The beginning of 2023 was marked by the renegotiation of contracts, the abolition of discounts and a partial return to market lease terms, which indicates a gradual recovery and stabilization of the market. There were changes in the structure of demand, and the trend towards a reduction in warehouse stocks continued.  The reduction in storage space was also driven by a shortage of staff and rising costs of qualified personnel.

The change in logistics routes had a significant impact on the market. "The closure of seaports has forced logistics companies to revise their transportation strategies, expanding transportation and cargo services alongside their core business. Such business diversification has supported the stability of the main 3PL operators, which has increased demand from such users. Thus, the wholesale and retail sector (38%) and logistics and 3PL operators (36%) continued to dominate the gross absorption structure, with annual take-up amounting to around 92,000 sqm (-37% y-o-y)," CBRE Ukraine analysts say.

Retailers also demonstrated stability. As CBRE Ukraine explains, this is due to steady consumer demand, mainly in the e-commerce segment and the recovery in demand for non-core consumer categories. In addition, humanitarian aid and military goods have stimulated demand for warehouse space.

"Currently, there is a demand for industrial premises for the pharmaceutical industry, electronic components (sometimes dual-use), warehouses within the city from companies that suffered after the arrivals in the Kyiv region, there are requests from companies planning to relocate from Kharkiv and Zaporizhzhia," comments Oleksiy Shestak, Warehouse Property Manager at Alterra Group.

There is still a demand for dry warehouses and low-temperature warehouses, including deep freeze warehouses. There is a shortage of them because a significant part of such warehouses was destroyed by an enemy attack during the attack on the Kyiv region at the beginning of the war. We should also mention temperature-controlled pharmaceutical warehouses, which are also in demand.

In contrast to 2022, when demand was mainly related to relocation from damaged warehouses and renegotiation of existing contracts, in 2023, several expansion deals (19%) and relocations with expansion (41%) were recorded, indicating a trend towards a recovery in the rental market, CBRE Ukraine analysts say.

According to CBRE Ukraine, as of the end of 2023, no new speculative properties were commissioned in the warehousing market in Kyiv. The annual volume of new supply for own use amounted to about 88,000 sqm in three warehouse complexes: Novus Warehouse (40,000 sqm), Nova Poshta Terminal (35,000 sqm) and the second phase of Oleksandrivskyi (12,600 sqm). As a result, the total supply of competitive warehouse space remained unchanged at around 1.41 million sqm.

The distribution of demand according to location directly depends on the proximity of the front line and the security of the region.  The most problematic areas are the frontline territories - Kharkiv and Dnipro. Quite a few warehouses were built here and are now under enemy attack.

Vacancy and rental rates

CBRE Ukraine cites the following figures: as of the end of 2023, there was a shortage of vacant space on the market, and the vacancy rate was only 1.8% (-2.2 percentage points y-o-y). "The destruction of a large number of warehouses in 2022 only further increased the pressure on the vacancy rate. In addition, low vacancy was supported by active absorption, where space vacated due to relocations or downsizing rarely entered the open market and was quickly leased," the analysts explain.

"Lease transactions continued to be concluded in local currency, although this trend declined in 2023. Combined with limited supply and a shortage of quality space, there was an increase in rental rates for Class A warehousing space. The effective rent increased by 15% in 2023 to $4.9 sqm per month, indicating a reorientation of the market in favour of landlords. Asking rents increased by an average of 20%, ranging from UAH 168-194 per sqm ($4.6-$5.3) per month for Class A space," CBRE Ukraine analysts said.

Forecasts: new space, rental growth

In 2024, the market should be replenished with new high-quality space, plus the restoration of destroyed warehouses is expected.

"In 2024-2025, about 161,000 sqm of new space may enter the market, which is a record figure for the last ten years. Among the objects are the logistics complexes Chaiky I-III (70,000 sqm), Dudarkiv (45,000 sqm), Oleksandrivskyi III (40,800 sqm) and Gorenychi (5,000 sqm), but delays and postponements of market entry are not excluded," CBRE Ukraine analysts predict. - "The announcement of such a volume of new supply has the potential to solve the problem of shortage of space in the Greater Kyiv area in the medium term, especially for high-quality Class A warehouses.

"Over the past two years, the cost of construction has increased by 30%. If earlier it was possible to build a warehouse for $400-$450 per square meter, today the cost of building a Class A dry warehouse will cost at least $550-600 per square meter with a total area of about 20,000 square meters," says Fedir Arbuzov, CEO of Watermelon Development.

RLC, one of the largest developers in the market, announced plans to complete the reconstruction of its destroyed 58,000 sqm warehouse by the end of 2024. Other developers have not yet begun to restore the destroyed warehouses and only a few of them have returned to full operation. Some companies whose warehouses were damaged or completely destroyed are refraining from rebuilding their facilities, instead considering alternatives by acquiring new complexes.

Against the backdrop of a more optimistic economic outlook, at least for 2H 2024, occupier demand is expected to show positive dynamics, and existing requests for large space, which form pent-up demand, will drive leasing activity in 2024. In the medium term, with the stabilization of hostilities, the segment is likely to remain more favourable for property owners, with rents gradually increasing.

Approximately 161,000 sqm of warehouse space is planned to enter the speculative market during 2024-2025, which is expected to reduce vacancy pressure and saturate the market with new space. Given the relatively short development cycle, the recovery phase of the market is expected to be shorter than in other property segments, once leasing activity picks up.