The year 2023 was a time when entrepreneurs had to face various difficulties. In the logistics industry, the biggest challenges included high energy and labor costs. The warehouse real estate market, in turn, had to face an increase in vacancy rates and a decline in supply. But is stabilization on the horizon? Kamil Nurek, Project Manager at Hines, provides his commentary.
A complex situation in the industry
The Polish logistics sector can be described as stable, which does not mean, however, that the last year passed without major challenges. Companies are still struggling with the consequences of the war in Ukraine. In the Confidence Index 20231 report, companies pointed to the consequences of geopolitical events that they feel in their daily operations. These include higher operating costs, labor shortages, disruptions in international supply chains, and increased costs of financing operations. Furthermore, in general terms, rising labor costs had the most negative impact on supply chains, production, and retail sales. As many as 79 percent of companies felt the difficulties associated with employee expenses. This factor proved to be an even greater challenge than inflation. Entrepreneurs were also burdened by rising fuel and energy prices, an uncertain economic situation, and a shortage of materials.
On the road to stabilization
The state of the Polish warehouse market in the last year also saw noticeable fluctuations. During the first nine months of this year, developers delivered 3.12 million sqm of space – 13 percent less than in the first three quarters of the previous year. As a result, the sector’s total stock exceeded the 31 million sqm threshold, making Poland one of the fastest-growing countries in Europe in terms of logistics and industrial space. It is worth noting that after the first three months, when the market was supplemented by almost 2 million sqm of new warehouse space, supply slowed down. The second quarter brought only 692.6 thousand sqm, and the third – 527 thousand sqm2. This is the lowest result since Q2 2021 and is the result of a smaller number of new construction starts last year. However, it is predicted that by the end of 2023, supply will reach 4 million sqm3.
In turn, gross demand amounted to 1.5 million sqm, which makes Q3 2023 the best in this respect since June 2022. New leases had the largest share in demand (56 percent). Renegotiations accounted for 30 percent, and expansions for 14 percent4.
The vacancy rate has shown an upward trend since the beginning of 2022 – at the end of Q3 of this year, it stood at 7.7 percent. This value results from the fact that a large part of the new supply introduced to the market was not fully leased. Almost half of the space delivered in Q3 2023 did not find its tenants. Furthermore, almost 70 percent consisted of facilities built after 20215.
There is hope in the fact that there has been a breakthrough regarding space under construction. Its volume at the end of September 2023 amounted to approx. 2.5 million sqm, which means the first quarterly increase in this value since the beginning of 2022. From August to September of this year alone, construction of almost 900 thousand sqm of warehouse space was started. At the same time, there was a smaller share of speculative investments on the market – at the end of September 2023, it amounted to 40 percent6.
We are currently also observing a stabilization of rents, which had been rising intensively in recent months. In the most popular locations, monthly rates for renting the most modern spaces are in the range of 3.9-5.4 EUR/sqm, and in Warsaw, they reach as much as 7.5 EUR/sqm7. We will likely see declines in regions where tenant activity is lowest.
What awaits the market in 2024?
The common denominator of the changes we can expect in 2024 will be ESG issues, and in particular environmental aspects. In the short term, new legal regulations may appear, aimed at minimizing the negative impact of real estate on the environment throughout its life cycle. Investors will have to adapt to new standards; companies are already preparing for the expected requirements and are including ESG issues in their strategies.
Following the legal regulations, there will likely be new or updated building certification rules. Work is already underway on the BREEAM V7 system, which is intended to introduce indicators ensuring greater compliance with, among others, the EU Taxonomy and the SFDR regulation.
The energy transition will not happen without an increasing share of renewable energy sources. Despite legal and infrastructural limitations, investors will fight high energy costs and climate change by installing RES technologies in their properties.
The year 2024 will pose new challenges for the market and investors related to real estate valuation that takes ESG issues into account. Due to the lack of data and standards, appraisers are unable to fully account for the risks and opportunities associated with ESG in their work. This could lead to the creation of a so-called carbon bubble, a situation where property values are inflated as a result of an incorrect assessment of these risks. The market is therefore facing the task of developing guidelines and providing data that will facilitate the work of appraisers.
Of course, the trends do not end there. We continue to observe changes in the organization of global supply chains, as well as the intensive development of friendshoring, nearshoring, and reshoring. In 2024, we can therefore expect a larger share of transactions related to these processes. I also hope that both the general economic situation and the condition of the warehouse market and the logistics industry will continue to strive for full stabilization.
Sources:
1. CBRE, Panattoni, report “Confidence Index 2023. Tenant sentiment barometer in the warehouse sector”: https://mktgdocs.cbre.com/2299/c4efbcf1-1c6f-4932-bef3-df3965931396-654112733.pdf
2. AXI IMMO, report “Warehouse Market in Poland in Q1-Q3 2023”: https://www.axiimmo.com/raporty-i-publikacje/raport-rynek-magazynowy-w-polsce-w-okresie-1-3-kw-2023-r/
3. Cushman & Wakefield, report “TRENDS RADAR 2024”: https://www.cushmanwakefield.com/pl-pl/poland/insights/trends-radar
4,5,6. Colliers, report “Market Insights. Poland Q3 2023”: https://www.colliers.com/pl-pl/research/market-insights-q3-2023
7. CBRE, “Polish industrial and logistics market Q3 2023”: https://www.cbre.pl/insights/figures/polski-rynek-przemys%C5%82owo-logistyczny-3-kw-2023r-