I&L market overview

The exCEEding Borders series of reports by Colliers are aimed at providing a wider regional view on the status and opportunities that the Central and Eastern European markets have to offer. In this edition, for the first time, we have taken a look at the Industrial and Logistics markets and related trends, across 17 countries in the region. These are: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia and Ukraine.

The first point to mention, similarly with the development and contribution for each of the country’s economies, is that their industrial and logistics real estate markets are all at different stages of maturity, both in terms of size and the pace of development. As a result of this, you will see that data for some markets are detailed at a national level, while others are more focused around the main economic hubs, typically capital or major cities with larger pools of labour. Each of the markets have their own strengths, but also areas for further development.

As the report will explore, some of the key challenges in this sector, revolve around a number of factors that include: the availability of land and property in locations that meet both the developers and end-user expectations, the availability and reliability of utilities (and increasingly data networks) and transport infrastructure, the availability and skills of the labour pool, EU membership and access to investment incentives, amongst others.

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Lukáš Hejduk
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I&L Market Overview

Total stock, new supply&vacancy rate in selected CEE capital cities in H1 2020

The total supply of modern Industrial and Logistics stock across the CEE-17 capital city markets alone totals over 22 million m2 and well over 50 million m2 in total. From this supply, the current availability can be categorized as low, with the majority of markets recording vacancy rates of below 5% and the remainder under the 8-10% level. A high percentage of the new supply being constructed is on a build-to-suit basis, or in other words, with tenants secured in advance of commencement. Speculative development across the region typically has a smaller share of the pipeline, however, I&L properties also have the shortest delivery times compared to other sectors (assuming all permits are in place), taking just 6 months on average to complete a standard warehouse, as guidance. As mentioned previously, there are several factors that can influence demand for a market and the decision-making process. The CEE region is ideally located in the very heart of Europe at the intersection between East and West which also plays an important role alongside the physical geographical and topographical features of each country or location. The region has excellent access to the international transportation network, which includes road, rail, river, seaports and air terminals. Much of this infrastructure has undergone improvements over the last few years and will continue to develop going forward.

Demand from the I&L sector in the CEE region over the past few years has overall been strong and has been driven by the 3PL, retail and distribution sectors, followed by the light production, automotive and FMCG sectors. During the pandemic and looking forward, we do expect to see some changes to the order and volume of this demand with sectors such as e-commerce, data centres and specialist storage increasing their requirements. Despite this, the CEE region, and some countries in particular, have long industrial traditions and remain very attractive to manufacturers ranging from the full spectrum of automotive parts and final product producers, through to aerospace, metals and plastics, complex electronics, home appliances, food, beverages, pharmaceutics and medical equipment, to name just a few. While we expect e-commerce and other sectors to grow at a more rapid pace and drive demand through these challenging times, we also expect that over the longer term, we will also see greater demand from producers/manufacturers to bring back parts of their supply chain closer to Europe to mitigate certain risks that we have seen in the past few months.

Demand in selected CEE capital cities in H1 2020
So many unanswered questions remain about the future because we simply cannot accurately predict the longevity and impact of the pandemic. The first wave raised serious concerns as to how the I&L sector and the economy reacted to what was initially a health crisis. In brief, much of the global economy was crippled or put on hold while most of us retreated to the safety of our homes and purchased only essential items. Even this showed signs of weakness as certain goods and services are cross-border and the disruption to, possibly over optimized, supply chains were significant through production closures, border closures and so on. In future, this may mean that larger inventories are stored or produced closer to the end consumer which could also translate to greater demand for I&L space. Although some companies were able to adapt and recommence within a fairly short period of time, there were also casualties as consumers became reluctant to purchase higher value items, due to the uncertainty that was unfolding. This has left some industries limping, and only time will tell how they move forward, or not. None the less, many companies in the manufacturing sectors have long term strategies, partly due to the amount of time and investment required to get set-up. While the current situation is putting a hold on, or changing, certain plans, they are still thinking longer term and need to think carefully about how to spread the risk, as these are complicated operations and cannot be done overnight. To add fuel to the fire, there are also plenty of other factors at play that were in the headlines well before COVID-19 came on the scene. If economies and all things related worsen, governments will almost certainly have to intervene to protect their most valuable national assets and interests. The headlines we refer to are the various trade agreement disputes, BREXIT and all things EU related, not to mention the various challenged political elections and civil unrest that are bubbling away close to the surface. In summary, some industries and companies could be pressured to bring jobs and assets "back home", especially if Governments (the taxpayer) has been required to bail them out.
Demand structure by sector in selected CEE countries in H1 2020

Through the pandemic we have recorded more demand for short-term leases to cope with additional demand however, typical lease lengths across the region range between 3 and 5 years for logistics and over 5 years for production. Logistics companies for example often have 3-year contracts with their clients so would prefer more flexibility however, we have also seen the end user taking longer term leases and having the logistics companies rotate instead. Build-to-suit facilities can be expected to command longer leases, often due to the additional investment put in by both developers and tenants.

Rents across the region have been largely stable, with growth recorded in the most sought-after locations, and where availability is limited. We expect this trend to continue, particularly as demand has been good and construction costs have also been on the rise over the past few years.

Typical headline rents across the region range between EUR 2.9 and 5.5 per m2/month although, markets in earlier stages of development can currently reach upwards of EUR 7.0 per m2/month.

Rental rates in selected CEE countries in H1 2020

Tenant incentives will vary depending on a variety of factors including availability in the location, length of lease and tenant covenant, amongst others.

In terms of delivery costs, we have also gathered indicative prices for land (assuming permits are in place) and hard construction costs (for a standard warehouse). Typical land prices across the region vary between EUR 10 and 80 per m2 however, due to the scarcity of land in the most sought-after locations, particularly those closer to major cities or economic/productive hubs, prices can rise up to between EUR 120 and 150 per m2.

Typical hard construction costs for a "standard" warehouse across the region range between EUR 300 and 600 per m2. Higher costs have been reported in some markets but overall, a combination of increased labour and materials costs have driven up construction costs by as much as 25% or more over the past few years.

I&L land prices in selected CEE countries in H1 2020

The I&L sector has become one of the most sought-after asset types by investors and, according to RCA data, now ranks in 3rd place since 2019, after Offices and Residential, and having overtaken retail. In EMEA, it ranks in 4th just behind retail but is expected to outperform over the next few years. In CEE (incl. Russia), I&L volumes have almost matched offices to come in a close 2nd year-to-date 2020. In CEE, we would see even greater I&L volumes, however the supply of assets for sale is somewhat limited due to many of the main investor/developers in the region being long term holders.

With the sector performing well overall currently, we do not expect to see this trend change in the near future. Opportunities remain limited but are expected to meet with high demand as investors are very keen to deploy their capital and even more so, in this sector. As a result, prime yields across the region have remained largely stable and we have even recorded some compression in markets where there had been limited movement since the GFC.