One Type Fits All? A Report into Real Estate Expectations from Warehouse Space Users. April 2010

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1 One Type Fits All? A Report into Real Estate Expectations from Warehouse Space Users April 2010

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3 One Type Fits All? April Is the modern warehouse of today that of tomorrow? Diversity of industrial real estate The type of modern warehousing found across Poland varies greatly, from mostly large distribution centres i.e. in Teresin or Wrocław-Bielany to some multi-storey, fully-automatic warehouses found in Piotrków Trybunalski or even City Storages in Warsaw and Łódź. Although the fundamental function of warehousing remains the same across all warehouse types (i.e. to store goods or manufacturing), some basic distinctions should be noted. Distribution warehouses (or distribution centres) are typically located in an inland location in proximity to large cities, close to the motorways or express roads, used to distribute goods to different locations within a region or a country. We estimate that distribution centres account for approx. 96% of total warehouse stock in Poland. This category features the greatest development potential due to the number of motorways and express roads currently being constructed in Poland which will define new prime destinations for developers and warehouse space occupiers. Business Parks built by both international and local developers to fulfil demand generated by companies willing to have small but efficient warehouse space located within the city boundaries. These types of warehouses sometimes offer column-free warehouse space and good quality office space often linked directly to the warehouse. Approx. 4 % of total warehouse stock in Poland is located in this category, mostly in Warsaw s Zone 1 1 and Łódź. Consolidation warehouses can refer to warehouses located next to sea port or airports. Goods are deposited here from ships or air cargo and await further action from third party logistics providers or freight forwarders. This type of warehousing is planned within the Pomeranian Logistic Center project in Gdańsk (Tri-City), the region which is a natural choice for consolidation warehouses due to its access to the Baltic sea. It is currently arguable whether the Polish seaports are successfully competing with German counterparts e.g. Hamburg. However, we believe that once the legal & tax as well as administrative procedures improve and become more competitive, the warehouse development potential of the Gdańsk seaport is significant. The variety of function within a category is an excellent example of the diversity of industrial real estate, which is also pronounced in Warsaw. Warehouses found across the three Warsaw industrial zones are different with a clear differentiation between the product located in Zone 1 (city boundaries) and that in Zones 2 and 3. So are warehouse rents. Traditionally prime rents for Poland were synonymous to prime rents achievable in Warsaw. This was true in late 1990s and early 2000s when the capital city accounted for a majority of the Polish warehouse distribution stock. Now with the industrial space market developed across Poland, a prime Warsaw rent in Zone 1 is not representative of the entire country where the products are typically functionally different to what is found in Zone 1. Thus the prime rents for Poland are currently / m 2 / month with the warehouse space in Warsaw Zone 1 leased at a 40-50% premium, reflecting limited availability of investment land and its price, as well as a fundamentally different product. Prime rents for modern warehouse space Warehouse rents in Poland differ depending upon the type of warehouse building and its function, rather than macro location in the specific region of the country. Prime Headline Warehouse Rents ( /m 2 /month) W arsaw Zone III Poznań Poland Central Small units Wrocław Silesia W arsaw Zone II North Poland Kraków Warsaw Zone I Source: Jones Lang LaSalle, April 2010 The highest rents are being registered in Warsaw s Zone 1 i.e. in business parks. Due to the lack of warehouse space in Kraków (vacancy rate of 8%, the lowest level compared to the rest of Poland) and limited availability of land, Kraków rents are also at relatively high level of / m 2 / month when comparing to other locations in Poland. Prime headline rents for distribution warehouses in Central Poland range typically between / m 2 / month. However, small units located within the Łódź boundaries are leased at around 5.00/ m 2 / month. 1 Warsaw greater area is notionally divided into 3 Zones: 1 (up to 15km from the City Centre), 2 (between 15 and 30km away from the City Centre) and 3 (more than 30km away from the Centre).

4 One Type Fits All? April More than grade A standard Grade A warehouse space is currently the market norm in Poland. However, we have noted that what is presently offered as A grade (details set out below) is not satisfying the ever changing real estate-related needs from warehouse space users. Occupiers are constantly looking for space offering additional advantages such as more comfortable work environment for the staff employed in the park, large car & truck parking, convenient internal road infrastructure, column-free warehouse space which may be used by smaller tenants willing to have very flexible warehouse space, two sided access with cross-dock, and representative office space if needed. Thus, there is clearly an incentive to develop an A+ grade warehouse space which would combine the current market standards with the elements mentioned above. Typical Modern A-class Warehouses in Poland Standard specification Light construction Floor load: 5T/ m 2 Non-dust floor Ceiling height: 10 m Column grid: 12 x 25 m Dock doors: 1 x 800-1,000m 2 Additional options on demand Air-conditioning Mezzanines Source: Jones Lang LaSalle Sprinkler system Capable of being divided for the multiple users Site fully fenced and secured Manoeuvring area with minimum depth of 35m Additional docks Higher clear height The difficulties in being able to find suitable accommodation i.e. meeting the standard A grade conditions but also enriched by some of the additional elements, have driven a number of logistic operators (and retailers) to develop their own distribution warehouses. This enabled them to establish the hub-and-spoke network for the domestic and international groupage service using highly specialised, non-standard warehouse space. In search for a perfect (= A+ grade) distribution centre from the technical and location points of view, other logistic operators and retailers are going down the built-to-suit (BTS) warehouse route, benefiting from warehouse facilities being developed to their particular needs (i.e. height, number of dock doors, cross docking, floor load). Undoubtedly, adjusted warehouses are more efficient. However, tenants deciding to lease BTS warehouse have to be prepared to sign longer lease agreements (for minimum 10 years) than for a typical warehouse. More standard leases enable more flexible extension or decrease of the leased warehouse space and to quickly adapt to current market conditions. This is, therefore, a clear advantage of speculative i.e. not built-to-suit warehouse developments. What do logistic occupiers and retailers want? In order to better understand real estate related needs of warehouse space users, Jones Lang LaSalle and Warsaw School of Economics carried out CAWI surveys amongst industrial occupiers. Functional and qualitative requirements from two important groups were researched i.e. logistic operators and retailers. 70 surveys were completed by these two groups of warehouse space users. Set out below are the survey findings. Lease vs own, modern vs old 20% of retailers lease warehouses in Poland and another 31% both own and lease warehouse facilities. Further 20% of retailers outsource the storage services to external partners. 44% of logistic operators lease warehouses in Poland. The lease of warehouse space is clearly a preferred option for the logistic sector providing the opportunity of fast adjustment to changing market conditions and demand. An overwhelming majority of warehouse space in use of logistic companies is of high quality i.e. with decent floor loading capacity, ceiling height, dock doors and sprinklers. One or many locations? Half of retail companies have one central warehouse facility in Poland from which they cover the entire country or a wider region and 80% of retailers have a maximum of three locations nationwide. This is in contrast to logistic operators who typically have more than 5 locations due to necessary short time to market. Internal expansion or outsourcing? Only 20% of retail companies surveyed will be extending current warehouse facility with majority of these being requirements for less than 5,000 m 2. Only 4% of retailers plan an extension exceeding 10,000 m 2. There are a number of reasons underlying this situation. Firstly, this is due to warehouse facilities by retailers already capable of ensuring a smooth distribution of goods. In addition, retailers do increasingly appreciate the benefits of outsourcing of distribution and storage services providing a higher degree of flexibility. Retail occupiers typically outsource storage and distribution of goods to specialized logistic companies on a country level, rarely on a pan-european level. Vast majority of retailers are served by more than two outsourcers - logistic operators. This outsourcing tendency may be particularly pronounced over the economic slowdown and variable retail market sentiment in Poland. In contrast, 64% of logistic operators will grow over the course of the next 24 months despite a slowdown on the logistic market. 58% of those expanding logistic operators plan to grow by over 5,000 m 2.

5 One Type Fits All? April Logistic: Does your company use the storage area in Poland? Sound expansion plans of logistic companies are also explained by the fact that over half of the operators occasionally (e.g. once a year) experience a shortfall in warehouse space. In addition, 50% of logistic and courier companies are approaching the maximum level of warehouse capacity with average utilization rate of %. Functional requirements 50% of retail and 67% of logistic companies think that 5 km is a maximum acceptable distance between a warehouse location and the nearest exit from a highway. Retail: Does your company use the storage area in Poland? Logistic: How many warehouse locations does your company have in Poland? 47% 0% 21% 32% more than 5 Retail: How many warehouse locations does your company have in Poland? 73% of forwarding agents and logistics operators look for warehouses, with minimum three truck bays per 2,000 m 2 of the storage and handling space, which significantly exceeds current standards. The implementation of more sophisticated distribution systems request exchange of the semi-trailers or swab bodies before or after handling of goods in the warehouses. Additional truck bays are requested to park the transport equipment for several hours. In such a case this equipment is treated as additional storage space which extends the handling space inside the warehouse. Despite a generic slowdown in the logistics business in 2009, we expect the sale of comprehensive logistics solutions to grow over next years, as modern logistic services help our clients strengthen their market position and competitive advantage. From logistic space developers we expect flexibility in approach which would assist us in better satisfaction of our clients needs. Janusz Anioł General Director, Raben Polska Sp.z o.o. 60% of the users of the warehouses expect that two or more parking places for heavy trucks are available per each truck bay, which is also above the current standard. Drivers needs will have to be carefully considered by developers in the future and secured parking spaces next to the place of loading and reloading of the trucks will have to be provided. Currently both manufacturers and retail companies strive for more efficient supply chain management and most importantly higher rotation of goods. The volume of goods distributed to particular shops declines and the deliveries are more frequent. Thus the demand for groupage and parcel transport grows and there is a clear driver to extend/ expand the existing networks of distribution by logistic companies. This is demonstrated by survey results whereby logistics companies plan to develop own or to rent additional warehouses and cross-dock terminals and look for new locations to cover the remote regions.

6 One Type Fits All? April Logistic: Do you plan to increase the occupied warehouse space over the next 24 months? Pay more for sustainable warehouses? Surprisingly retailers are generally reluctant to pay a higher rental rate for a sustainable warehouse which provides a more comfortable work environment for the staff. Unlike retailers, logistic operators are concerned about sustainability as warehouse sheds are a core of their business operations. A large proportion of logistic operators surveyed are keen to pay between 1% and 5% more for sustainable warehouse space whilst every tenth even between 5% and 10% more. Going green? Retail: Do you plan to increase the occupied warehouse space over the course of the next 24 months? In an economic climate of rising costs and increasing demand for fuel, the need to construct sustainable buildings and minimalise their impact on the environment is paramount. Warehousing is no exception, and the progress in developing sustainable warehouses has also been made in some countries around the world. The common preconception is that there are large additional construction costs involved in developing sustainable buildings. However, research shows that the average payback period to recoup these small additional costs is 3-4 years, representing a relatively short period in a typical building s life cycle. Retail: How many outsourcing providers does your company have? Logistic: Did you happen to face the problem of insufficient storage capacity? Industrial buildings such as factories can be some of worst polluters, although warehouses typically have a lower impact on the environment. However, there is still room for improvement. In the warehousing world, UK warehouse developer Gazeley has become synonymous to sustainable warehousing, initially introducing its first green warehouse in Milton Keynes in England in Now they also plan sustainable warehouses in Poland. According to Gazeley, occupiers can enjoy 60% cuts in water usage for a standard warehouse. When Gazeley also fits out the interior of warehouses with low-energy heating and lighting systems, the environmental impact is much more dramatic. The company estimates that on a G.Park Blue Planet recent facility in North Staffordshire, England, electricity savings are in the region of 40% and gas savings are 48% compared with a standard warehouse over the centre s 25-year life. This was possible due to a detailed analysis of site's natural features in order to take full advantage of these and respond to water and wind conditions, prior to the construction. Energy saving features of the carbon positive G.Park Blue Planet logistic development include: Underfloor heating to warehouse fuelled by on site Biomass power station; Energy efficient lighting in the offices linked to movement detectors; Energy efficient lighting to warehouse linked to movement detectors and daylight savings controls;

7 One Type Fits All? April Logistic: What is the relation between the number of gates and the storage area that you would consider optimal in order to avoid the bottlenecks in the loading/unloading processes? Super air tightness and thermal efficiency 25% better than regulatory requirements; Natural ventilation; Optimised daylighting in the offices reduces the need for artificial light; Rainwater collection for re-use in offices; Low water use sanitary appliances. Logistic: Does your company address the issue of sustainability when it comes to leasing of warehouse space in the distribution centres? (green buildings, rainwater recycling, efficient energy management, staff and environmental friendliness etc.) Logistic: How much more (in the percentage terms) would you be willing to pay for the warehouse that would be friendlier to your employees and would improve the working environment? As such, do sustainable warehouses exist in Poland? What are the plans? According to the survey conducted by Jones Lang LaSalle and Warsaw School of Economics, one third of survey respondents currently consider sustainability and green issues as important for warehouse buildings. In addition, 44% of them will look closely at sustainability in the future. More importantly 65% of surveyed logistic operators are willing to pay more for a warehouse space in a sustainable distribution centre. This demonstrates an increasing green-awareness amongst occupiers and opens the door to developers wishing to meet the ever changing needs of tenants. Our first eco-warehouse in Poland, which is currently being developed in Poznan for H&M, marks the beginning of a new trend on the market of modern warehouse space. The growing needs of tenants, environment protection policies and primarily the need for ensuring a comfortable workplace for employees will impact the development of the green market and sustainable warehouses in Poland. The currently built-to-suit warehouse in Poznań has the following pro-ecological features: better lighting system, solar panels for heating water, rainwater recovery systems, building materials not consisting of PCV or Styrofoam. Robert Dobrzycki CEE Managing Partner, Panattoni Europe Logistic: Do you find it important to have an access to the combined transport terminal within the distance of 50 km off the warehouse facilities your company occupies? As stainable warehouses exist in Poland? What are the plans? We have incorporated some of the pro-ecological solutions in the Kraków Airport Logistic Centre as the natural environment protection is fundamental to Goodman Group policy. Particularly the following solutions will limit the impact of the project on natural environment: separation of the site through an isolation greenery and acoustic screens, as well as an innovative system of slow evaporation of rainwater from the roofs. Our worldwide experience of warehouse development demonstrates that sustainability and pro-ecological buildings features are increasingly important not only for industrial developers, but more importantly occupiers who appreciate that their business partners also pursue the green/ sustainable strategy. Zbigniew Kmiecik Development Manager, Goodman Group

8 One Type Fits All? April ProLogis maintains an unwavering commitment to green building practices. We strive to reduce the environmental impact of our facilities by developing them to the highest environmental standards. Currently our buildings stand out in energy efficiency and all new developments in Central and Eastern Europe are designed and constructed in accordance with our sustainable development approach. As a result, ProLogis buildings help our customers to save energy, reduce their carbon footprint and protect the environment. Our combination of passive measures and energy efficient plant and systems can reduce operational energy use and CO2 emissions by 50-60% compared to existing buildings and 30-40% compared to existing new builds. This is demonstrated by the (independently assessed) Energy Performance Certificates we have obtained for our new buildings. (in accordance with the Energy Performance of Buildings EU directive introduced in CEE countries in January 2009.) In addition to these standard features ProLogis considers for each scheme opportunities for renewable energy generation and includes features such as solar water heating, photovoltaic panels, solarwall, ground source heat pumps and even wind turbines where these are considered environmentally beneficial and appropriate. These features are normally delivered in partnership with our customers who benefit directly from the resultant energy savings. Ben Bannatyne Managing Director, ProLogis CEE At P3 we have focused on sustainable development and will continue to invest in this key area. We have already provided ecological solutions on our parks the most recent being the construction of solar panels in Czech. This is a major requirement for all our buildings now and in the future to be sustainable and we will role out on a country by country basis.p3 is actively committed to seeking sources of alternative renewable energy and this has become one of the priorities of the company. Craig Maguire Managing Director, PointPark Properties Conclusion The One Type Fits All? report is a result of co-operation between Warsaw School of Economics, Transport Department and Jones Lang LaSalle. As opposed to providing classical market indicators such as supply, demand and rents, the report looks at the end user perspective and is based upon our combined knowledge as well as seventy surveys completed by two groups of warehouse space users in Poland i.e. logistic operators and retailers. While the various groups of warehouse space occupiers have completely different strategies and diverse real estate related needs, common for warehouse space tenants is an objective of quicker rotation of goods/ faster to the market. A good example of more frequent deliveries is TNT s new European Direct Express service launched in March this year. The goods are collected directly from clients and delivered to the TNT hub in the country of destination, with an exclusion of a TNT hub in the country of dispatch. Despite the slowdown on the logistic market, which was particularly pronounced in 2009, 64% of logistic operators surveyed is planning to grow over the course of the next 24 months with 58% of them expanding by over 5,000 m 2. This can be explained by the fact that over half of the operators occasionally (e.g. once a year) experience a shortfall in warehouse space. In addition 50% of logistic companies are approaching the maximum level of warehouse space capacity with average utilization rate of % of the leased area. Occupiers are increasingly demanding in terms of real estate parameters, which begs a question of the quality (technical, location) of warehouse space. In addition to what became a market norm under A grade space, tenants are increasingly looking for additional advantages such as more comfortable work environment for the people employed in the park, large car and truck parking, convenient internal road infrastructure, column-free warehouse space to be used by e.g. smaller tenants willing to have very flexible warehouse space, two sided access with cross-dock, representative office space if required. Not being able to find a suitable accommodation, some of the warehouse space users develop own facilities. 10% of logistic operators and 23% of retailers surveyed own warehouses in Poland and 43% and 31% of logistic and retail companies respectively both own and rent. A significant group of retailers (20%) outsource the storage function to external providers. In addition, in order to secure the best location and ensure the most efficient warehouse space, some of the warehouse space users go down the built-to-suit route. The report also demonstrates greater awareness of sustainability, which looks set to grow further in the future. One third of survey respondents currently consider sustainability and green issues around warehouse buildings. In addition, 44% of them will look closely at sustainability in the future. More importantly, 65% of surveyed logistic operators are willing to pay more for a warehouse space in a sustainable distribution centre. This opens doors for developers and there are numerous examples of developers looking to address sustainability in the Polish operations.

9 One Type Fits All? April Poland road infrastructure and distribution corridors Source: GDDKiA, Jones Lang LaSalle, April 2010

10 Jones Lang LaSalle ul. Królewska Warszawa, Poland Warsaw School of Economics Al. Niepodległości Warszawa, Poland Office John Duckworth Managing Director CEE Anna Bartoszewicz-Wnuk Head of Research Poland Prof. dr hab. Wojciech Paprocki Transport Department Dr Michał Wolański Transport Department Beata Hryniewska Associate Director, Industrial Agency April COPYRIGHT JONES LANG LASALLE IP, INC. & SGH All rights reserved. No parts of this publication may be reproduced, stored or distributed in any way (electronically, mechanically, as a copy or in any other way) without the prior consent of the authors of the publication. The publication was developed based on materials that were drafted with due diligence and in good faith. Every effort was made to ensure the reliability of data contained herein, although no warranty is granted as to their accuracy or reliability, or permanent character in the future. If you notice any errors, please notify the authors of the publication so that they can make relevant corrections.