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The Warsaw Voice » Real Estate » September 24, 2008
Modern Office Space
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No Stopping the Office Boom
September 24, 2008   
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Demand for modern office space is maintaining its 2007 momentum. Warsaw is still setting the pace but some regional cities, particularly Wrocław, are showing they are no slackers.

The first half of the year were happy days for the office real estate market with demand keeping vacancy rates low. More pre-lease agreements are being entered into and more developments are being announced.

Warsaw in the lead
Commercial real estate services specialists CB Richard Ellis report that about 244,400 sq m was let out during the first half of the year, most of it outside the city center. Bank Pekao set a record when they signed a pre-lease for the entire 39,000 sq m of Lipowy Office Park on Żwirki i Wigury Avenue.

More than 141,000 sq m has become available since the start of the year to give Warsaw a total stock of 2.84 million sq m, a mere 11,000 sq m of which is in the city center.

Grzybowska Park, from development and investment company AIG/Lincoln Polska, is this year's most significant downtown development so far. The seven-story A-class building has over 10,000 sq m of office space.

Most office buildings under construction are situated in Mokotów, south of the city center. Belgian group Ghelamco's Marynarska Business Park, which opened in March, is the largest project to go up during the past few months. The development is a complex of four buildings with a total office space of 43,700 sq m, 99 percent of which has already been leased out. Telecom operator Netia, together with its subsidiary P4 which operates the Play cell phone network, is the most visible tenant, having leased 21,000 sq m. Marynarska Business Park has since been sold to Germany's Degi International for 167 million euros in what is so far the largest commercial real estate transaction in Poland for the year. Tulipan House, from British-based Segro on Domaniewska Street is another prominent A-class office building with 17,800 sq m. Tulipan House was sold to Germany's Commerz Real Investmentgesellschaft fund in June.

Warsaw will have another 470,000 sq m come online by the end of 2010 and 11 percent of it will be in the city center, according to CB Richard Ellis. A high percentage of the office space under construction has already been let out. Pre-lease contracts accounted for 118,500 sq m, or 49 percent of all leases in the first half of the year.

Rents remain high but stable after last year's record increases. Downtown rates are dramatically higher than elsewhere according to real estate services specialists Colliers International. Asking rates in the center of town vary between 25 and 30 euros per sq m and can reach as high as 40 euros. This compares with 14-17 euros elsewhere.

Other Polish cities have not been sitting idle. Almost 160,000 sq m came online during the first six months of the year with another 160,000 sq m due by the end of the end, according to Colliers International. This compares with 138,000 sq m for the whole of last year. Wrocław, Cracow, the coastal Tricity of Gdańsk, Sopot and Gdynia, and Poznań are the most developed markets.

Wrocław on the rise
Wrocław is rapidly becoming the largest modern office center after Warsaw. The city has gained 77,200 sq m of modern office space this year to bring its total to 276,200 sq m, only 148,000 sq m of which is in the city center, according to CB Richard Ellis. The western part of the city along Legnicka and Strzegomska streets is going gangbusters.

Globis's Wrocław office and the 23,000 sq m Bema Plaza are the largest buildings to start leasing this year. The former, which has 14,650 sq m of modern office space, opened at the intersection of Powstańców ¦l±skich and Swobodna streets in the city center at the end of March.

Around 115,000 sq m of office space is currently going up in Wrocław with another 126,000 sq m planned by 2010, according to CB Richard Ellis. Vacancy rates fell to around 4 percent in the middle of the year.

Rents have risen to 14-16 euros per sq m since last year and have hit 18-19 euros per sq m for the most prestigious buildings, according to Colliers.

Cracow in demand
Supply has clearly not been keeping apace with demand in Cracow where rents are high and vacancy rates low. The completion of the second stage of the Rondo Biznes Park and a 2,300-sq-m building on Zawiła Street were the only new additions to the city's skyline during the first half of the year. Cracow had 221,800 sq m of modern office space at the end of June, according to Colliers International. Most projects are running behind schedule so the total for the year is only expected to be 25,000 sq m. Rentals had increased to around 14-17 euros per sq m by the middle of the year, according to Colliers.

Grupa Buma, a consortium of developers that has been active since 1991, has commenced building its Quatro Business Park. When finished, the four 14-story buildings on Gen. Tadeusza Bora-Komorowskiego Avenue in the city's north will have a total floor space of 48,000 sq m, making it the largest office complex in southern Poland. Construction is proceeding in four stages and is due for completion in 2012.

The western city of Poznań, which had around 114,000 sq m at the end of June, is taking life easier than Wrocław and Cracow, only adding a little over 2,000 sq m during the first half of the year, according to Colliers.
Poznań is asking 14-18 euros per sq m although the city's outskirts offer better rates.

Welcome to the seaside
The Tricity (Gdańsk, Sopot and Gdynia) started to pick up last year after a spot in the doldrums. The Tricity has some 160,000 sq m of which Gdańsk has 86,000, Gdynia 67,000 and Sopot 6,000. Most of the 26,500 sq m of new office space that came online during the first half of the year was accounted for by Gdańsk's Arkońska Business Park, Centrum Biurowe Grunwaldzka and KA5 projects, according to Colliers.

The first stage of Allcon Investment Properties' Łużycka Office Park was the largest new office facility to open in Gdynia during the first half of the year. The 6 Łużycka St. complex will consist of five A-class buildings with a total floor space of over 33,000 sq m. The first two are already taking on tenants and the rest will be ready in January 2009, May 2009 and Q4/2010, respectively.

Tricity rents are 14 euros or less per sq m in older buildings and 15-17 euros in new buildings, according to Colliers.

And the rest
The office markets in Katowice and ŁódĽ are still at an early development stage. Developers are also beginning to test smaller cities like Szczecin, Lublin, Rzeszów, Kielce and Gliwice.

Magdalena Fabijańczuk

Potential to Grow

Rafał Mazurczak, Echo Investment commercial director for offices and hotels:
Poland's office market continues to have the potential for rapid development. Continuing economic growth and a stable political situation are conducive to increased activity among domestic investors and render Poland attractive for foreign investors too. More and more consulting and financial firms are deciding to locate their offices in our country, which of course has an effect on demand. Currently, we have a situation where demand for office space in the capital, as far as rental is concerned, outstrips supply and rents have soared by over 20 percent. The market is also rapidly developing in many other large cities in Poland such as Poznań, Cracow, ŁódĽ, and Szczecin. Analysis of market data on office space either in the process of being built in Warsaw or planned for the capital, can lead you to think that in a short while the market could be over-saturated. However, if we assume that despite the credit crisis in the U.S., which has wider ramifications, the Polish economy continues to grow, then demand for new offices could rather lead to a balanced market and rent stability. We should also take into consideration the fact that not all the office projects in the pipeline will be completed in the near future, if only because of banks' more restrictive policies with regard to the financing of such projects.

A Market of Two Parts
Robert Karniewski, Partner, Office Space Department, Colliers International Poland Sp. z o.o.:

The Warsaw office market can generally be divided into two parts. The first part comprises the districts of Mokotów, Wola and Ochota, and the other part is the city center, referred to as the Central Business District (CBD). These two parts differ considerably from each other mainly in terms of rents.

We expect this division to continue in the next two years. At present, the average monthly rent for office space in the CBD is 30 euros per square meter, while outside the city center it is only 15 euros. Tenants who have their offices in the CBD and whose rental contracts will expire within the next two years may have a problem finding new headquarters because vacant office space currently accounts for only 3-5 percent of all space in the CBD.

But we expect that there will be a sharper price correction in the city center three or three-and-a-half years from now and that the average price in this area will fall to 23 euros per square meter. We estimate that by 2012 developers will build over 400,000 sq m of new office space there. The situation outside the city center will be quite stable during this period.

The northwestern part of Warsaw, which means the district of Wola and its surroundings, will be developing quite rapidly. More than 200,000 sq m of office space is expected to be built there by 2012. Investors are also increasingly interested in areas along Jerozolimskie Avenue where many new projects are planned. These areas will be a good alternative for tenants looking for space close to the city center. By the end of 2009, some 430,000 sq m of new space will be built in Mokotów. But we believe that rents in this district will remain at the present level of 15-16 euros per square meter per month.

The demand for office space in other large cities shows that Szczecin and the Tricity of Gdańsk, Sopot and Gdynia in the north enjoy a lot of popularity. Szczecin has a shortage of modern office space, while demand is growing. There are two important factors behind this increased demand: a large number of technical university students and much lower labor costs than in cities that already have many office buildings, like Warsaw, Cracow and Wrocław. Investors are looking for sites in Szczecin and the Tricity area and are likely to announce new office projects in these cities soon.
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