Kaspars Gražulis, Colliers Industrial and Logistics Agency Expert
E-commerce is not only breathing new life into traditional trade, it is also changing the very conservative sector of industrial space, highlighting the need for new solutions. One of them is the “stock office” or “three-in-one”.
Online sales in the West, including Central Europe, had already taken a strong turn before Covid-19 spread. As a result of these processes, the volume of real estate and industrial areas directly related to e-commerce also increased significantly. For example, the well-known and popular company, Amazon, alone built hundreds of thousands of square metres of construction every year in different countries. With us—well, we would be lucky if the entire market was a total of 100 thousand square metres of industrial space.
The product is not being held in stock
Of course, online marketing was and is still present here. From time to time, people order something on Amazon, maybe buy a gift at a local online store or sports equipment on a certain brand’s website, though they bought relatively little food this way.
However, from a real estate perspective, e-commerce in the Baltics was difficult to observe. The region has its own online stores, but the companies did not have much stock in the warehouses. Consequently, the warehouse space of such companies is small. Large virtual stores are more similar to Internet catalogues—log in, look, buy, but in the end one will most likely have to wait 2-3 weeks for the product because it is not kept on the premises. As a result, sometimes an item from an Amazon warehouse is delivered faster than when you order it from a local retailer.
Growth in the domestic market has so far been more pronounced in the so-called last mile delivery (internationally used for the last stage of the supply chain). Suppliers gradually began to grow, new players entered the market, and the network and number of parcel terminals began to develop. At one time, DPD was the only one to have its own terminal premises (in the industrial space market, this is a sub-segment between production and warehouse premises with specific features; we usually adapt standard warehouses to the needs of such companies). UPS built its hub, the Omniva, from a small business unit and a hundred square meters, which has now grown to use more than 6,000 square metres—the company’s relocation took place last year, even before Covid-19. Venipak also expanded, and Itella focused on this line of business. However, the growth of companies was relatively slow.
Delivery is slow
In the last year and a half, since the coronavirus has raged throughout the world, almost every inhabitant of Latvia has felt the importance and necessity of e-commerce personally. Many people have received a message that the coveted item was not in stock or that they’d have to wait longer, or that the parcel terminals were overcrowded. Suppliers were overloaded, could not fulfil orders, and we saw that the last point of delivery was slipping. This is an indication that this segment (small package suppliers, couriers, etc.) definitely has room to grow. And these companies are also expanding significantly now. I think this trend will continue, because the habit of shopping in the virtual environment will continue. It is possible that now that the stores are open again, the volume of orders has fallen, but the tendency to use online solutions will not decrease.
Optimise daily operations
In addition, many companies in many different industries had to rapidly adapt their business to the virtual environment and rethink the logistics and warehousing of goods in order to survive. In practice, due to Covid-19, companies implemented plans that were expected to be implemented in 3-4 months within a month. Covid-19 was a real driver for speed and a variety of digital solutions.
In such a situation, “stock offices”, a lesser-known type of real estate, which is gradually gaining popularity in our region, has also become relevant—these are buildings that combine three different functions into one: office, warehouse and showroom. This offer is more aimed at small businesses—the areas are small—from 100 to 300-500 square metres.
We talked to the market about such an approach and solution a couple of years ago, perhaps a little too early, before the real need arose. But now it is really clear—the growth of e-commerce has accelerated the development of such properties.
There are companies that previously used not very high-quality Class C premises, but now are ready to move to Class A objects, because they are more efficient, and provide an opportunity to save. There are lower utility bills, from the point of view of business functions - rational. Namely, often the companies had an office in one place, a warehouse in another, and a store in another place. By combining all business units under one roof, daily operations can be significantly improved.
Stock offices become more and more popular
So far, this market segment in the Baltics is quite small. In terms of real estate development, Estonia is ahead, with more than 100 different projects with such “stock office” premises. It was out of the total volume offered on the industrial space market last year that these relatively small stock office buildings dominated.
Two such projects could be highlighted in and around Riga—“LNK” Piedrujas street project “Dienvidu vārti” and “Mārupes Smart park” on the other side of the Daugava. As this concept has become relevant for entrepreneurs or the market is ready for it, new ideas have appeared, already now several plots of land have been purchased with the intention to develop such “stock office” projects. For example, at Ulbrokas street, which has historically developed as a business district, two projects of this type are currently being planned. This segment will definitely develop.
It should be noted that there is a difference from larger industrial projects. Until now, they were filled in with tenants while still under construction, the supply was limited, the crossing was planned in time. In turn, for these small areas, the signing of the contract and relocation is planned quite close to the moment when the object is scheduled to be put into operation. Every developer wants to attract tenants while still in the design, construction stage. The tenants, on the other hand, have a certain distrust—how do I sign a lease in an object where nothing is visible in the project yet?
However, later this year, we will see construction begin on one or two projects. As such, next year, 2-3 new objects will already be available on the market, the total planned area—over 20 thousand square metres.