Good morning. My name is Tomasz Szpyt, and welcome to another episode of the 7R.Blog.On podcast series. Today we’ll be discussing the investment appeal of warehouses. Our guest is Tomasz Kostrzewa, Senior IInvestment Director at 7R.
Good morning, everyone. A warm welcome to you all.
The title of today’s meeting is essentially a question: what are we dealing with right now? It’s the “15 minutes of fame” for warehouses, because warehouses weren’t exactly a sought-after investment product before. That changed a few years ago, and now warehouses have become a major player in the investment market. When and what changed?
It’s true that this asset class has a relatively short history in Poland. However, I think it’s worth looking at what has happened over the past fifteen years. The market for investment-grade leases of logistics and manufacturing space had a slightly different character. First and foremost, the lease terms were much shorter. Clients were looking for leases between 3 and 5 years. That was sort of the minimum when it came to leasing. This was due, among other things, to the fact that logistics operators were entering into these agreements for precisely those periods. Now, however, the revenue stream from a warehouse lease agreement is longer-term. It is secured for a minimum of five years. This is, in a way, the first factor that has made this asset class more attractive, but we have also observed a certain degree of specialization. Since there are more logistics companies, clients are entrusting this aspect of their operations to specialists. Current reports indicate that approximately 37–40% of the space is leased by such companies, and this percentage is clearly rising. This means that, from an investor’s perspective, this product is more stable and more predictable. It simply has a more long-term nature.
What is really driving the warehouse boom, and how much longer might it last?
The foundations vary in nature. There are foundations that stem primarily—in my view—from the maturity of Polish companies. As I mentioned, logistics was a somewhat mysterious field for a long time. Generally, everyone focused on sales, production, and marketing. Logistics, on the other hand, was neglected. Now that has changed, because delivery times and the ability to ensure inventory for companies are of critical importance. And simply put, maturity—in terms of management and corporate maturity—has led companies to seek modern and relatively flexible logistics space. That is one side of the coin. On the other hand, we also have consumer habits, of course. E-commerce, mentioned by many specialists, has recently become a common topic both in the media and in our daily reality. It is changing these habits. It is shifting consumption to the internet. That is where we spend our money and fulfill most of our needs. There are also factors of much broader significance when it comes to nearshoring—that is, moving supply chains closer to factories and closer to customers. This is particularly significant in our geographical region and location. And then there is what has brought about massive changes recently—the pandemic. A pandemic that has actually had an impact on several levels. For the logistics industry, for developers, and for investors. On the one hand, online shopping activity increased—which fueled a warehouse boom—but logistics as an asset class also benefited from capital flowing away from other asset classes. That is, from commerce, from retail, and from offices.
Am I to understand—knock on wood, of course—that once the pandemic is over, the bonanza in the warehouses will come to an end? Isn’t that a bit of a simplistic conclusion?
Fortunately, I don’t see that risk. Capital pressure will, of course, disappear, because capital naturally seeks out the best investments and the best returns. It will return to a certain kind of diversification. Although this balance will stabilize at different levels. Logistics will remain a very attractive asset class, significant in the portfolios of investors who specialize in real estate. However, a very strong trend will remain. Consumer habits will remain. These habits will continue to shape demand. In addition, a very strong group of highly specialized real estate experts will remain. I would like to mention this because it is a topic that is often overlooked. And the human factor in serving the real estate market is of key importance. Just fifteen years ago, we didn’t have specialists who knew as much about warehouses as we do now. There were no brokers, lawyers, leasing specialists, or capital markets experts who understood logistics. Logistics operates by its own rules and differs somewhat from other asset classes—and that is a major advantage.
Some consulting firms argue that the development of artificial intelligence could actually lead to significant job losses among agents, advisors—and perhaps even lawyers. Is this a trend that could actually come to pass?
This is an area we’re monitoring very closely at 7R, because the automation of production processes—both on-site, that is, within our physical facilities, and here in the office, in terms of sales, leasing, and managing the capital functions of the facility—is of great importance. In my opinion, automation will actually make significant strides within the physical structure of the buildings themselves. We’re talking here about various types of storage systems and systems that facilitate easier access to a given product. However, the specialization and automation of serving this market—that is, leasing or sales—will be limited to the most repeatable segments. Leasing and sales transactions are unique in nature and have a sophisticated structure—especially in the Polish context and this part of the legal jurisdiction—so that element of spontaneity and negotiation will always be important, so warehouses and processes, yes. However, the actual sales and handling of the entire sales and leasing process—here, it’s more about people.
In recent years, there has been very rapid growth in warehouse space in Poland. We have surpassed twenty million square meters. We will likely exceed twenty-five million soon. Where is the limit? Is it thirty, thirty-five, or forty million square meters? What is the absorption capacity of the Polish market in terms of this space?
From a developer’s perspective, of course, it would be best if this boundary did not exist, but we have to be realistic. Setting this boundary can be modeled in a certain way. If we look at mature markets—the markets of Western Europe—where the stock is, first of all, much more diverse, as it includes both older and modern properties. In Poland, the total supply of properties is mainly concentrated on modern properties—so-called Class A properties, prime properties. At the moment, we are actually approaching a stock of around twenty-four million square meters. When calculated per capita in Poland, this amounts to less than one square meter—0.6 square meters per person. If we were to compare the Polish market to the German market, where this space totals over seventy million square meters—that is, over seventy-two million square meters—this ratio increases significantly. Following this line of reasoning, I predict that saturation will occur at roughly between thirty-three and thirty-five million square meters.
In other words, every resident of the country should have their own little spot in the warehouse.
Absolutely. Whether it's a basement or a 7R warehouse—absolutely.
As the warehouse market has grown, new locations have also emerged. At first, it was central Poland, Warsaw, Silesia, Wrocław, Poznań, and Pomerania—those are the obvious ones. Where else can we expect this—let’s not be afraid to call it what it is—invasion of warehouses?
Warehouses are everywhere—and I say this with full awareness of the situation in Poland. The markets we call key markets—or “core” markets, as they’re known in English. Indeed, central Poland, Poznań, Wrocław—the major cities. However, we are observing a very interesting development and evolution of the so-called “core plus” markets. For example, Szczecin. This is a very dynamic market, and we are seeing significant growth. This is not only due to its geography or proximity to Germany and Scandinavia, but also to its highly specialized workforce. Another interesting example is the entire corridor along the S3 route—that is, along our western border, where parts of production chains are actually located. And companies are also taking advantage of the benefit of a cheaper workforce. On the other hand, the entire eastern part of Poland offers enormous opportunities. Here, as 7R, we have a presence in Lublin. We have a very strong presence in Rzeszów. I think we still have a lot to do in this region.
East, west, north, south. Warehouses are concentrated around road transport. Is there a chance that the intermodal segment—which currently exists in Poland only in a rudimentary form—will also develop?
Here we’re touching on a very interesting topic, because when we look at warehouses, we should be looking at infrastructure. Not at buildings that are unconnected and scattered across the map of Poland. Instead, they form a coherent network—an infrastructure network. If we add intermodal transport to this—that is, the actual potential for transshipments from river or rail transport—a very interesting picture emerges. Are we ready for this? That is a very good question, because at the moment most transport actually takes place on Polish roads. And investments are also heading in that direction. The growth of the road network in Poland is very impressive. Especially if we compare 2006, when there were a mere 930 kilometers of expressways and highways in total, to 2020, when the total length reached 4,300 kilometers. It’s clear that the focus is there. Personally, I am a proponent of intermodal transport, and I would very much like to see logistics develop in that direction.
Let’s hope so. The pandemic is starting to wind down, despite differing opinions on the matter. How will this affect the warehouse market—demand, perhaps supply, perhaps the growth of e-commerce? There’s also a limit to the Polish market’s capacity. My question is this: what should we prepare for if the heat in the warehouse market cools down?
If the temperature in the warehouse market cools down, I think both investors and developers who deliver a sophisticated, high-quality product will come out on top. In that case, potential buyers will indeed become more selective. They will pay attention not only to the quality of the product, not only to the occupancy rate, and not only to the location. These are important, key factors. However, on top of all that will come the management of the entire leasing process, sales support, and that more elusive impression stemming precisely from the human factor. So the companies that will come out on top are those that have professionals capable of efficiently handling both the leasing of warehouse space and the sales process.
Thank you very much for speaking with us. Our guest today was Tomasz Kostrzewa, Senior Investment Director at 7R.
Thank you very much.
