The rental process, step by step

Tomasz Szpyt: Good morning, and welcome to the 7R.Blog.On podcast series. My name is Tomasz Szpyt, and together with our guest experts, we’ll be discussing current trends in the warehouse real estate sector. Today, we welcome Maciej Krawiecki, Head of Leasing at 7R, to the studio.

Maciej Krawiecki: Good morning.

Tomasz: Good morning. We’re going to walk through the leasing process step by step. Maciej, the warehouse market is basically red-hot. What’s the situation like right now? Does the tenant approach the developer, or does the developer seek out tenants?

Maciej: It’s a very complex issue, because what’s been happening over the past year—starting with the pandemic and the first lockdown—has really shaken things up. Looking at what was happening in the warehouse market in Poland, everyone was wondering what would happen next. The volume of leases signed was, let’s say, 20–25% of what we had anticipated. However, since mid-2020, records have been broken every month, and indeed, at first, those who had a lot of vacant space benefited, because the supply chain from China was disrupted, which meant that many businesses are still really struggling when it comes to the delivery of semi-finished products, raw materials, or components. The automotive industry is probably suffering the most in this regard. However, we have indeed been experiencing a real boom since then.

I think this is very unfair, which is why I’d like to use this podcast to highlight the important role an agent plays for both the developer and the client. The fact that a client comes to a developer is great, but it takes several months of hard work for the agent to explain and demonstrate the benefits, get deeply involved in the client’s operations, and show them exactly what savings they’ll realize—so by reaching out to clients, we already have the opportunity to work on this. This is the first step: connecting the client with the developer. That’s really where it all begins. Moving forward, step by step… We receive an inquiry, and depending on whether the client is experienced with this type of transaction, whether they’re brought in by an agent, or whether this is completely new to them. For example, they’re in a Class B building where the rent is in PLN, there’s a single rate, and you don’t really know exactly what it covers. So our job is to process all this information, which also means preparing a preliminary offer, presenting the terms, and explaining what, for instance, NFPA 13 is—that is, the building’s fire protection. For some, this is something that seems like: “Cool, there are sprinklers, it’ll be great.” This also brings a lot of restrictions on the products that can be stored, but of course it offers enormous possibilities, and this is where our educational role comes in: we receive the initial inquiry, the initial offer, and based on that, we assess to what extent the client’s inquiry is a benchmark and to what extent it reflects a genuine desire to change locations or launch a new one. We serve a very wide range of clients. For some, a 10,000 m² warehouse with 4-meter clear height—okay, the possibility of high-bay storage, five levels (0+4), meaning five storage levels, high-bay storage, the ability to install induction lighting—great, fantastic. Even now, our standard of 11.7 meters—meaning six storage levels—offers enormous possibilities, but for some clients who’ve been in Class B facilities where the building height is 4 meters, it’s like: “God, I have four meters, so that’s plus two… how am I supposed to heat that?” So I’ll tell you, the range of our experiences is truly vast. The fact that every day looks completely different, and I talk about this with my team of over 20 people, goes like this: “Hey, Maciek, listen… I’ve been in this industry for so many years. I thought I’d come in, know what I’m doing, and that it’s more or less repetitive.” No. Every day is something different.

Tomasz: Exactly—what are the differences in tenants’ approaches to warehouse leasing and their expectations…? Who actually needs to have the process explained to them step by step? I know there are professionals out there who have built their entire business around warehouse space and know exactly how the game is played.

Maciej: Absolutely. Usually, that first warehouse is a real game-changer for an organization—understanding how it works, that it’s a Triple Net Lease structure, meaning that all cost categories consist of rent, a maintenance fee, and utility costs, and all costs are effectively allocated to the tenant. These are usually smaller transactions, say up to 5,000 sq. m., and we actually joke that sometimes it’s easier to lease 50,000 sq. m. than 1,000 sq. m. because of the number of questions and the amount of explaining required for each issue—which is great, because, in reality, it’s very important to me and my team—even with a 1,000-square-meter space—to explain things thoroughly and not treat it as, “Hey, it’s just 1,000 square meters”; we’re building relationships. We build relationships with companies, we build relationships with people, and those people come back to us, which is also a very strong point for us in the context of our 40–45% year-over-year growth. On the other hand, there’s a totally different example: clients come in and say, “Hey, I’m an international—or rather, a Polish—but a major player. I know exactly what I want. Not only do I know what kind of space I want, but you know, this is my specification, and I’ll only accept this specification. So if you’re able to build at one of your locations—provided your master plan allows it, and you can handle the entire zoning process, obtain a building permit, and deliver it to us within 8–9 months—then we can talk about it.” That’s also nice, because we’re dealing with a finished product rather than creating something from scratch, and we don’t get involved in the client’s R&D by looking for a tailor-made solution for them, whether it’s a BTS or a multi-customer solution. However, it really is a short-term solution.

Tomasz: But to build a warehouse in 6–8 months, you don’t start by buying land; instead, you already need to have a portfolio and the resources that come with securing at least…

Maciej: Generally speaking, the entire development process looks like this… To put it very briefly, it involves collaboration between the land and acquisition, development, capital markets, and leasing departments. When a plot of land becomes available, the development department works with us to create an initial budget, which we use to assess whether the location will be viable in terms of leasing, rent, and commercial viability—and, of course, in terms of construction costs. And of course, as a developer, we consider the so-called exit strategy, so all these departments have to work very closely together. Indeed, we are a discreet developer—I’ll say that without modesty. We focus on bringing ready-to-market projects to the market, meaning we don’t boast about signing a preliminary land purchase agreement, because there are plenty of those. We currently have 2–3 million square meters of land in our portfolio, on which we plan to develop and deliver space to our tenants over the next 2–3 years. But we do indeed try to enter the market only with space that: first, is secured or purchased; second, has at least an environmental decision or even a building permit. So what we want to do is launch a product that is 100% certain. If it has a building permit in advance or just an environmental decision, then we know that within those eight months we can confidently deliver the project, but also the other way around—we want our partners—here we mean clients, agents, and local authorities—to be certain that if we put forward a proposal, that proposal is reliable. We rely on a great deal of trust.

Tomasz:I see. On the one hand, there are tenants who are just beginning to explore the professional warehouse market; they lease 1,000, 2,000, or 5,000 square meters. On the other hand, you have global players as tenants. I’d like to ask a bit about the requirements of this second group. What unusual requirements regarding space, location, and warehouse equipment have you encountered?

Maciej: There are small clients with high demands. For example, in one of our last-mile projects in Warsaw on Działkowa Street, all the pilots who needed to obtain licenses had to fly to the UK to do so until now. Right now, we have one of the first pilot training centers in Central and Eastern Europe, and we have simulators there where pilots can effectively renew their licenses. So there really is a pilot training center; there are Boeing 787 simulators there, for example. I’d say that’s unique. However, when it comes to major players… We can enter any sector because each has something specific, because each has a product that’s unique in its own way. However, what’s probably a huge trend right now is the use and optimization of space. Going back a bit to Covid, to the supply chain… Many companies weathered Covid because they had inventory. I myself took a postgraduate course in logistics on this very topic, and inventory is a cost—no one wants to carry inventory—yet inventory was the key to success. Those who didn’t have inventory often failed. What we’re seeing is a total shift in consumer habits. We see that because shopping malls were closed, many customers—especially older customers—I can say this from the perspective of my parents, who until now would say: “The Internet? Hello, what’s that?”, now can’t imagine shopping any other way than online, from companies like Frisco and Barbora, which can deliver groceries to them. Companies like Zalando, Amazon, and Inditex will deliver clothes to them. In reality, conventional sales are shifting completely to online sales. Consequently, the supply chain and warehouse facilities need to be overhauled significantly, so major players are adopting a lot of automation and mezzanines. It seems to me that if you’re asking about specific trends that are really taking off, I’d point to pictowars. Pico-warehouses are the future: automation, mini-load systems, AutoStory. This is what makes it so: first, there are fewer human errors; better use of space because we’re going up; faster order picking; and of course, moving further down the line—warehouses, pico-warehouses—but the last mile, meaning same-day delivery, or the next day at the latest. So we’re moving into deviations—of course, sprinklers in the mezzanine, of course, evacuation routes, external stairwells, DSO… A lot of things, but that’s what we’re here for, as 7R. A client comes to us and says, “Listen, I have an idea. I think it would be cool to do this as a mezzanine.” And now, as part of 7R, we’re constantly striving to optimize processes, to go a step further… Not just to present a standard warehouse proposal, but we’ve established a Research & Development department that’s always figuring out what can be done better, how to adapt the building, how to make the building as versatile as possible so that we can later implement a wide range of solutions. Above all, how to bring the client’s idea to life—it might sound a bit silly, but we make dreams come true.

Tomasz: If you could name a few of the most important principles that 7R follows in its work with tenants, what would they be?

Maciej: I think I’d start with flexibility. We’re a Polish company backed by tremendous trust and substantial foreign capital, but we’re people who always try to approach each challenge individually, because it’s not about having a problem—it’s about facing a challenge. We treat it as a challenge, and we want to solve it. The second thing is, as we were entering the market strongly, we discussed within our inner circle what we wanted to focus on. We decided that we wanted to focus on the quality of the properties, on ensuring they aren’t the cheapest, lowest-rented, or lowest-priced… We’re moving forward. We want these properties to serve as a kind of trendsetter. You can see this on the market now—even the biggest players are starting to follow our lead, changing the colors of their facades, incorporating certain technical solutions into their standards, and adopting eco-friendly solutions. Our eco-friendliness lies in the fact that we use a lot of solutions: thicker insulation for partitions—that is, the roof and facade—photovoltaics, and graywater recovery; things we do as standard, not just if the client pays for them. So I think we’ve found a nice synergy here, because we’re able to give back—let’s call it what it is—give back a portion of our profit to build a better warehouse that will serve the client longer, remain modern longer, age more slowly, and the client doesn’t pay extra for it. So we’re operating within the same market price range as other developers, but with premium quality.

Tomasz: At the beginning of our conversation, you mentioned that those who had stockpiles came out on top. But the pandemic has also shown how quickly the business environment and operating conditions can change in virtually every market in this country and beyond. Could you venture a few words of forecast on how the situation might develop over the next year or two? Is the situation so unpredictable right now that you’d rather not do that?

Tomasz: So we'll see what the future holds.

Maciej: Definitely.

Tomasz: It's safe for now, but we still need to be cautious about how things develop.

Maciej, thank you very much for the interview, and thank you all for listening. I invite you to tune in to the next episode of the series 7R.Blog.On.

Maciej: Thank you .