Will they snap under market pressure?

In all probability, the relative calm that ruled the market of logistics centres last year will come to an end, with the 150 thousand square metres of expansion recorded in 2007 expected to almost triple in 2008. according to forecasts, some 400 thousand square metres of modern warehouse space will be delivered to market this year. the big question is whether demand will be able to keep pace with the dynamic rise in supply.
An interesting topic of the logistics market is the definition of expanding leasable area and the volume of leases. Each consulting firm publishes different data in their analyses on leasable space and transaction volume, because there is no unified calculation method on this market, unlike on the office market. In closing transactions, for example, there are as many as four phases from a verbal agreement to actual moving in. Analysts can also vary the starting and end points of calculating gross leasable area, deciding for themselves when a building counts as completed or empty.
 For long years, speculative developments ruled the market of industrial real estate, but the 120-150 thousand square metres of expansion registered in each of the past two years is expected to jump signifi cantly this year, with around 400 thousand square metres of new space to be delivered, says Tamás Beck, head of the industrial real estate division of Colliers. Contracts were signed last year for 183 thousand square metres of space, and transaction volume totalled 167 thousand square metres in the previous year.

Based on this, there is no obvious boom in demand, but at the same time, leasing dynamics for the first quarter of the year indicate some signs which could support developers - optimism, stresses Beck. For one, it is a fact that although the vacancy rate was 9 percent last year, this supply was not concentrated in one area, but was spread out among logistics centres with a few thousand square metres available at each site.

Size matters now

Clients seeking 5 thousand square metres at the end of last year did not really fi nd warehouse space in modern centres, while according to the trend, tenants are appearing on the market looking for bigger and bigger space. The nature of demand for spaces of more than ten thousand square metres also raises new kinds of conditions parks need to meet - it is no coincidence that 20-30-40 thousand square metre halls dominate most of the buildings to be delivered this year. The biggest hall at present is the 68 thousand square metre one-time Rozália park along the M1 - which has been repositioned as Westlog following the Rynart bankruptcy -, while second in line is a 45 thousand square metre building in the ProLogis Sziget park, but most of the buildings on the market are between 10-20 thousand square metres.

In addition to rising demand on back of increased space needs and the Rynart bankruptcy, speculative developments received another boost from the fact that many projects have been fully let and cannot be expanded further. Therefore, those developers who followed an active investment strategy and have stocked up on adequate sites thanks to their land banking activities, now see that the time has come to move forward. The completion of a new section of the M0 is also spurring developments along main junctions, while some investors who have thus far concentrated on other areas are looking to expand to logistics projects as well. All these factors together led to this year's development boom, which would theoretically lead directly to a further decline in rents as a consequence - however, Tamás Beck believes even the opposite could happen.

Fundamentals theoretically point to rising instead of falling rents

Price offers are currently in the 4-5.2 euro range, but this is reduced by discounts based on individual agreements. This level was stablished based on land prices of maximum 40 euros, however land with good attributes, near motorways, now goes for around 50-60 euros per square metre. Construction and fi nancing costs have also risen, and investors now expect a return sooner than before, calculating with yields of 7-8 percent, as opposed to the earlier 6.5-7.5 percent. The market is also getting more concentrated, and all these factors would theoretically point towards a rise, but at the least a stagnation in rents, therefore in theory now is the right time for tenants to sign contracts. Whether there will be a possibility for rising rents despite the increase in supply will only be able to be answered at the end of the year.

Without transport development the eastern sector will get left behind

Park developers continue to focus on Budapest and its immediate vicinity, with the 400 thousand square metres of new space this year - 40 percent of which will be delivered in new parks - concentrated in four major regions. Shifting focus away from the capital or expansion to rural areas is not expected this year either. This is underscored by the example of the ProLogis Park in Hegyeshalom, where the most modern facility - with attractive rents and an ideal location near Vienna, Bratislava and Győr - still awaits tenants with the fi rst building one year after opening.

The attractiveness of the already listed, popular locations is increased by their good transport connections, and until mass transport infrastructure is not improved on the outskirts of the city, or usable suburban transport is not built out in the agglomeration areas, that sector will develop more slowly, stresses the Colliers expert. Companies do not really rent warehouse space in an area to where the workers cannot travel comfortably, and this is frequently the most important factor when choosing a site, especially in the case of end-users. In terms of services, only dining opportunities play an important role, everything else, such as postal services, customs, or banking, is considered just an extra comfort, and is at the end of the list when making decisions.

Development sites in 2008:

- M1-M0-M7 region
- M0 southern section and Gyál region
- M4-M0 junction, Vecsés, Üllő, Ferihegy
- M0-M3/M2 junctions

City logistics

City logistics is expanding dynamically, with the most signifi cant projects among the increasingly massive supply including the industrial site of Wallis in Southern Pest, Ablon1s Airport Business Park, City Point 9 developed by Convergence, and the Italian-developed Innove Business Park. Additional city logistics hubs could be or are being developed in the 11th, 21st and 3rd districts of Buda, but there is also signifi cant development potential in Újpest or Rákospalota, and developers have not yet exhausted the opportunities in Ferencváros either.