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The Warsaw Voice » Real Estate » March 5, 2008
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Polish Office Market Continues to Grow
March 5, 2008   
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Record Growth for Office Rentals
The Polish office rental market witnessed unprecedented growth in 2007, according to international real estate advisers Cushman & Wakefield. The scarcity of available office space has left tenants facing higher rents and fewer incentives such as rent-free periods. Rents and transactions hit record levels last year, and the figures were particularly high in the center of Warsaw. Bank Millennium led the charge by leasing 30,000 sq m of the Harmony Office Center.

The results for 2007 reveal that Cushman & Wakefield remained the market leader in renting office space, with 85,000 sq m leased out nationwide. This is a record for international advisers operating in Poland.

"Last year was a bumper one on the Warsaw office market," said Richard Aboo, a partner at Cushman & Wakefield. "During 2007, 211,500 sq m of new office space came onto the market, 13 percent more than in 2006. This surge in demand brought vacancy rates down 2.3 percentage points to 3.08 percent, their lowest level in 10 years. This significant drop had a major impact on rents, which went up 35 percent in the center of the capital to 31 euros. This compares with a rise of 9 percent outside the city center to 18 euros. The huge difference in rents significantly affected supply, as can be seen in central Warsaw. Rising demand didn't just affect the number of transactions, it significantly raised the average transaction size-to 1,100 sq m. This is an increase of 40 percent on 2006."

Developers want to make another 400,000 sq m of office space available during 2008. This would be the largest increase in supply since the 1990s, although only 11 percent has been earmarked for the center of Warsaw. This falls short of requirements and means that rents here may hit 35 euros by the end of the year. Rents outside downtown Warsaw will probably grow apace but will be nowhere near as high.

The central Warsaw office rental market is not expected to settle down until 2010 when more new office blocks come online. The growing number of new projects planned for nearby Wola is the only immediate dampener in sight. Wola might be able to absorb some of central Warsaw's excess demand and help contain rents. An increase in supply throughout the rest of the capital over the next three years should keep rents down to 17-19 euros and lift vacancy rates. Finding suitable office space should be easier and less time-consuming than it has been.

The situation in the rest of Poland is similar to what was happening in Warsaw during the 1990s. Rapid development is being driven by an upsurge in business process outsourcing centers rather than by local demand, which is muted. The overall economic situation is much better than it was a few years ago and this can only boost demand from local firms.

The Polish office market saw increases in both supply and demand in 2007, accompanied by a rise in rents. The increase in office space was particularly fast in regional cities, and 2008 is set to be another good year for the market.

In the first half of 2007, the Polish market for investment in office space was still benefiting from the booming economy and good macroeconomic data, while capitalization rates for real estate in the best locations approached those in Western Europe. The number of transactions, however, was much lower than in the same period of 2006 and capitalization rates declined slightly. The situation worsened in the second half of 2007, when the American subprime mortgage crisis took its toll on financial markets around the world. Many transactions were postponed and some were never made. The amount of investment made in 2007 plummeted by 40 percent in comparison to 2006. Still, the latter half of the year set a new record in capitalization rates for the best office real estate and, for the first time in Poland, the rate reached 5.25 percent, although this figure was reported in real estate that offered a potential increase in rent. The discrepancy between regions in terms of transactions continued to grow last year and there was much more interest in transactions in secondary cities. The number of such transactions increased as well.

In 2007, most office buildings went to buyers from Western Europe, the bulk being mutual funds from Germany, Britain, the Netherlands, Ireland and France. Polish mutual funds such as Arka and BPH were more active on the market than before. It is quite likely that this year, the number of investors interested in real estate in the best locations will decrease and the market will be dominated by buyers with a greater share of their own capital, such as mutual funds in Germany and Austria. The demand for the best products may also dwindle because, on more mature markets such as Britain, the capitalization rate has increased by 75-100 base points.

In the first half of 2007, transactions totaled 883 million euros and, despite a decline since the same period of 2006, there was a large number of small transactions and several big purchases, such as the Focus Building, Prosta Office Center and Trinity Park II, all in Warsaw. According to preliminary estimates, the transaction volume doubled in one year, but transactions made in the latter half of 2007 totaled a mere 248 million euros. Nevertheless, forecasts for 2008 are quite optimistic, due to a number of transactions that began last year and will be finalized in the first quarter of this one. The sale of the Andersia Tower in Poznań, central-western Poland, resulted in a record high capitalization rate-5.8 percent-for an office building located in a regional city.

The market for office space across Poland went through an extremely dynamic phase last year. Sharp increases occurred in both supply and demand for modern office space, but demand tended to prevail over supply, resulting in higher rents. Although Warsaw remains the most well-developed market, the increase in available office space is getting faster in regional cities, particularly Cracow in the south and Wroc³aw in the southwest. The demand was primarily generated by foreign investors, while Polish companies provided more supply than before. This year will be another good year on the market for office space, as according to forecasts, the market may grow by another 600,000 sq m.

Warsaw
Last year was an advantageous time for lessors in the capital, because demand for office space surpassed supply, which itself was very high. A total of 21 buildings came onto the Warsaw market, housing 211,500 sq m of space, which was 13 percent more than in 2006. The total volume of office space in Warsaw thus increased to 2.7 million sq m. The largest buildings completed last year include Trinity Park II (24,000 sq m), IO-1 (23,500 sq m), Lumen (23,500 sq m) and Skylight (19,525 sq m).

The winners in terms of the number of new buildings were locations outside the city center. Mokotów alone accounted for 47 percent of supply in non-central locations, with almost 65,000 sq m of new office space. It is estimated that the rapid increase in space in non-central locations will continue throughout 2008 and may reach beyond 360,000 sq m, while the downtown area will have the lowest number of new buildings in a few years, at around 40,000 sq m.

The Warsaw market for office space to let broke the record in 2007, for the sixth consecutive year. The total gross demand neared 492,200 sq m, which was 20 percent more than in 2006. This year, the figure is estimated at at least 550,000 sq m. The strongest demand was reported in Mokotów, where almost 180,000 sq m went to new tenants. Leased space enlargements accounted for 6 percent and almost 53,700 sq m was subject to renegotiation on lease contracts. It is noteworthy that pre-let contracts had a 34-percent share of the demand volume. Transactions on more than 10,000 sq m accounted for a larger share of the market last year than before, for example, Bank Millennium rented 22,400 sq m of the Harmony Office Center and Deloitte rented 14,500 sq m of Atrium City. The average amount of office space in a single transaction increased by 40 percent since 2006, to 1,100 sq m. Dynamic economic growth will play a key part in the development of the space-to-let market in Warsaw, as will higher consumption and investment rates, more qualified staff and improved infrastructure. These factors will stimulate the demand for office space over the coming two years.

The vacancy rate in Warsaw, which has been systematically declining since 2002, reached the lowest level in its history last year. At the end of the fourth quarter, the rate dropped to 3.1 percent, averaging 3.37 percent in the central business district (CBD) and 2.88 percent outside the city center. Compared with the end of 2006, the vacancy rate decreased by 43 percent, or 2.3 percentage points. The most vacant space was available in southeastern Warsaw (7.8 percent) and the downtown area (6.8 percent). The powerful demand in Mokotów brought the vacancy rate in the district down to 1.6 percent, while it sank below 1 percent in the downtown peripheries and in Wola. The rapid decline of available space was a result of the quick increase in demand and the limited supply of modern office space, especially in the city center. At the end of 2007, the amount of vacant space shrank to 36,500 sq m in the CBD, while locations outside the city center had 46,500 sq m of available office space.

The high demand and relatively low supply are likely to keep the vacancy rate at low levels until 2010. The coming few years will bring considerable differences between the amount of available space in the CBD and non-central locations. Due to the low supply, the vacancy rate will continue to decrease in the city center, while more modern office space will be available in non-central locations. The high demand will assure a steady vacancy rate in non-central locations.

Last year also broke records in rent rates. Rents in the best central locations rose by almost 36 percent, from 22 euros per sq m per month at the end of 2006 to 30 euros at the end of 2007. Starting rents in non-central locations usually range from 14 to 18 euros per sq m per month. Extra financial burdens include utilities, which average 5-6 euros per sq m per month in the CBD and 3-5 euros in non-central locations. Parking costs remain stable at 130-200 euros per month for a single parking space in underground car parks of the CBD and 65-120 euros in non-central locations. Outdoor car parks in non-central locations cost 30-80 euros per car per month.

High rents are expected to last until 2010 in downtown Warsaw. Due to the very low supply, rent in some buildings has shot up to 40 euros per sq m per month. The planned supply in Wola provides a chance for rents in the CBD to come down. The demand in non-central locations is a counterbalance to the fast-growing supply of office space and, as a result, rents are beginning to rise from their previous stable levels. If the booming economy lasts into 2008 and makes the same demand scale possible, rents are very likely to continue to increase next year and reach around 19 euros per sq m.

Other cities
Last year was a time of exceptional development on the office market across Poland, especially due to high demand generated by foreign investors. Modern office space was sought for BPO (business process outsourcing), expansion of companies' headquarters, and investment.

The most well-developed markets for office space include Cracow, Wroc³aw, Poznań and the Tricity of Gdańsk, Sopot and Gdynia. Cities with prospects of dynamic development include Katowice and £ód¼, while Szczecin and Lublin are regarded as emerging markets.

Cracow
The total volume of modern office space in Cracow, southern Poland, is estimated at 350,000 sq m. The combination of a shortage of office space and a growing interest in the city among foreign investors has encouraged developers to prepare new plans. Projects already underway will increase the current volume of office space by around 50,000 sq m. Some of the most noteworthy projects in this group include Kraków Business Park, Rondo Business Park, Edison, Onyx, Portus, M65 Meduza and Centrum Biurowe Kazimierz. Future plans involve another 400,000 sq m.

Since demand clearly prevails over supply, much of the space that is still under construction has been already rented out. At over 19 euros per sq m per month for the best space, Cracow has the highest starting rents of all regional cities, while the vacancy rate in the main office buildings is close to zero.

Wroc³aw
Wroc³aw, southwestern Poland, will soon have the second-highest concentration of high-rise buildings after Warsaw. Tall residential and office buildings under construction include Sky Tower, Centrum Po³udniowe, Odra Tower and Angel Wings.

Wroc³aw has a total of 260,000 sq m of modern office space. The fastest growing, western part of Wroc³aw stretches along Legnicka and Strzegomska streets towards the airport. Around 150,000 sq m is under construction in the city and another 430,000 sq m is planned. Major projects in development include Zachodnie Centrum Biznesu, Grunwaldzki Center, Globis and Bema Plaza.

The demand for office space will be generated by centers for research and technological development and thriving projects related to all kinds of industries. The vacancy rate in Wroc³aw was around 3 percent at the end of 2007. The starting rent rates for the best office space rose to 17.5 euros per sq m per month.

Gdańsk, Sopot and Gdynia
Until mid-2006, the Tricity area in northern Poland was stagnant when it came to office space, but the situation began to change in 2007 when investors sensed higher demand and launched construction of two large office complexes-£uæycka Office Park in Gdynia and Arkońska Business Park in Gdańsk. The Tricity market now covers around 230,000 sq m of modern office space.

In comparison with other markets in Poland, very few new buildings are constructed in the Tricity. Almost all of the 40,000 sq m that will be delivered to the market this year has been rented out. Another 220,000 sq m is being planned.

Rent in the Tricity has risen considerably because of a very low vacancy rate and insufficient supply. The highest rents have reached 17 euros per sq m and are very unlikely to return to lower levels this year. Rising rents and a dwindling amount of available space are the characteristic features of the Tricity market this year and only the planned extra supply can stabilize the situation.

Poznań
The amount of modern office space in Poznań, west-central Poland, exceeds 180,000 sq m, while 42,000 sq m is under construction and another 150,000 sq m is planned. Supply, which was adjusted to market needs at the beginning of 2006, could no longer match demand last year. The economic revival caused a rising demand among new tenants and those who were enlarging the space they occupied. The situation triggered higher rents, which are now approaching 18 euros per sq m in the best buildings.

The vacancy rate in Poznań is around 2.4 percent. Prices are not expected to stabilize until at least mid-2009.

Katowice
The office market in Katowice, southern Poland, is in an early development phase at 175,000 sq m, but it will grow rapidly in the coming years thanks to projects carried out by foreign developers-such as Skanska, GTC and TriGranit-and the demand generated by foreign investors. The insufficient supply is expected to increase demand and rents in Katowice. The best starting rent in A-class office buildings in the city center is around 16 euros per sq m and the vacancy rate averages 2 percent.

£ód¼
The market for office space in £ód¼, central Poland, has entered an early boom phase. Foreign developers have reserved attractive plots of land, but since the city has a high vacancy rate, most of them are waiting to see how the market develops. The £ód¼ market for modern office space offers around 106,000 sq m, but is still relatively underdeveloped. Almost 55,000 sq m of office space is under construction in buildings such as Textorial Park, Synergia and Red Tower. Planned projects total 230,000 sq m. Renting 1 sq m in the best locations costs 15 euros per month.
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