Kaspars Gražulis, Colliers Industrial and Logistics Agency Expert
Vigorous competition between the two giants is expected very soon. 2020 was the first year after the previous crisis when the volume of new industrial premises put into operation in the Riga and Pieriga region reached the level of 2007.
This means that there will be two generations of Class A buildings on the market in the future. In addition to tenants, other trump cards will be used in the competition alongside traditionally important factors.
Inflow of new premises
In general, this segment of the real estate market in Latvia has suffered relatively little during the Covid-19 pandemic; active design and construction of industrial facilities is taking place, and developers are increasingly focusing on energy-efficient solutions, which will become more important in the coming years.
Since the recession up to year 2014, the market accumulated the areas created between 2005 and 2009 when the largest industrial parks were built.
During that time, the projects were mainly built not for a specific company, but for rent; many buildings have universal solutions. Thus, in the beginning of the crisis, the amount of vacant space or vacancy was large. Over several years, the premises were gradually filled and, from 2014 to the middle of last year, the share of vacant space remained at the level of 2-4%. It should be noted that, in Western Europe, the vacancy rate is mostly at the level of 7-8%, which is assessed as healthy. With the development of new projects becoming more active in recent years, it is now 6.1% with us. In addition, not only in 2019 and last year, but this year will also see a significant increase in new areas. According to Colliers estimates, this year sees plans to offer new industrial premises in the market in the amount of about 100 thousand square metres. Currently, four professional developers are actively implementing larger projects.
Energy efficiency first
In the future, two-cycle products will co-exist and compete in the market. Until now, there was more or less intense competition between the sites in terms of location—the tenants assessed the location itself, the availability of labour, and the transport infrastructure. These factors will continue to be important for tenants, but the products will be more or less the same in terms of location (for example, Rumbula currently has two parks almost opposite each other; the airport area also attracts developers), but other nuances of competition will be important.
One such competitive advantage will be energy efficiency. In the past, tenants did not pay too much attention to it, but now green thinking is being cultivated and, for many companies, especially multi-national, the future strategy already includes the goal of zero emissions. In Latvia, such a view was not particularly characteristic of the construction of industrial premises, nor was there a strong demand for sustainability certificates.
Benefits—in the long run
When choosing between two similar projects, tenants are more likely to prefer a more modern, energy-efficient one with a sustainability certificate, as this type of project is based on cost-effectiveness, including appropriate heating, lighting, energy solutions, etc. The first project with energy efficiency certificates will soon appear in Riga, as well.
Older industrial parks will not be left without tenants for at least the next 10-15 years, because not everyone can afford to pay more for an energy efficiency and sustainability certificate, although there is a question of long-term benefits. Undoubtedly, they will also be adapted to modern requirements, the easiest way to do this is to replace the LED lighting.
However, in order to talk about major changes, such as the adjustment of the rental price of older properties, the market needs to reach a certain amount of new space. For the time being, project developers will need to be able to clearly justify the benefits to tenants, including in terms of costs. It is the rent that makes up a large part of the costs, but the next thing that is assessed is the utility and management costs. Tariffs could be quite similar in different objects, but in the long run it becomes important whether, for example, maintaining a temperature of 18 degrees in a warehouse requires one or another amount of heat energy.