Demand for logistics space grows

THE STANDSTILL in construction of new warehouses and logistics centres in Slovakia in 2009 because of the economic crisis extended into 2010 as well. A clear market trend has been for logistics and warehouse-space operators to focus on renting their available space in existing facilities and to construct new facilities only for specific clients on a build-to-suit basis. But industry experts say that Slovakia’s low vacancy rate and the expected inflow of new foreign investment may spur the construction of new logistics centres, particularly in areas outside western Slovakia.

“Construction was halted especially because of lower interest by end-users and more difficult financing,” Peter Jánoši, the head of the industrial department at CB Richard Ellis (CBRE), a global provider of corporate and institutional services in the real estate industry, told The Slovak Spectator. “Only projects which had already started were completed. This has led to historically-low vacancy rates. Compared with neighbouring countries in which the boom in the segment of industrial and logistics real estate arrived a bit later than in Slovakia, for example in the Czech Republic and Poland, Slovakia has not ended in such a bad situation in terms of existing projects being vacant.”

Martin Baláž, from the department of industrial and retail warehousing at Cushman & Wakefield Property Services Slovakia told The Slovak Spectator that during the last quarter of 2010 the vacancy rate at modern logistics parks in Slovakia was about 5 percent. Over the last few months additional space was rented and Baláž estimates that the current vacancy rate is around 4 percent.

Martin Polák, a market officer for the Czech Republic and Slovakia for ProLogis, which is the logistics market leader in Slovakia with about 38 percent market share, said that the overall demand for logistics and warehouse facilities was healthy in Slovakia in 2010 but added that the lack of available space resulted in less overall leasing activity last year than in 2009.

“Developers avoided speculative developments, choosing to focus on leasing their existing portfolios and looking for build-to-suit opportunities,” Polák told The Slovak Spectator, adding that for that reason rental levels remained stable. “The market in Slovakia is closer to the Czech market than the Hungarian market due mainly to Slovakia’s economy being stronger than its southern neighbour's. Demand decreased due to the lack of existing options and poor availability; on the other hand, both the Prague and Ostrava markets can offer immediate space. Therefore, for regional international distribution, companies are looking more for options in the Czech Republic than in Slovakia.”

Investment spurs logistics centres

The inflow of foreign investments has an effect on occupancy rates and the building of new logistics facilities.

“This trend is visible, for example along the D1 highway around Trnava and Galanta where the arrival of investors like PSA Peugeot Citroen and Samsung also initiated the building of modern logistics centres,” said Baláž.

Jánoši agreed, adding that new major foreign investments were accompanied by the arrival of many subcontractors which drew in logistics companies to handle those companies’ outsourcing.

“Those companies often need to be located as close as possible to these prominent investors,” said Jánoši, adding that in the past such important investments centred especially in western Slovakia with its dominant automobile industry (Volkswagen Slovakia in Bratislava, Kia Motors Slovakia near Žilina and PSA Peugeot Citroen in Trnava) as well as major electro-technical companies (Foxconn, Samsung and AU Optronics). Jánoši said this was because of the better road infrastructure in western Slovakia, such as the D1 highway joining Bratislava and Žilina and the D2 highway between Bratislava and Brno.

Jánoši said Slovakia is of interest to logistics companies because of its geographical position and its developing road infrastructure, but added that the country has not yet tapped its full potential.

“Slovakia, compared with neighbouring countries, is a small market and logistics companies often prefer centralising their logistics operations in bigger economies, for example in the Czech Republic and Poland,” said Jánoši. “In most cases it is possible to serve the Slovak market from these countries without any big problems. We see further prospects in the development of road infrastructure but also of railway infrastructure – which would help Slovakia become part of important European rail corridors.”

Baláž expects more development in other regions of the country, especially eastern Slovakia, that will complement the developed logistics centres in western Slovakia.

“Some development companies have already announced their intention to build logistics premises in eastern Slovakia,” Baláž said. “It will be important to get tenants for a sufficiently large amount of space so that construction can start.”

CBRE has registered interest not only among end-users, i.e. logistics firms, but also developers in building warehouses and industrial premises in less-developed parts of Slovakia, Jánoši said. These include industrial regions of northern Slovakia, for example Žilina and Martin and their vicinity, as well as eastern Slovakia, especially in the areas around Prešov and Košice. He noted that the recent activities of PointPark Properties and its newly-built logistics parks in Košice and Žilina are good examples of this trend.

“But we do not expect concentration of parks [in the east or north] to such an extent as in western Slovakia in the past,” Jánoši commented. “We assume that these will be rather stand-alone, build-to-suit projects.”

Expectations for 2011

Speculative construction of logistics facilities was the dominant model in Slovakia for some time but during the recent past the primary interest of owners of logistics facilities has been to lease their already available capacity and experts say the most visible trend in the market today is to start construction based only on the specific needs of a client.

“However, there is an assumption that when premises are constructed for a particular client, then the interest of other potential clients in a given locality can increase and for that reason some developers are prone to start construction on a speculative basis as well so they can satisfy potential demand as fast as possible,” Jánoši said.

Jánoši said lease prices for logistics space decreased to historical lows in the recent past but that prices may increase moderately because the current prices of land, construction and financing are in the end reflected in the lease price.

Polák of ProLogis views the optimistic economic forecasts for central and eastern Europe, including Slovakia, as an encouraging sign and hopes that further improvements in the market for modern distribution facilities will come in 2011.

“We expect a further increase in demand, generated mostly by companies in the logistics sector as well as by growing retailers and manufacturing companies,” said Polák.

“It is worth noting that due to the decreasing stock of available warehouse space in Slovakia, rental rates will remain stable or may increase this year. In 2011, we plan to focus on extending lease agreements with our existing clients and targeting pre-let opportunities and build-to-suit projects.”