In the first quarter of 2022, the volume of investment transactions in the Polish industrial and logistics space market amounted to 191 million euros. Although the current economic situation, combined with significant uncertainty due to the war in Ukraine, presents new challenges for the logistics industry, there will be no major changes in terms of supply and demand volume in the long term, even if the growth rate of this market segment may be lower than in previous years, according to the 7R and Colliers report “Logistics and Industrial Sector. Development Directions from the Perspective of 2022”.
Unlike many other sectors of the economy, the pandemic proved to be one of the key drivers for the development of the entire warehouse industry in 2021. This was due, among other things, to the increased demand for courier and logistics services, which required the construction of appropriate infrastructure. Developers responded very quickly to the increased demand, and thanks to large land bank resources, they were able to start the construction of new facilities almost immediately and respond to the growing needs of the market on an ongoing basis.
– The situation we observed in 2021 was unprecedented in many respects. The pandemic accelerated many processes that would have taken much longer under normal conditions, including digital transformation. It also made us aware of the sensitivity of supply chains and caused more and more companies to decide to shorten them. The war in Ukraine is causing great uncertainty in the market. The economic consequences of these events are difficult to predict, but in the long term, we can expect several significant changes in the context of the warehouse space market. Energy independence from Russia will certainly provide a new impetus for the development of clean energy in Europe, and this may translate into an increase in the importance of sustainable industrial construction. On the other hand, the inevitable increase in rents will draw even more attention to the optimization of operating costs, as well as the importance of proptech solutions in this area – says Tomasz Lubowiecki, founder and CEO of 7R.
Opportunities and challenges for the industry in 2022
According to data from the consulting firm Colliers, the total supply of modern warehouse space in Poland at the end of Q1 2022 amounted to over 25 million m2. Developers completed nearly 1.3 million m2 during this time, which was the highest result in the history of the Polish industrial and logistics space market to date. The past quarter was also marked by a record volume of space under construction. At the end of March 2022, it amounted to 4.8 million m2.
Whether the market growth dynamics for the entire year 2022 will be similar to those of the previous year will be decided by many factors. Among them, the most important is undoubtedly the issue of a potential escalation of the war in Ukraine and its economic consequences.
– A significant increase in construction costs was visible from the beginning of the pandemic, but the war in Ukraine accelerated this process. In the long term, we can therefore expect increases in base and effective rental rates, which are dictated by, among other things, higher raw material prices, as well as rising operating costs and energy prices. This, in turn, may affect changes in lease terms, because developers, in order to secure future revenues, will be less willing to offer long-term contracts (e.g., for 15 years) and short-term leases. It is worth noting, however, that although rents will increase, they will remain competitive compared to Western markets – explains Maciej Chmielewski, Senior Partner, Director of the Logistics and Industrial Department at Colliers.
According to the authors of the 7R and Colliers report, limited availability of building materials and higher fixed costs of conducting investments are a major challenge for both warehouse space developers and their tenants. They also point to another very important issue, namely the shortage of workers in the construction and logistics sector, of which Ukrainian citizens have so far constituted a significant part of the workforce. Due to the outflow of nearly 1 million people who left Poland for Ukraine, the industry today faces a serious challenge to fill this gap. Otherwise, we will face serious difficulties, and this, in turn, will translate into delays in the schedules of individual investments and a slowdown in the growth of new warehouse and logistics space.
Warehouses still on the investors’ radar
Data collected in the 7R and Colliers report shows that the investment market in Poland in 2021 recorded another jump in the context of logistics and industrial projects, which accounted for nearly 50% of the committed capital – approx. 3 billion euros. Capitalization rates in this sector have compressed by another 120 bps over the last year. This means a record low level of 4.3% for the best multi-tenant facilities and approx. 4% for large new properties leased to single reputable tenants for a period of over 10 years.
In Q1 2022, the volume of investment transactions in the industrial and logistics space market amounted to 191 million euros. In terms of capitalization rates, there were no significant differences between the beginning of 2022 and 2021. Until the end of 2021, there was a trend of decreasing capitalization rates. The end of Q1 2022 brought a reversal of this trend caused, among other things, by inflationary pressure.
– Geopolitical changes beyond our eastern border caused an obvious shock in the capital markets. In the initial phase, fund managers focused on processes already underway and assessing the impact of these effects on the profitability, stability, and liquidity of the acquired assets. At the same time, they applied a “wait & see” strategy to all new investment processes. An important aspect that influenced the strength and duration of this strategy, however, was the source of the capital. European capital perfectly understood what being a member of the European Union and an active NATO partner means for the Polish real estate market, which influenced the rapid outlining of potential scenarios, most of which were positive for the warehouse real estate market and influenced decisions to actively participate in new property purchase processes as well. American capital was characterized by greater caution in the initial phase, but is now also returning, looking for interesting, secure projects. It is worth noting that capitalization rates for new processes remain very competitive – says Łukasz Jachna, member of the 7R management board, Chief Capital Markets Officer.
No single scenario for the market
In addition to the limited availability of new sources of energy raw materials and building materials, financial instability and a high level of inflation are also factors that the 7R and Colliers report lists as significant in the context of a potential, temporary decline in the investment attractiveness of the Polish industrial and logistics space market. However, experts from both companies also point to opportunities for further development of the industry, including increased interest in investments among entities from Eastern Europe, a gradual increase in the workforce, enabling the construction of new facilities in an increasing number of locations, or the development of smaller logistics markets, which have so far been characterized by the highest level of vacancies and available warehouse resources.
Which of the above aspects will gain importance in the near future will largely be decided by the scenario that will accompany the events in Ukraine, and with it the scale of military operations conducted in that country. According to the macroeconomic analysis by Prof. Witold Orłowski, prepared for the report, the optimistic variant assumes a gradual stabilization of raw material prices and normalization of the situation in the context of development activity and the investment climate for Poland. For this to happen, relations between Russia and other EU member states should take a course of de-escalation, and any tightening of these relations will result in a deterioration of the long-term outlook.
The full report is available at https://www.colliers.com/pl-pl/research/polska-branza-logistyczno-przemyslowa-2022