Warehouse investment attractiveness

Good morning. My name is Tomasz Szpyt and welcome to the next podcast in the 7R Blog On series. Today we will talk about warehouse investment attractiveness. Our guest is Tomasz Kostrzewa – Senior Investment Director at 7R.

Good morning and welcome to you.

The title of today’s meeting is basically the question – what are we dealing with now? This is warehouses’ fifteen minutes of fame as previously warehouses were not a particularly popular investment product. That changed a few years ago, and now magazines have grown into a major player in the investment market. When and what has changed?

In fact, this asset class has a relatively recent history in Poland. However, I think we should look at what has happened in the last fifteen years. The market for lease, investial lease of logistics and production space was a bit different in nature. First of all, the leases were much shorter. The customers were looking for leases between 3-5 years. It was a minimum when it came to lease. It resulted, among others, from the fact that logistics operators concluded contracts for such periods. Currently, the revenue stream from a warehouse facility lease agreement is longer. It is secured for a minimum of five years. This is the first element which has made this asset class more attractive, but we have also observed a kind of specialization. The clients are entrusting this aspect of their business to specialists as we have more logistics companies. Currently, reports show that about 37-40% of the space is just leased by these types of companies and this percentage is clearly growing. This means that from the investors’ perspective such product is more stable, more predictable. It is simply more long-term in nature.

What exactly is causing the warehouse fever and how long can it last?

Those foundations are of a different nature. There are foundations which stem primarily, in my opinion, from the maturity of Polish companies. As I mentioned earlier, logistics was a secretive field for a long time. Generally everyone focused on sales, on production, on marketing. However logistics was neglected. Now it has changed, because the delivery time, the stock provision time for companies is very important. And simply the growth – in terms of management and corporate maturity – has caused companies to look for modern and relatively flexible logistics space. This is one side of the coin. On the other hand, we also have consumers’ habits, of course. The E-commerce mentioned by many specialists, which has recently become a common topic both in the media and in our everyday reality. It changes these habits. It makes consumption move to the Internet. That is where we spend our money and that is how we fulfill most of our needs. We also have factors of much broader significance when it comes to nearshoring – that is, moving supply chains closer to factories, closer to customers. That has a big impact especially in our latitude and in our location. What has also brought huge changes recently – which is the pandemic. A pandemic that has actually resulted on two levels, in fact for the logistics industry, for developers and for the investors. and for investors.  The online shopping activity has increased – which has fueled warehouse fever, but also logistics as an asset class has become the beneficiary of capital’s retreat from other classes. That is, away from retail, away from office.

Should I understand – knock it off, of course – that the pandemic will end and the eldorado in the warehouses will end? Is it not that simple a translation?

Fortunately, I see no such risk. The pressure of capital will obviously go away, because capital has a way of looking for the best placements and the best returns. It will return to some kind of diversification. Although that parity will stabilize at other percentages. Logistics will remain a very attractive asset class, important in the portfolio of investors who specialize in real estate. On the other hand, a very strong trend will remain. The consumer habits will remain. These habits will continue to shape demand. Also, there will be a very strong group of highly specialized real estate experts left. I would like to mention this, because it is a topic that is often overlooked. And the human factor in handling the real estate market is crucial. Just fifteen years ago, we didn’t have specialists who had a grasp of warehouses as much as we do now. There were no brokers, lawyers, leasing or capital markets specialists who understood logistics. The logistics business has its own rules and is somewhat different from other asset classes – and that is a very big advantage.

Some of the advisory firms are arguing that, in fact, the rise of the artificial intelligence could pretty well swell the ranks of the agents, the advisors – maybe even the lawyers. Is this a trend that could actually happen?

This is a thread that we are watching very attentively at 7R, because the automation of production processes both in the field – that is, actually in our physical facilities – as well as here in the office, that is, when it comes to the sales, the leasing or the handling of the capital function of this facility – is of great importance. In my opinion, the automation will progress very significantly actually in the substance of the buildings themselves. We are talking here about various types of storage systems, systems that allow easier access to a given a product. The specialization and the automation to serve this market – meaning leasing or sales – will be limited to the most repetitive segments, though. The leasing and the sales transactions have such a unique character and sophisticated structure – especially in the Polish conditions and in this part of the legal jurisdiction – this element of spontaneity and of negotiation will always be important for warehouses and processes. However, the sale and the handling of the entire lease sale process is rather human.

The last few years have seen a very dynamic development of the warehouse space in Poland. We have exceeded twenty million square meters. Soon we will probably exceed twenty-five. Where is the limit? Is it thirty, thirty-five, forty million square meters? What is the absorption capacity of the Polish market in terms of this space?

According to the developer’s perspective, it would be best if this boundary did not exist, but we have to be realistic. This limit can be modeled in a certain way. As we observe mature markets – the markets of the Western Europe, where the space is much more diversified, because there are both older and modern facilities. In Poland, the total supply of facilities is mainly focused on modern facilities – the so-called A-class buildings, the prime buildings. At the moment, we are actually reaching the stock of twenty-four million square meters. In terms of the population in Poland, this is less than a square meter, 0.6 square meters per capita. If we compare the Polish market to the German market, where there are over seventy million square metres, that is over seventy-two million square metres, this coefficient increases significantly. If we compare the Polish market to the German market, which has over seventy million square meters, it is over seventy-two million square meters.

It means every person in the country should have their own piece of the warehouse floor.

Definitely yes. Whether it’s a basement, whether it’s a 7R warehouse – absolutely yes.

As the warehouse market developed, new locations also appeared. At the beginning there was central Poland, in Warsaw, Silesia, Wrocław, Poznań, Pomerania – these are the obvious ones. Where else can we expect this – let’s not be afraid to call it – invasion of warehouses?

The warehouses are everywhere – and I say this with full awareness when it comes to Poland. The markets which we call key markets – so-called cor markets. In fact, central Poland, Poznań, Wrocław – the main cities. However, we observe very interesting development and evolution of the so-called core plus markets. For example, Szczecin. It is a very dynamic market and we observe big increases. Not only connected with geography or proximity to Germany and Scandinavia, but also connected with highly specialised workforce. An interesting example is the entire corridor along the S3 route, i.e. along our western border, where some production chains are actually located. And companies also benefit from the advantage of cheaper workforce. On the other hand, eastern Poland offers great opportunities. Here as 7R we are present in Lublin. We are very strongly present in Rzeszów. I think we still have a lot to do in this region.

East, West, North, South of Poland. The warehouses are centered around road transportation. Are there chances that the intermodal segment, which is now present in Poland in a residual form, will also develop?

It is here that we touch upon a very interesting subject, because a look at warehouses should be a look at infrastructure. Not on buildings which are unconnected and scattered around the map of Poland. On the contrary, they create a certain coherent network. A network of the infrastructure. If we add intermodal transport to this – in fact, the potential for reloading from river transport or rail transport – a very interesting picture emerges. Are we ready for this? This is a very good question, because at the moment most transport is actually carried out on Polish roads. The investments are also heading in this direction. The growth of roads in Poland is very impressive. Especially if we compare 2006, when there were only 930 kilometers of express roads and freeways in total, to 2020, when the total is 4,300 kilometers. You can see that the emphasis is placed there. Personally, I am a supporter of intermodal transport and I would like logistics to develop in this direction.

Let’s hope so. The pandemic is beginning to end though the differing opinions on the subject. How it will affect the warehousing market – the demand, perhaps the supply, perhaps the development of e-commerce. We also have somewhere set the limit of absorptive capacity of the Polish market. My question is: What to prepare for if the temperature in the warehouse market drops?

If the temperature in the warehousing market drops, I think that both investors and developers who deliver a refined product of higher quality will win. Then in fact the potential buyer will be more picky. He will pay attention not only to the quality of the product, not only to the rental rate, not only to the location. These are important, the key factors. However, on top of all this he will add the service of the whole rental process, the sales service and such a more intangible impression resulting from this human factor. So the winners will be those companies, those companies that have professionals who will be able to efficiently carry out both the rental process of this property – as well as the sales process.

Thank you very much for the interview. Our guest today was Tomasz Kostrzewa – Senior Investment Director at 7R.

Thank you very much.