The lease process step by step
Tomasz Szpyt: Hello and welcome to the 7R.Blog.On podcast series. My name is Tomasz Szpyt and together with the invited experts we will talk about current trends in the warehouse real estate industry. Today we are pleased to welcome Maciej Krawiecki, Head of Leasing at 7R.
Maciej Krawiecki: Hello.
Tomasz: Hello. We'll talk about how to go through the lease process step by step. Maciej, the warehouse market is basically red-hot. What does it actually look like now? Do tenants come to the developer or does the developer look for tenants?
Maciej: The topic is very complex because actually what has been going on for the last year... initially pandemic and the first lockdown. What was happening in the warehouse market in Poland... everyone was wondering what was going to happen next. The structure of leases signed was approx. 20-25% of what we assumed. Whereas, since mid-2020, the bars and the records have been broken every month, and indeed in the beginning, those who gained were those who had a lot of vacant space, a lot of unused space, as the chain from China clogged up, which has caused a lot of business to date to actually suffer when it comes to the delivery of semi-finished products, raw materials or components. The automotive industry probably suffers the most in this regard.... However, since then we have actually been experiencing a real boom.
How do we get to the point where we manage as an industry to sign a lot of leases? There are different paths. I wouldn't say that the client comes to the developer, rather I would say that there are actually two methods. One is that as part of the activities of the leasing departments of individual developers, as in our case: we actively search for potential clients, we actively do marketing, we go around different industrial districts, we also check what potential brands are in what buildings, and you know that we try to offer something new. However, things have changed a lot over the last 2-3 years in terms of building design, savings for clients, ability to run more efficient and more effective operations. The other point, which some of my colleagues at other companies are forgetting, is the broker. Brokers, as a matter of fact, are something that's very important to us, or actually people who are very important to us because some developers, perhaps some laypeople in general too, think it's so easy to grab a client. And these clients then call these agents and say: “Hey, listen, I want some space. Give me the developer's quote, I'm up to my elbows in work.” Not quite. I strongly disagree with this. I believe this is very hurtful and that's why in this podcast I would like to highlight what an agent's role means to the developer, to the client. The fact that clients approach developers is great, but it takes a long time, several months, for the agent to explain the advantages, to show the client the advantages, to enter strongly into the client's operations, to show them what the savings are. So us reaching out to clients, we already have room to work on that. This is the first step, matching a client with a developer. That's really where it all starts. Moving forward, step by step.... We get an inquiry and just depending on whether the client is experienced in this type of transaction, whether they're brought in by an agent, whether it's completely new to them. The type is in a Class B facility, where the rent is in zlotys, there's one rate, and you don't really know quite what for. Our task is to process all the material, which means also preparing an initial proposal, presenting the assumptions, explaining what the NFPA13 standard is, which is a fire protection standard for buildings. For some, it's just something that they describe: “Cool, there are sprinklers, it will be great”. This brings with it a lot of limitations also in terms of the stored products, but of course it gives a lot of opportunities, and this is where our educational role comes in, so we have the first inquiry, the first proposal, and based on that we can see to what extent the inquiry of a given client is a benchmark, and to what extent it is a real desire to change the location or to start a new location. We reach a very large spectrum of clients. For some, a warehouse with a clear area of 10,000 sqm – ok, the possibility of high storage, five levels (0+4), so five levels of storage, high bay, the possibility of induction - great, mega. Even now, our 11.7 standard, which is six levels of storage, that provides tremendous opportunity, but for some clients, who have been in Class B facilities where the building height is 4 m, think: “God, I have four it's going to be plus two.... what will the heating cost be?” So I will actually tell you that the span of our experience is very large. The fact that every day looks completely different and I talk about it with my team of 20+ people is wrapped up in the conversation: “Hey, Maciek, listen... I've been in this industry so many years now. I thought I'd actually come, I know what I'm doing, it's more or less repeatable”. That’s wrong. Every day has another colour to it.
Tomasz: Well, just what are the differences in tenants' approaches to renting a warehouse, to expectations... Who basically needs to be explained step by step how it's done? I know myself that there are also professionals who have actually stacked their entire business in the warehouse space and know exactly how to play the game.
Maciej: Definitely. Typically that first warehouse is such a game changer for the organization, understanding how it looks like, that it's a Triple Net Lease structure. Which means that really all the cost groups consist of rent, maintenance fee, utility cost and all the expenses are de facto allocated to the tenant. These are usually smaller deals, say up to 5,000 sqm. We joke that sometimes it's easier to rent 50,000 sqm than 1,000 sqm due to the number of questions, the amount of explaining each issue. This is also great, by the way, because it is really important for me and my team to clarify and not treat smaller deals in such a way: “Hey, it's only 1,000 square meters,” we build relationships. We build relationships with companies, we build relationships with people, and those people come back to us, which is also our strength in terms of our growth of those 40-45% year-over-year. On the other hand there is a total different example, clients come and say: “Hey, I'm an international, or national, but big 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 this is the only specification I accept, so if you're able to build on any of your sites, the master plan allows you, generally all the zoning and you can get a building permit done and deliver it to us in the 8-9 month range, then we can talk about it”. It's also cool because we face the finished product on the basis of not creating something and we don't go into such R&D of the client looking for a tailor-made solution for them, be it BTS or multi-customer. However, this is indeed a fast game.
Tomasz: But to deliver a warehouse in 6-8 months you don't start by buying land, you already have to have some portfolio and opportunities secured at least...
Maciej: That's right. The last three and a half years have been very intense for us. In fact, today I represent one of the many divisions of our company, the lease division, but I would have nothing to trade if it were not for the other divisions within our organization. Generally, the whole development process looks like... In a nutshell, it is a cooperation between the departments of land and acquisition, development, capital market and lease, i.e. a plot of land appears, the development department together with us create the first budget, based on which we look whether a given location will stand the test of time in terms of rent, commerciality, which is also with regard to construction costs. And then, of course, we're thinking as a developer about what we call exit, which means all of these vessels have to work very strongly together. We are indeed a stealth developer, immodestly speaking. We're looking at releasing material that's ready to market, which means we're not bragging about signing a preliminary agreement for land, because there's a lot of that. We currently have 2-3 million sqm of land in our base, where we plan to do development and deliver space to our tenants in the next 2-3 years. But we really only try to approach the market with space that: firstly, is secured or already purchased; secondly, has at least an environmental decision or even already a building permit. So what we want to do - we want to come out with a product that is 100% reliable. If it has a building permit earlier or just has an environmental decision, then we know that within these eight months we can easily deliver the construction plans, but also the other way round - we want our partners: here we have clients, agents, local authorities, to be sure that if a proposal comes from us, this proposal is reliable. We rely on a very high level of trust.
Tomasz: I see. On the one hand, there are tenants who are actually just recognizing the professional warehouse market; they rent a thousand, two, five thousand meters. On the other hand, you have the tenants of global actors. I would like to inquire a little bit about the requirements of this second group. What unusual requirements concerning warehouse space, location, equipment have you faced?
Maciej: There are small clients who are demanding, for example in one of our last mile projects in Warsaw at Działkowa Street, all the pilots who were required to get licences had to fly to the UK to date. Right now we have one of the first pilot training centres in Central and Eastern Europe, and we have simulators there that de facto pilots use to renew their licenses. So there is actually a pilot training centre, there are Boeing 787 simulators for example. I would say it's peculiar. However, when it comes to the big actors.... We can get into any sector because each has something specific, because each has a product unique in its own way. However, what I think is a very strong boom right now is the use and optimization of space. A little bit back to that Covid, the supply chain... Many companies beat Covid because they had the inventory. I myself went to a postgraduate logistics course on this topic and inventory represents a cost, no one wants inventory, whereas inventory is a winner here. Those who didn't have supplies fell very often. What we're seeing is a total change in consumer habits. We can see that by the fact that the malls were closed, a lot of customers, older customers, I can say this from the perspective of my parents, who have though by now: “The Internet? Hello, how's that?”, now they can't imagine shopping other than online, with companies like Frisco, Barbora that can bring their groceries to them. Companies like Zalando, Amazon, Inditex will bring them clothes. In fact, there is a total change from conventional sales to online sales. Which means you have to change the supply chain very much, the warehouse facilities, so as the big players – lots of automation, lots of mezzanines. It seems to me that if you're asking about things like that, what's specific but what's happening a lot, I would go with pictowers. Pictowers are the future, automation, mini-loads, AutoStory. That's what makes it: once, there's less human error, better use of space as we go up, speed of packaging&customising, and then of course going forward, warehouses, pictowers, and the last mile, which is same day delivery, next day delivery at the latest. So we go with deviations, obviously sprinklers in the mezzanine, obviously emergency exits, exterior stairwells, VA.... Lots of things, whereas that's what we as 7R are for. A client comes to us and says: “Listen, I have an idea. I think it would be nice to do it as a mezzanine”. And now, within 7R, we are also constantly striving to optimize processes, to go even deeper... Not only to present a proposal for a standard warehouse, but we have set up a Research & Development department which is constantly thinking about what can be done better, how to adapt the building, how to make the building as universal as possible so that later on we can implement many different solutions. Well first of all, how do we legitimize the client's idea, so to speak, it sounds funny, but we are making dreams come true.
Tomasz: If you could name a few such key principles that 7R follows in working with tenants, what would they be?
Maciej: I think I would start with flexibility. We are a Polish company with a huge trust behind us, a huge foreign capital, while we are people who always try to approach a challenge individually because we don't have problems, we have challenges. We look at it as a challenge, we want to solve it. The other thing is, going into the market forcefully, we were thinking in the immediate circle about what we wanted to put some weight on. We found that we wanted to focus on the quality of the facilities, to make sure it is not the cheapest facility, with the lowest rental and selling price.... Moving on. We want these facilities to be a kind of trendsetter. You can now see on the market how even the biggest ones are starting to imitate us, changing the colours of the façades, introducing certain technical solutions to their standard, entering into ecological solutions. We are pro-environmental in that we use a lot of solutions: thicker insulation of the envelope, i.e. the roof, façade, photovoltaics, grey water recovery; something we do as standard and not when the client pays for it. So here I think we've found a nice synergy because we're able to give away, let's call it straight, give away some of our profit to build a better warehouse that will last longer for the client, be more modern for longer, age slower, and the client doesn't pay extra for that. That is, we are within the same market prices as other developers, but with premium quality.
Tomasz: At the beginning of our conversation, you mentioned that those who owned supplies won. But the pandemic also showed how quickly the business environment and operating conditions can change in basically any market in this country and beyond. Do you mind making some predictions as to how things might unfold in the next year or two? Or is it such an unpredictable reality now that you'd rather not do it?
Maciej: We meet here to talk about it, yet it is indeed hard to predict anything in this way. What we're seeing is an ongoing interest in areas. With the current situation, I think another year, year and a half will be really good. But as always, looking at the macroeconomic situation, you can't go up all the time, so I think we're going to see a little dip sooner or later. I think it will be later nonetheless, but the important thing is to be prepared for it and have a plan for it. However, as far as the situation in the coming year is concerned, I am confident that we will record new growths, new records. After that, I don't want to go that far, but somewhere we are looking at the fact that such a good situation on the industrial market cannot last forever.
Tomasz: That is, we will see what the future brings.
Tomasz: It's safe for now, but you also have to be cautious about how the situation develops.
Maciej, thank you very much for the interview, you dear listeners for listening to our conversation and I already invite you to the next podcast in the 7R.Blog.On. series.
Maciej: Thank you.