The COVID-19 pandemic and the subsequent dynamic geopolitical events, energy crisis, and wave of inflation in recent years have catalyzed rapid changes in the supply chain sector.
Since March 2020, consumer prices have increased by nearly 16% in the United States, 15% in the Eurozone and the United Kingdom, 16% in India, and 21% in Brazil (McKinsey). A significant portion of this inflation results from disruptions in supply chains and a sharp reduction in the supply of certain goods.
The events of recent years have demonstrated how crucial the resilience of logistics for material and goods flows truly is.

In the face of threats and in search of a new balance, we want to once again consider whether renting a warehouse is a strategically better choice than building or purchasing one for a company’s own operations.

The “rent or build” dilemma can be examined from the perspective of increasing a company’s resilience to market volatility or from the perspective of corporate financial management.

Perspective: Enhancing Resilience to Market Uncertainty
Business security and resilience are key issues in uncertain times. Can the limited supply of warehouse space in our market environment pose a threat? In Poland, the supply of warehouse space continues to grow at pre-pandemic levels, while rental rates have stabilized. However, this is a macro-level perspective. If, for some reason, our warehouse needs to be located outside the few major urban centers, then we may indeed encounter supply constraints. Professional developers today are reluctant to invest in projects that don’t guarantee liquidity and may sit vacant for a long time.

Agility, Flexibility, Speed of Adaptation
Renting a warehouse is an obvious option for companies that are growing or entering a new market. If we don’t have a long business history, it will be difficult to make a solid forecast of future warehouse space needs. The option of investing in an owned warehouse can be considered when there is a high probability of accurately forecasting inventory needs over a 5–10 year horizon.

An “asset-light” strategy—shifting away from fixed costs toward variable costs—should, in many cases, especially in logistics, create a foundation for increased agility and resilience of a company to environmental changes.

A study by Ernst & Young LLP conducted on U.S. public companies from the Fortune 500 list in several sectors shows that asset-light companies achieved a higher total shareholder return compared to their asset-heavy counterparts.

Specific construction requirements or technical adaptations of the building

The more standard and universal the logistics process, the easier it is to find suitable warehouse space for lease.
The use of atypical, business-specific solutions will typically require the construction of a built-to-suit (BTS) warehouse for the company’s own use. Professional developers offer such options and build facilities tailored to narrowly defined requirements, but this comes at the cost of long-term lease agreements (over 10 years) and higher rental rates. All technical investments in the building are amortized through the rent. Still, this option usually offers more flexibility compared to an investment financed with a 25–30-year loan.

Investment perspective and corporate financial strategy

The real estate market is, by nature, an investment market. Building a warehouse requires financial outlays. Therefore, we must assess the cost of the capital involved in the investment. What is the source of funding?

Operating cash flow and capital source

If a company can finance the construction or purchase of a warehouse with its own funds—from accumulated profits—it should evaluate the attractiveness of the investment compared to other uses of capital. The return on investment (ROI) will help determine whether the project is rational compared to, for example, buying bonds or investing in innovation or business expansion. There are known examples of companies that allocate their own funds to real estate investments for internal operational use.

If the investment is to be leveraged with borrowed funds, then the cost of capital over time, including the impact of inflation, becomes a key part of the calculation. In today’s market, capital is relatively expensive, and obtaining it also requires meeting a range of conditions regarding the company’s financial health and providing guarantees to lenders.

A key metric for assessing investment risk is DSCR (Debt Service Coverage Ratio)—a measure of a company’s available cash flow to service debt obligations. One must remember that debt servicing can significantly reduce operational liquidity. A loan agreement will typically bind the company for 20–30 years, compared to a lease agreement, which usually lasts 5–10 years.

Building the company’s equity

The cost forecast of a development project should be balanced with the expected returns. If we are considering building a warehouse for our own use, the “income” is the money saved on rent. Thus, we must evaluate how long it will take for the savings to equal the initial expenditures—typically a period exceeding 10 years.

However, one of the advantages of this model is that fixed assets add to the company’s balance sheet value, unlike leasing, where the money spent does not accumulate as equity.

A warehouse facility could potentially be leased or sold in the future, provided that the right decisions were made during its design and acquisition. It’s crucial to ensure the warehouse meets both technical and environmental standards. Ignoring these criteria could result in the facility being unsellable in the future. This also applies to building certifications, such as BREEAM.

Knowledge and expertise

Purchasing—and especially building—a warehouse requires knowledge and competencies in real estate investment. It starts with budgeting the project. Creating a sound financial model requires specialized knowledge. All cost elements must be accurately assessed.
Inexperienced investors often underestimate “soft” costs such as:

• project preparation and obtaining the necessary permits and administrative decisions,
• legal support and project management,
• financial costs.

When undertaking an investment project, we must ask whether the company has the human capital—knowledge and expertise—needed to successfully complete the process. The effort and time required from internal teams are often underestimated.
Mistakes, underestimations, or unexpected obstacles occur on every construction site. Budget reserves should be planned for such contingencies, but for an inexperienced investor, costs can quickly spiral out of control.

Technical maintenance of the building

Owning a warehouse means being responsible for its ongoing technical condition. The company must be prepared for the operational and organizational effort related to regular maintenance, repairs, cleaning, snow removal, and servicing the building and its equipment.

Building management can be outsourced to professional companies or handled internally by developing the necessary resources and competencies. In either case, these are costs and resource commitments that factor into the overall equation.

In summary, the high volatility of markets, uncertainty, and rapid changes in global supply chains argue in favor of an “asset-light” strategy. Leasing frees up operational funds that can be redirected toward strategic areas.

In some cases, investment in fixed assets—such as real estate—can be a good idea, but typically only when it is treated as an investment backed by financial engineering. A lack of knowledge and experience may entangle the company in a venture that ties up resources and diverts attention away from its core competencies.

___________________________________________________________________________________________________________

M4 Real Estate  (m4re.pl) is a company specializing in comprehensive logistics, investment and development consulting, the lease of warehouse and logistics space, as well as the implementation of BTS and BTO projects.