Back to the future – or the past?

‘Eurobuild CEE’: Last year turned out to be a record year for warehouse developers. Did H1 maintain this trend?

Paweł Sapek, Prologis: 2022 was Prologis’ best year ever and it was a very good year for the industry as a whole. This was confirmed by the results of the Prologis Logistics Property Rent Index report, which found that global rental increases in nominal and real terms were the highest since 2007, when our research department started monitoring them. This increase was driven by rising construction costs and property values, as well as a shortage of attractive land compounded by regulatory barriers that have slowed the supply of new properties in prime locations. As a result, rents rose by 34 pct in the US and Canada last year, and by 15 pct in Europe. A combination of strong demand and limited new supply in the US also led to a decline in vacancy rates to 3.2 pct, while in Europe vacancy rates of 2.7 pct continued the record low levels seen in previous years. Following record rental growth of 30 pct in 2022, Prologisʼ experts now forecast a normalisation due to a slowdown in the pace of transactions and increased speculative supply in some markets. The first half of this year has confirmed these optimistic forecasts; we ended the second quarter of 2023 with rental growth of more than 28 pct in the twelve countries where we operate in Europe, with an occupancy rate of 98.2 pct across a portfolio of more than 22.3 mln sqm of modern warehouse space.

So can it be concluded that the market has now achieved stabilisation?

On the contrary, the market is constantly changing and attempting to stabilise. Today, fulfilment forms the backbone of the supply chain, and it is evolving at an unprecedented pace. This evolution is being driven by changing customer demands, new technological advances, and global economic changes. As companies seek to keep their edge in this dynamic landscape, it’s critical for them to identify and adapt in order to maintain competitive advantage while continuously improving performance and preparing for future growth. Unfortunately, some players on the Polish market have reverted to the kind of short-term strategic thinking that we had thought a thing of the past.
Focusing solely on the here and now limits their ambitions simply to survival, with decisions being made based primarily on price. This, in turn, can lead to a decline in – or complete halt to – further rent increases, which, to be clear, have only now become realistic, reaching acceptable levels of profitability. The warehouse market, like the economy as a whole, is in a phase that requires reliable forecasting, long-term planning, and consistent implementation. This is the only way to achieve stable, predictable, modern and sustainable logistics. What matters is future-oriented thinking in terms of further investments and growth. This is not possible without appropriate levels of rent change and rent growth.

This is indeed a challenge for the industry. What else is changing in this warehouse revolution?

One of the three major trends that has intensified in the wake of the pandemic is the reduction of capital expenditure (CAPEX) on physical assets, such as warehouses, transport and warehouse logistics infrastructure. Companies are instead shifting their investment strategies towards operating costs (OPEX) to maintain financial flexibility and reduce risk. Instead of large upfront outlays, many have moved to flexible leasing or rental models, outsourcing certain functions and prioritising pay-as-you-go contracts. What’s more, the tax benefits of opting for OPEX mean immediate savings to improve cash flow when it is needed most. With such resources at hand, organisations can adapt more quickly to changing market conditions, allocating funds strategically according to demand. This is particularly important for supply chain structures, where fluctuating costs, regulatory requirements, shifting peak periods and transport can have a major impact on operational expenditure. Among other things, this was the starting point for the implementation of our Prologis Essentials platform, which offers sustainability, energy management, electromobility and warehouse equipment solutions.

Have customers in Europe and Poland been convinced by this service?

Yes – in Poland alone, we have already completed more than 50 transactions through Prologis Essentials this year. Work on the platform began in the United States less than three years ago. In Poland, the service was implemented more than a year ago, and now we can say that thanks to the work of our experts, customers are making use of the solutions it offers more and more confidently. I would like to point out that we are the first and only developer to offer a turnkey warehouse – one that is fully equipped and ready to use from the first day of the lease agreement. This is the first complete offer in the field of warehouse solutions. Its modular nature allows customers to choose what they need at any given time, such as racking, forklifts, cleaning machines, electric car charging stations, and other equipment that makes it easier for them to use their warehouse, while facilitating optimal usage of the available space. This brings us to the second trend defining future growth: the optimisation of space.

How can this be understood? And more importantly, how can it be put into practice?

As land availability and costs become increasingly challenging in many locations, optimising existing space and maximising the use of warehouse space has become key. To this end, technology is being used to analyse the layout of warehouses as well as material flows and inventory management, all with the aim of increasing warehouse efficiency and throughput. The implementation of robotics and automation solutions such as autonomous mobile robots (AMRs), conveyor systems and automated storage and retrieval, as well as warehouse management systems (WMS), are major developments that significantly improve warehouse efficiency and reduce labour costs. Other optimisations, such as narrow aisle forklift equipment, increased rack heights and strategic workflow improvements, dramatically speed up operations and throughput, enabling improved productivity. These tools and practices help achieve warehouse space optimisation while contributing to operational excellence and adaptability, in so doing meeting customer requirements and reducing operational costs. We strongly support our customers throughout this process. We create solutions and implement technologies that irrevocably change the nature of modern warehouse facilities. A perfect example is the implementation of the Prologis Essentials platform. It’s also worth noting that since 2016, our Prologis Ventures fund has invested over USD 180 mln in nearly 40 companies, including cooperation with Lucas Robotics, which produces and delivers mobile automation solutions for warehouses.

So it’s technology, technology, and more technology?

There’s no turning back from the digital revolution, especially in the logistics industry, and the warehouse is the next point of supply chain transformation. In order to stay competitive and future-focused, investment in IT infrastructure is essential; it is perhaps one of the biggest drivers of warehouse operational efficiency today. Key IT investments include upgrading hardware, software and network capabilities to take advantage of increased bandwidth, redundancy and access points. With the growth of e-commerce and multi-channel order fulfilment, companies are also implementing artificial intelligence, machine learning and predictive analytics to optimise routing, planning and inventory management. These enhancements can significantly improve real-time process monitoring, data-driven decision-making and flexibility. All this leads to building a real competitive advantage. We observe and support the digitalisation of our customers’ processes. We are an important partner, initiator and implementer of such changes, a role which we see as a serious responsibility given the scale of our global operations. After all, 2.8 pct of the world’s gross domestic product (GDP) was calculated as flowing through Prologis facilities in 2022 by ‘The Future Flow of Goods’ report. In practice, this means almost 3 pct of all goods produced and sold worldwide ‘passed’ through our logistics properties that year. We play a central role in shaping trends and we stay a step ahead of what the future will bring.

And what will the future bring?

It is clear that supply chains will remain in a state of constant evolution. Staying ahead of what’s next requires proactive monitoring of trends and emerging opportunities, especially at a time when technological advances are happening at record speed. The drive towards net zero emissions is accelerating, and the logistics industry is under pressure as a key sector in need of transformation. With our scale and size, we are supporting customers on the road to net zero. We are helped in this by the Prologis Essentials platform, including Prologis Energy, through which we offer efficient energy solutions, smart LED lighting systems and electromobility solutions to our customers.

Despite the many challenges and objections, electromobility is now becoming a reality. How do you intend to support customers in this area?

As climate change mitigation takes centre stage, companies face an urgent need to achieve net-zero targets and adapt to changing regulatory pressures. The logistics industry plays a key role in this transformation. Electrified fleets are a practical solution to reduce greenhouse gas emissions, but the transition to electric drive requires careful planning and coordination of various complex elements. As a warehouse space developer, we want to help our customers prepare for this change by providing optimal solutions, especially in the context of fleet electrification and vehicle charging at logistics parks.

Have you implemented any solutions yet?

Our flagship electromobility project is the DC5 building at Prologis Park Tilburg, built based on a circular design using a high percentage of recycled building materials, fully equipped with LED lighting, and equipped with solutions to promote health and well-being for employees. On the roof of the 41,000 sqm warehouse are 9,300 solar panels with a total capacity of 4.2 MW. As there was only a 1.75 MW electrical connection, we could not feed the generated surplus back into the grid. As such, we set up a 1 MWh intelligent battery system – the size of a shipping container – allowing us to better coordinate energy generation and consumption for heat pumps, electric vehicles and machinery. This solution is good for the planet and also for our customers.

To conclude, what plans does Prologis have for the coming year? And what would your message be for all Expo Real participants?

Prologis has been active in the global logistics real estate developer market for more than 40 years, and in Poland for more than 25 years. During this time, the market has changed, evolved, survived global crises, and broken records – and we have consistently maintained a trajectory and pace heading forward and upward. This is here to stay. In the near future, we intend to focus on continuing our long-term growth. We plan to do this by leveraging the potential of our existing capabilities and land, as well as by significantly increasing the size of our central European portfolio through acquisitions of existing buildings and property portfolios.

To all Expo Real participants, I wish a mature, responsible and transparent European warehouse development market. I hope that we will all be able to focus on the real, long-term value that we can deliver to our customers, shareholders and investors.