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The Warsaw Voice » Real Estate » May 14, 2008
The Real Estate Voice
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Office Space: Steadily Up
May 14, 2008   
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When looking at Poland's office space market, it is worth watching the regions because this is where the market is developing the fastest-though Warsaw decidedly remains the market leader in this sector.

Despite the current downward trend in the real estate market worldwide, the Polish market is relatively stable and even shows an upward trend.

The Warsaw office market last year experienced a breakthrough: tenants rented a record area of office space and the increase in rents was higher than expected. Bartosz Mierzwiak, director of the office-rental department of real estate consultants Jones Lang LaSalle, said, "If there continues to be a limited supply of new projects in the center, we can expect further rent increases. During the last 12 to 14 months rents have increased by 35-40 percent for space in niche projects such as Dom Dochodowy or Kamienica Lipińskiego, where monthly rents now start at around 40 euros per square meter. Currently rents in the center range from 28 and 30 euros, and outside the center they range from around 15.50 to 17 euros per square meter.

Rates of return for investors are stable for prime office space, but are rising for Class-B buildings. Tomasz Trzósło, Jones Lang LaSalle's capital market director, had this to say about real estate investment last year. "Recently capitalization rates for investment in the Central European real estate market have risen insignificantly for prime properties but more significantly for the remaining properties. Credit is also more difficult to come by; banks' margins have risen lately; and the time needed to complete credit formalities has significantly lengthened-all these factors depress prices. Thus prudent owners of commercial real estate in Poland should take these factors on board when planning to sell in the next few months to accurately estimate possible profit."

Last year was another record-breaking year in terms of new office supply. The total modern office stock in Warsaw grew by 211,500 sq m and exceeded 2.7 million sq m. The majority of new completions were located in the Upper South and South West subzones, 30.6 and 20.8 percent respectively. The most competitive office projects delivered to the market in 2007 included: Trinity Park II (24,000 sq m) and IO-1 (23,500 sq m) in Mokotów district as well as Lumen (23,500 sq m) and Skylight (19,525 sq m), located in the core of the city center. There was also a significant rise in the cost of fitting out offices, and a lengthening in the time required to do it, with tenants sometimes having to wait six months.

The next 12 months will be characterized by a continuation of high levels of demand, primarily for new leases in recently developed buildings and those still under construction in the Upper South and South West districts of Warsaw.

Other trends will include an increased movement between districts by companies moving into newly delivered projects, and the departure of certain tenants from the city center, as well as further increases in rents within the Central Business District (CBD).

Provided all projects are delivered according to schedule, the Warsaw office stock is likely to increase by an additional 310,000 sq m in 2008 and 470,000 sq m in 2009. Most of the pipeline buildings are located outside the city center, especially in the Upper South subzone. Throughout 2007, take-up (excluding renegotiations) reached 435,000 sq m, which is the best result ever recorded. The take-up with renegotiations accounted for 491,500 sq m, which represents a 19 percent growth in comparison to 2006. Most of the leasing transactions were signed outside the city center. Take-up in Upper South subzone reached as much as 169,500 sq m (excluding renegotiations) and doubled compared with the previous year. Transactions signed before the building completion have remained a popular practice and accounted for 44 percent of the total take-up volume.

As a result of projected strong demand, the availability of modern office space in 2008 is going to remain low, in spite of large pipeline supply. The availability of office space outside the city center may go up slightly due to a large volume of pipeline projects especially in the Upper South subzone. Over 2007 prime Class-A headline rents in central locations increased to 30-33 euros per sq m per month. Rental levels in the best non-central office developments grew to 16-18 euros, with the average between 13-15 euros sq m per month. DTZ forecasts that prime asking rents in central locations are likely to increase to 35-40 euros over the next 12-18 months. Outside the city center prime asking rents may decrease insubstantially over 2008-2009 due to many new office buildings coming to the market, especially in the Mokotów district.

In 2007 the biggest deal signed in the Upper South subzone (and the city as a whole) was a pre-lease of 22,000 sq m of office space in the Harmony Office Center by Bank Millennium.

The second biggest transaction was in the city center where Deloitte signed for 14,500 sq m in Atrium City, a Skanska Property Poland development that is under construction on Jana Pawła II Ave. Two of the biggest transactions concluded in 2007 (Millennium Bank and DNB Nord) signaled the movement of tenants from the center to other districts. This shows a new trend whereby companies that do not need a central location will move from the city center to the suburbs. Due to the limited availability of space in the CBD, and increasing rents, tenants are going to move to office buildings mainly in the Upper South and South West in search of savings or expansion possibilities. This is the reversal of a trend seen just two years ago when several tenants moved toward the center, when vacancy rates were higher and rents had fallen.

A steady fall in vacancy rates has been observed in Warsaw during recent years from 2004 when the level stood at 11.8 percent, through to 3.1 percent in December 2007. The lowest rates (under 1 percent) were registered in the West zone and in the city center fringe. The level of unoccupied space in these zones will remain low; they are popular among tenants and new projects will not appear there until the second half of 2009.

An upward turn in the vacancy rate in certain quarters resulted from the delivery of large new projects which were not fully leased on completion, for example IO-1 in the Upper South subzone (Q2 delivery) or Skylight in the City Center Core (Q3). However, apart from these exceptions, the underlying amount of unoccupied space fell rapidly during the year, and despite some space becoming available following the departure of certain tenants from the center, high demand and low additional supply will cause further falls in the vacancy rate in the CBD.

Investment is booming in Wrocław, both in terms of investments by the city in infrastructure, and by private developers in office, retail and industrial projects. Some of the biggest operators in the Polish market, such as Skanska, GTC and Ghelamco have decided to build office buildings in the city. At present there is approximately 152,700 sq m of office space, of which almost 25 percent was delivered to the market in 2007. The biggest completions last year were Silver Forum (14,200 sq m) and Arkady Wrocławskie (12,000 sq m). However, 2007 was only a preview of what will happen during the next two years: the office market in Wrocław will be transformed. If all projects planned for 2008 and 2009 are completed, the city's stock of modern office space will double.

Despite the delivery of quite a large amount of new office space (37,000 sq m) during the last 12 months, high demand meant that the new space was quickly absorbed, and that the vacancy rate dropped to 2.9 percent at the end of the year. Developers of new projects offer rents in the range of euros 14-15 per sq m, but in the last available office space in the city center rates may reach euros 18.

A similar development rush to that in Wrocław is taking place in Cracow, where roughly 25 percent of the city's existing stock was delivered to the market in 2007. At the close of Q4 2007, the Cracow office market had 211,000 sq m of high quality space, which is equivalent to almost 6 percent of the nationwide stock. Despite a high rate (58,000 sq m) of new supply, the vacancy rate fell significantly during the last 12 months.

In Q3, it was only 0.45 percent, and it changed little through to the end of the year as no new properties entered the market during the last quarter. The low vacancy rate is a result of high levels of demand, much bigger than in previous years, and can be attributed to a large extent to BPO investments. The absorption rate in 2007 surpassed 50,000 sq m, a level double that of a year earlier. The lack of available space caused rents in good quality buildings to rise by 1-2 euros to around 14-17 euros per sq m. These higher levels will endure during the coming months until the delivery of new projects. In 2008 over 35,000 sq m of office space is to be delivered to the market. A further 150,000 sq m will be delivered in 2009. This should help bring balance back to the market.

The modern office stock in Poznań is estimated at around 112,600 sq m, with the market having developed more slowly than in Cracow or Wrocław. Yet the city is becoming more attractive to investors and international corporations that wish to open service centers here. One example is Franklin Templeton Investment, which decided to open its office (6,500 sq m) in Poznań in a new building, Andersia Tower. Last year it was one of the biggest deals outside Warsaw. Only two buildings, with a total of 11,400 sq m of office space, were delivered to the Poznań market in 2007. All this space was leased and the vacancy rate remained at a low level throughout the year, falling below 1 percent by the end of the year. There are fewer office projects planned or under construction in Poznań than in other cities, and in 2008 there will be just 22,000 sq m of office space delivered to the market. Although demand in Poznań is lower than, for example, in Cracow, such an amount of space is too small for the needs of this market. According to developers, 75 percent of the space is already leased or under negotiation. Therefore, we cannot expect a substantial increase in the vacancy rate following the completion of the new buildings. Asking rents are 12-15 euros per sq m. However, as in Wrocław, the owners of the last remaining units on the market now offer rents even a few euros higher.

Although Łódź is the second largest city in Poland, it has only 52,000 sq m of modern office space. The level of demand in comparison to other regional markets is also low. Despite the central location, size of the city and availability of labor, investors have historically showed no interest in Łódź, mainly because of poor infrastructure and time-consuming transport from Warsaw. However, planned improvements in infrastructure, a large pool of labor and lower operating costs are attracting a growing number of companies. In 2007 the city enjoyed increasing interest from developers and a large number of new projects was announced-possibly as much as 190,000 sq m of office space within the next three years. Even if not all planned projects are completed, it is possible to expect a higher vacancy rate to result, considering the limited demand in Łódź. Rents have risen slightly during the last year due to a lack of space (the vacancy rate in the third quarter was only 0.40 percent), but the completion of new projects will help stop the growth of rents. In good quality buildings rents are around 11-14 euros per sq m, while the developers of the planned projects have asking rents of 14-15 euros per sq m.

The stock of modern office space in the Tricity region is approximately 134,000 sq m. Although demand has been low and the market has developed relatively slowly, growing interest among investors and developers can be observed. The market is dominated by local developers, but larger investors such as TK Development and Echo Investment have already announced plans for projects. In 2008, around 50,000 sq m of office space is expected to be delivered, and further investments are planned for completion in 2009 and beyond. In the two largest cities of the conurbation, there are office parks under construction: Łużycka Office Park from Allcon in Gdynia, and Torus's Arkońska Business Park in Gdańsk. One of the most impatiently awaited projects in the region is the Young City (Młode Miasto) project developed on the site of the former shipyard in Gdańsk. The project will see the construction of a retail complex, residential buildings and an initial office building of approximately 15,000 sq m of leasable space. The project should be ready in 2010 though construction work has not yet started. Since the developer will not receive an occupancy permit until a new road through the district has been laid, the project will reportedly not be launched until the winner of the tender for Nowa Wałowa Street is known. The Tricity market is quieter than Cracow's or Wrocław's and for the last few years rents have remained stable and vacancy rates have fallen consistently from 20 percent in 2002 to 7 percent in 2006, and down to 6.5 percent at the end of 2007.

However, with the completion of new projects during the coming years, the vacancy rate should rise again. Rents are at 10-14 euros per sq m depending on the class of the building, though developers of future office buildings are asking slightly higher rents-around 15-16.50 euros per sq m.

As is the case with Wrocław, Cracow and Łódź, Katowice is on the verge of a real investment boom. During the next two to three years approximately 200,000 sq m of office space is planned for delivery to the market, to add to the approximately 90,000 sq m that currently exists. The city is attractive because of its good location and well-developed infra structure. Katowice lies on the junction of important national and international routes. Thanks to Pyrzowice Airport, the city also has convenient air connections with other European cities. The city's key advantage though is its large potential labor force, coming from the Silesia conurbation.

Until recently local developers dominated the market, but companies such as GTC, Reinhold Polska, Trigranit and Echo Investment have announced their plans to invest in office space here. As in other cities the vacancy rate was quite low this year. Mainly small modules are available at the moment and tenants looking for large, high quality space are forced to wait until new projects have been completed. Asking rents are 12-14 euros per sq m, but in high-class buildings that do still have free space available rents are higher, approaching 20 euros per sq m.

Hadley Dean, managing partner at Colliers Poland:
There's no such thing as a one-way bet, and this is as true in the world of real estate investment as anywhere. After several years of strong rises in property prices the gloss began to come off many markets during the second half of 2007, with falls in values being seen in Britain and the United States.

What do the credit crunch, turbulent financial markets and slowing world growth mean for Poland? Though it is not immune to shocks elsewhere, thankfully Poland is at an earlier stage in the growth cycle. Much-needed infrastructure investments and domestic consumption will continue to boost the economy even if demand from our major trading partners slips.

We are now hearing less of terms like "yield compression," and the annual value of property transactions is leveling off. However, a large volume of office and shopping center completions in 2008, along with high demand for space and rising rents, should help maintain investor activity levels in the medium term.

On the leasing side, both the office and industrial markets continue to shine. Contracts were signed for 20 percent more office space in Warsaw in 2007 than during the previous year, while Cracow and Wrocław are in the midst of a genuine boom.

Meanwhile, the growth of the manufacturing and retail sectors has helped propel the warehousing and logistics market in recent years, and in 2007 take-up of space in the industrial sector reached nearly 1.4 million sq m, which is a rise of 80 percent on the previous year. Once again, the most prolific growth in activity can be found outside the capital.
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