The war in Ukraine returns production to Europe, demand for warehouses will grow

The war in Ukraine led to the redistribution of raw materials and the relocation of production, which necessitated the construction of new logistics centers and industrial areas. This became clear during the Third International Conference on Industrial Property in Sofia.

After the beginning of the coronavirus pandemic, there was a demand for rent and deals for warehouses with an area between 200 and 500 square meters, while last year the demand was focused on warehouses with an area between 400 and 800 square meters.

There are many Class A areas on the market in Sofia, some of which are vacant. However, in the country there are almost no such and this leads to higher prices for newer industrial areas. Market activity comes mainly from Bulgarian companies and less from foreign ones. The main players are logistics companies and companies in the fast-moving sector.

About 80% of the properties built at the beginning of the year are custom-made and exact requirements of the user companies. Those built for speculative purposes are realized in steps and slowly. There are also ready-made properties for Act 16, which are not activated while waiting for tenants to save taxes for some time.

Transactions were realized mainly in class B properties for premises with good location and good condition. It is important to note that there were several deals with professionally built Class A warehouses, located in a good location, which did not change their prices, despite the fact that they were not in Sofia and Plovdiv.

The prices of rents for warehouse space in the country vary from 2 to 3.5 euros / sq.m., And for Sofia the levels are between 3 to 5.5 euros per sq.m. In the purchase and sale in the last two years there is interest mainly in depreciated properties, which began to enter the market.

There were also many highly offered properties by owners who had been affected by the larger increase in the housing sector. Here I want to firmly emphasize that the curves in rising housing prices and industrial property are not parallel - in industrial property the increase is much smoother than the acceleration in housing.

Pandemic and war

In the last ten months, we have witnessed very high inflation, shrinking consumption by people and countries around the world, international and political uncertainty, rising interest rates. The good thing is that countries like Bulgaria may benefit from this unpleasant, even poisonous mix. In the last three years, we have seen a very rapid change in supply chains and a shift in production from China to Europe, leading to a shortening of supply chains.

Analysts expect the problems due to the pandemic and the war in Ukraine to deepen. We are already witnessing more expensive fuels, which leads to more expensive transport.

The pandemic has strengthened the demand in the retail sector and that of courier services, which has had a positive impact on the sector in both Europe and Bulgaria. Much of the occupied space is from companies in these two sectors. Employment in the segment is extremely high. We expect a slight increase in prices as a result of high demand.

Are prices low or high?

Analysts say the situation is complicated. On the one hand, landowners are trying to sell them as expensively as possible. On the other hand, the prices of construction materials have been rising unprecedentedly in recent decades. Large warehousing companies face the dilemma of not developing parks or developing them at higher prices.

Compared to other European countries in Bulgaria the prices are lower. An unwritten rule is that logistics companies cannot afford land over 60-70 euros per square meter. This is quite far from the prices around Sofia, which are higher, analysts say.

The price discrepancy is a fact. In Bulgaria, rents are historically higher than in the Czech Republic, for example. The same goes for the land market. The price of land in Sofia has always been higher, but there are many other problems.

According to analysts, some of them are related to slow procedures at the state and municipal levels. If an investor wants to acquire 30 decares of land, for example, it will take him at least two years. Three more years to come in order to bring order to the regulation. But after these five years, someone can buy the land for two months at half price.

The procedure is so long that at some point the price no longer matters. Almost all companies in the area of ​​Sofia Airport are potential buyers of warehouse space at a price of 100 or 150 euros per square meter. But no one sells large plots of land. Even if we assume that there is such a seller, it will still take two years for the investor to bring the property into regulation and infrastructure. Against this background, the increase in the price of materials turns out to be the easier part of mathematics.

For companies that have already acquired the land, the prices of construction materials are a major factor. Some analysts expect a decline in industrial property construction due to higher material prices. "I can't predict what the prices of fuels and iron will be, but they are unlikely to return to the levels of the last three or four years.

The market of industrial parks

The pandemic has directly affected this segment of the logistics real estate market. "The corona crisis forced us to initially suspend our investment program for a moment. As the results of the COVID crisis began to be seen, namely the development of e-commerce, disrupted supply chains, more interest was generated in logistics areas. E-commerce needs more logistics, which is closer to, even within the city. It needs more small warehouses with more buses, not TIR ramps.

Disrupted supply chains and uncertainty have led industrial enterprises and large retailers to look for larger storage areas to have a larger production buffer. This has generated construction both for the own needs of large companies and has increased the demand for rental properties. In the last six months, the interest has been much higher than a year ago.

There is potential for the development of the logistics sector west of Sofia. The area is interesting because it is close to a large part of the population of the capital, which is a huge plus. Purely geographically it is well located, with good transport links, especially when it comes to a large volume of cargo to be received or shipped. Transport connectivity and the ability to hire people is essential in this part of Sofia.

Rental levels in logistics centers around the capital and major cities will rise, analysts expect. This trend is yet to be felt. The reasons for the increase in rental levels are many, mostly related to increased construction costs. All future projects must apply higher rental prices. We should not be afraid that this will stop the demand, because it is still active at the moment. As an entrepreneur, I do not see a shock that would lead to an outflow of demand.