The logistics and industrial sector remains attractive to investors, although the growth rate of both supply and demand may be lower
In the first quarter of 2022, the volume of investment transactions in the Polish industrial and logistics real estate market totaled €191 million. And although the current economic situation, coupled with significant uncertainty due to the war…
Izabela TrancygierMay 23, 20227-minute read
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In the first quarter of 2022, the volume of investment transactions in the Polish industrial and logistics real estate market totaled €191 million. And although the current economic situation, coupled with significant uncertainty due to the war in Ukraine, poses further challenges for the logistics industry, in the long term there will be no major changes in terms of supply and demand, although the growth rate of this segment of the market may be lower than in previous years—according to a report by 7R and Colliers “The Logistics and Industrial Sector: Development Trends from a 2022 Perspective.”
Unlike many other sectors of the economy, the pandemic turned out to be one of the key drivers of growth for the entire warehouse industry in 2021. This was due, in part, to increased demand for courier and logistics services, which required the development of appropriate infrastructure. Developers responded very quickly to the increased demand; thanks to their large land banks, they were able to begin construction of new facilities almost immediately and respond to the market’s growing needs on an ongoing basis.
The situation we witnessed in 2021 was unprecedented in many respects. The pandemic accelerated many processes that would normally have taken much longer, including the digital transformation. It also highlighted the vulnerability of supply chains and led more and more companies to shorten them. The war in Ukraine is causing significant market uncertainty. 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 give a new impetus to the development of clean energy in Europe, and this may translate into a growing emphasis on sustainable industrial construction. On the other hand, the inevitable rise in rents will draw even greater attention to the optimization of operating costs, as well as the importance of proptech solutions in this area.
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 the first quarter of 2022 exceeded 25 million square meters. During this period, developers delivered nearly 1.3 million square meters, marking the highest figure to date in the history of the Polish industrial and logistics market. The past quarter was also marked by a record volume of space under construction. At the end of March 2022, it stood at 4.8 million square meters.
Whether the market’s growth rate for the whole of 2022 will be similar to that of last year will depend on many factors. Among them, the most important is undoubtedly the potential escalation of the war in Ukraine and its economic consequences.
A significant increase in construction costs has been evident since the start of the pandemic, but the war in Ukraine has accelerated this trend. In the long term, we can therefore expect increases in base and effective rent rates, driven in part by higher raw material prices, as well as rising operating costs and energy prices. This, in turn, may lead to changes in lease terms, as developers, seeking to secure future revenues, will be less inclined to offer long-term leases (e.g., 15-year leases) and will instead favor short-term leases. It is worth noting, however, that while rents will rise, they will still remain competitive compared to Western markets.
Maciej Chmielewski
Senior Partner, Head of the Logistics and Industrial Division at Colliers
According to the authors of the 7R and Colliers report, the limited availability of construction materials and higher fixed costs associated with development projects pose a major challenge for both warehouse developers and their tenants. They also highlight another critical issue: the labor shortage in the construction and logistics sectors, where Ukrainian nationals have historically made up a significant portion of the workforce. With nearly 1 million people having left Poland for Ukraine, the industry now faces a major challenge in filling this gap. Otherwise, we will face serious difficulties, which in turn will result in delays in the schedules for individual projects and a slowdown in the growth of new warehouse and logistics space.
Warehouses remain on investors' radar
Data compiled in the 7R and Colliers report shows that the investment market in Poland saw another surge in 2021 in terms of logistics and industrial projects, which accounted for nearly 50% of the capital invested—approximately €3 billion. Capitalization rates in this sector have compressed by another 120 basis points over the past year. This translates to a record-low level of 4.3% for prime multi-tenant properties and approximately 4% for large new properties leased to single, reputable tenants for a term exceeding 10 years.
In Q1 2022, the volume of investment transactions in the industrial and logistics real estate market totaled €191 million. In terms of capitalization rates, there were no significant differences between the beginning of 2022 and 2021. Until the end of 2021, there had been a downward trend in capitalization rates. The end of Q1 2022 saw a reversal of this trend, driven in part by inflationary pressure.
Geopolitical changes beyond our eastern border have clearly sent shockwaves through the capital markets. In the initial phase, fund managers focused on ongoing processes and assessing the impact of these developments on the profitability, stability, and liquidity of the assets being acquired. At the same time, they adopted a “wait-and-see” strategy for all new investment processes. However, an important factor influencing the strength and duration of this strategy was the source of the capital. European capital fully understood what it means for the Polish real estate market to be a member of the European Union and an active NATO partner, which led to the rapid identification of potential scenarios—most of which were positive for the warehouse real estate market—and influenced decisions to actively participate in new real estate acquisition processes as well. American capital was initially more cautious, but is now returning in search of interesting, reliable projects. It is worth noting that capitalization rates for new transactions remain very competitive.
Łukasz Jachna
Member of the 7R Management Board, Chief Capital Markets Officer
There is no single scenario for the market
In addition to the limited availability of new sources of energy resources and construction materials, financial instability and high inflation are factors that the 7R and Colliers reports cite as significant in the context of a potential, temporary decline in the investment attractiveness of the Polish industrial and logistics market. However, experts from both firms also point to opportunities for the industry’s continued growth, including increased investment interest from Eastern European entities, a gradual increase in the labor force, enabling the construction of new facilities in an ever-growing number of locations, and the development of smaller logistics markets, which until now have been characterized by the highest levels of vacancy rates and available warehouse space.
However, which of the above factors will gain prominence in the near future will largely depend on the scenario that unfolds in Ukraine, and with it, the scale of military operations in that country. According to the macroeconomic analysis by Prof. Witold Orłowski, prepared for this report, the optimistic scenario assumes a gradual stabilization of commodity prices and a normalization of the situation regarding development activity and the investment climate in Poland. For this to happen, relations between Russia and the other EU member states should take a path toward de-escalation, and any escalation of these relations will result in a deterioration of the long-term outlook.
Izabela Trancygier serves as Head of the Central-South Region at 7R and is responsible for the company’s business development in the Central-South region. She oversees the leasing and development divisions,…
