A course for growth

Piotr Szymoński, Director at Walter Herz

The retail sector is not slowing down

The pandemic, conflict in Ukraine as well as inflation and high interest rates that recent years have brought have reshaped the real estate market around the world. The global slowdown also resulted in last year's nearly three-fold decline in the value of transaction volumes in the real estate sector in Poland compared to the previous year.

The more difficult economic environment influenced the development of the commercial market in our country, but not all sectors slowed down. The logistics, industrial and retail space markets are coping well in the new conditions, and their potential has been growing rapidly in recent years.

The greatest progress, both in terms of new supply and share in investment transactions, was recorded in the retail sector last year. In 2022, the stock of modern retail space in Poland increased by approximately 350 thousand sq m. Last year, new supply amounted to over 450 thousand sq m., including approximately 70 percent space provided by new retail parks and convenience centers. Forecasts say that this year, the increase in new space will remain at a similar level as last year.

It is projects implemented in a smaller format that have been generating the greatest growth in the sector for several years. We have over 600 retail parks across the country of at least 2 thousand sq m. There are 3.6 million sq m. of this type of  retail facilities. About 400 thousand sq m. of retail space is still under construction. As much as 80 percent of new retail space will soon be provided by retail parks and smaller shopping centers, which are being built in all regions of the country, especially in the cities of less than 100 thousand residents.

However, it is claimed that saturation with retail parks is approaching a level that requires analysis of the foundations for further development of such projects. In my opinion, there are still places on the commercial map of Poland, where there is a lack of modern retail space. Developers active in this sector have ambitious plans. They intend to expand their portfolios. Tenants also declare their willingness to develop their chains. Nearly 30 new brands entered the Polish market last year alone. Customers, however, have returned to traditional shopping and are visiting retail facilities in droves, which means that shopping centers are generally doing well.

A safe investment option

Very good shape of retail parks, most of which have a full set of tenants at the time of opening, as well as the overall retail space market in Poland, which accounts for only 3 percent of vacancies, encourages investors to be active. Confidence in retail parks increased significantly during the pandemic, when, unlike large shopping centers, they thrived.

The already established status of retail parks and local shopping facilities as one of the safest assets on the real estate market is confirmed, among others, by the structure of investment transactions in Poland in 2023. The retail real estate sector turned out to be more attractive to investors than the office real estate sector. In terms of transaction value, it ranked second, after warehouses. With transactions worth over EUR 440 million, trading assets generated approximately 30 percent of the total value of acquisitions registered in Poland.

Investors were mainly interested in retail parks and convenience centers, which earned 60 percent of transaction volume in the retail sector. Most of the finalized transactions ranged from EUR 20 to EUR 30 million.

Already in 2022, we could observe a significant increase in the share of commercial assets in investments. The commercial sector, dominated by retail parks, generated approximately 26 percent in the total investment volume.

New investors and brands

Last year, demand for regional shopping malls continued, but I do not expect transactions involving large shopping centers to return in the upcoming quarters. Assets available in the sector also enable attractive opportunistic purchases, which may increase the profitability of investments through, among others, demolition and change of function.

The investment market is waiting for the announced reductions in interest rates in Europe and the USA, and thus a decline in investment financing costs. The return of the largest international entities to investing in Poland would allow for an increase in transaction volume in the second half of the year. Optimism is also brought by the inflow of new players to the Polish market interested in commercial products, including Lords LB Asset Management, BHM, Leoff, and Frey.

I believe that in the mid-term perspective, the retail park market has sound foundations for further growth. The high cost of project implementation is not in line with the increase in rents, and the level of yields puts pressure on developer margins, but investor demand for retail parks remains high.