Logistical dreams in Central Europe

Logistical dreams in Central Europe
The upturn in demand for industrial space is underpinned by regional economic growth, but most particularly due to a growth in e-commerce warehousing.
By Kester Eddy in Budapest February 25, 2016

Industrial property is the Cinderella of the real estate world. Most of us can relate to offices, the masses flock to shopping malls, and the number of home-style magazines attest to the allure of a swanky residence. But warehouses, logistics parks and production halls? These just don't press the emotional buttons for most folks. Yet across Central Europe such utilitarian developments – essential components of a modern, comfortable and affordable lifestyle – are once again on the up after a severe downturn in 2008-09.

And that excites Ferdinand Hlobil, head of Central Europe Industrial at Cushman & Wakefield, one of the region's largest property agencies. “New supply in 2015 exceeded 1.5mn square metres (sqm) in Central Europe. That's a record since the bubble time of 2007-2008, and is the third best year historically in our statistics measurements. Total take-up, including renewals, was a record 4.5mn sqm, and the vacancy rate has dropped to 5.7% – that's even lower than the [previous] record levels of 2004 and 2006,” Hlobil tells a press briefing in February.

All this means the regional stock of Class A industrial space now tops 20mn sqm, on a par with Germany's 24mn sqm of prime quality facilities. And the low vacancy rates – down from a peak approaching 15% in 2009 – imply a demand for both further expansion and pressure on rents in the immediate future.

The upturn in demand for industrial space has been underpinned by general economic growth across the region, but most particularly due to growth in e-commerce warehousing, which Hlobil says now accounts for a 10% slice of new demand. This sub-sector is exemplified by Amazon, the US internet retailer, which has taken 133,000 sqm in the Czech Republic in the past two years, but also includes developments such as Tim (30,000 sqm) and Home24 (24,000 sqm) in Poland, and Alza (12,000 sqm) in Slovakia.

Along with e-commerce, the automotive sector, despite significant hiccups (most notably the Volkswagen emissions scandal), continues to play “a continuing, dominant role” in the industrial real estate sector across the region, Hlobil notes.

On top of these trends comes a demand for ever-larger buildings. “These days it's no surprise to receive an order for 100,000 sqm, occasionally even for 150,000 sqm. That was unthinkable a few years ago,” he says.

Putting Poland on the industrial map

Naturally, the impact of the upturn varies across the region, but because of its size, developments in Poland – now boasting almost 10mn sqm of industrial space – tend to dominate the numbers.

Cushman & Wakefield puts the Polish 2015 take-up at 2.47mn sqm, or 55% of the Central Europe total. (Competing agencies CBRE puts it a slightly higher 2.62mn sqm, while Jones Lang LaSalle gives a figure of ‘just’ 2.2mn sqm.)

Whatever the actual number, clearly Poland has, and will continue to have, the lion's share of industrial development. According to CBRE, last year Poland saw 930,000 sqm of new industrial space, with almost as much already under construction for this year. It puts the vacancy rate at an historic low of just 5.0%

As part of the rush for new space, developers are also eyeing new locales. “We've seen developers out and about, and the industrial map of Poland is very much deepening. Because of the infrastructure improvements, new sites are being acquired in new locations which previously developers did not find very attractive,” says Tom Listowski, head of industrial in Warsaw for Cushman & Wakefield – without mentioning names.

CBRE, meanwhile, cites Lublin, Rzeszow, Szczecin and Bydgoszcz as likely new targets for development.

Yet despite the bustle in Poland, the Czech Republic, though just one quarter the size, arguably outperformed it's northern neighbour last year. It experienced an astonishing 1.39mn sqm of gross take-up – 31% of the Central Europe total and a new record for the country. The largest deals include the renegotiation of the DHL Solutions lease in Prologis Park Prague Jirny, a 106,000 sqm contract. 

With vacancy rates at an all-time low of 5.1%, and demand seemingly unremittingly optimistic, some Czech developers are again taking to speculative projects. According to Colliers' Prague office, 2015 saw delivery of 563,000 sqm of new space, the best year since the financial crisis of 2008, and the current pipeline of 303,500 sqm (the bulk due for completion in the first quarter of this year) comprises 38% speculative build. These include Mountpark, a 44,000 sqm development near Plzen by USAA-Realco, described by Hlobel as “probably the largest” speculative development in the region right now.

The immediate futures for industrial in Poland and the Czech Republic certainly look positive. As Cushman's Listowski puts it: “The low vacancy rate is a bit of an issue, there is a time lag of space coming to market... but, generally speaking, the market is extremely healthy, and we're looking forward to breaking some more records this year.”

Feeling little bit Hungary 

Compared to the frenzied activity to the north, the Slovak and Hungarian industrial sectors appear positively torpid, with gross take-up of just 246,000 sqm and 354,000 sqm respectively in 2015. Nonetheless, participants in both markets insist that trends are positive.

“The [Slovak] economy is growing, and so is demand for warehouses. What is becoming a trend is [interest] in new locations, not only the western part of Slovakia, but also the eastern part. This has not been seen in the past two to three years,” says Martin Hudak, head of Industrial for Cushman & Wakefield in Bratislava.

With new delivery at 80,000 sqm last year and total industrial space at 1.34mn sqm, Slovak vacancy levels are now just 3%, the lowest in the region – conditions which support Hudak's optimism.

Hungary – which effectively means Budapest – is a decidedly poor performer. Despite boasting an excellent motorway system, along with a government pledge to make logistics a priority for development, industrial real estate saw just one new development, comprising a mere 5,000 sqm last year – bringing the total stock to 1.9mn sqm.

Cushman's Hlobel admits that the country “has been suffering a bit from the political situation”, but insists that “over the last 24 months” things have improved. “You can see it on the vacancy level, which dropped from 22% in 2013, down to 11% in 2015,” he says, “and we can see new developers coming to the market as they see potential”.

But even this reduced vacancy level is twice that of Poland and the Czech Republic. And real estate professionals fail to mention the catastrophically mishandled introduction of the Ekaer goods registration system, which was ostensibly designed to reduce VAT fraud, but which gave hauliers sleepless nights and rising labour costs.

While the Hungarian government champions Ekaer as a success, logistics operators continue to tell bne IntelliNews it is an operational and financial burden that damages competitiveness. There are, doubtless, many factors involved, but the abysmal performance of Hungary's industrial sector relative to its northern peers does not support the government's positive take on its Ekaer system.