users through such features as green areas for rest and recreation, electric car charging stations, bike shelters, public transport stops, and a wide range of other services intended to boost the experience of all who use our logistics centres. In Poland, we have introduced BookBox open-air libraries and bicycle repair stations, as well as shelters for small animals, such as hedgehog houses, insect hotels and nesting boxes for bats. Last year, we launched a mobile bicycle service across five Prologis parks in Poland that has serviced a total of 138 bikes. We have also invited employees of four Prologis logistics parks for free dermatological consultations. The pride and joy of Prologis Park Janki, meanwhile, is its 8,000 sqm bio park and outdoor well-being zone. These are just a few examples of our activities that are having a positive impact on communities, environments and individuals throughout Central Europe.

Well-being became a major topic in office space a few years ago, and it was always clear that it would also become important in warehouses. We see a lot of advantages in boosting well-being, as some of our customers previously reported to us that their employees would consider transferring to rival companies for just a little more money per hour. We came up with solutions to help them retain their workers, including improving the quality of workplaces with better lighting and brighter colours for a friendlier environment.

Where are we now in terms of the automation of warehouses? Is this still a crucial factor for the future development of the sector?

Modern, automised warehousing represents a vital technological link in the supply chain and in logistics operations. Innovation is, therefore, still crucially important in real estate. Digital solutions are being introduced to help companies remain competitive and efficient, such as automated warehouse processes, product tagging systems, sorting, conveyor belts and robots that retrieve products from shelves. Digitisation increases safety and improves the quality of work in warehouse and production facilities. For example, temperature monitoring systems and sensors make it possible to quickly detect failures or deficiencies, which in turn translates into the better protection of goods and increased customer confidence. In addition to that, smart energy metering and automatic licence plate reading systems are also among the solutions we are introducing to streamline the operations in our parks. For projects such as these, we’ve set up PrologisLab, which analyses dozens of potential solutions every year, many of which are implemented. We have also established Prologis Venture to invest in start-ups specialising in new tech that could significantly change the industry, so that we can be close to the latest innovations and quickly implement them. Generally speaking, our view of these technological changes is, like our view of the market, pretty positive – it’s a changing environment, but one that’s changing for the better.

A finger on the European pulse

Paweł Sapek is responsible for the company’s entire portfolio in the region (Poland, the Czech Republic, Slovakia and Hungary) with a total area of 4.6 mln sqm. In addition, he runs the Polish branch of Prologis and directly supervises operations in Hungary. He oversees the company’s investment and operating activities, including business strategy implementation, investment opportunities identification, new developments and customer acquisition. He has 27 years of experience in real estate and project management. He was formerly at Segro Poland, where he was business development director for the CEE region. Before joining Segro, he was employed by Washington Group and Ove Arup

& Partners. Paweł graduated in marketing and management from the University of Economics in Katowice. He also holds a postgraduate diploma in logistics management from the Warsaw School of Economics and is a chartered surveyor (FRICS).