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The Warsaw Voice » Real Estate » March 4, 2009
MODERN RETAIL SPACE MARKET
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Slowdown, But No Disaster
March 4, 2009   
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Only well thought-out, diverse projects combining multiple functions will stand a chance of succeeding in the coming years, according to real estate market experts. The market slowdown is expected to affect poorly prepared projects, especially in small towns.

Last year was a dynamic time for the Polish shopping mall market. The total supply of modern retail space at the end of 2008 stood at 8.4 million sq m, about 43 percent of this built in cities with a population of over 200,000, reports real estate services company DTZ Research. The development of shopping malls was supported by the improving situation of households due to low unemployment and growing average salaries.

Analysts predict that 2009 will see another 1 million sq m of modern retail space added to the total. However, the situation and the forecasts are changing by the month. We know today that some projects will be put off until 2010 because developers are having problems obtaining funding.

Empty spots in the capital
Due to its demographic and economic potential, Warsaw remains Poland's largest market for retail space. The capital still has some blank spots in terms of modern retail space supply. The reason? New housing estates were built at a fast pace in recent years in locations where retail trade was not developed at the same time. The best examples of this can be found in the districts of Białołęka and Wilanów.

Wrocław has outpaced Warsaw and now shows the greatest saturation with modern retail space. In recent years Wrocław has gained many new shopping malls. There is almost 800 sq m of such space per 1,000 residents. Other cities with a high saturation level include Warsaw, Poznań, Szczecin, and the tricity of Gdańsk, Sopot and Gdynia, according to analysts from real estate services company Colliers International.

Smaller cities going slower
Investing in smaller cities has been one of the main trends of the retail market. Developers' interest in such locations has met with reciprocated interest from tenants.

The attitude of local government has also changed, with authorities and residents starting to react positively to the construction of modern shopping centers. Though multifunctional complexes are still being built in smaller towns, many of them with large catchment areas, developers will be more cautious about planning new projects.

Parkridge Retail has some ambitious plans for these emerging markets. Last year this developer opened the Focus Mall in Bydgoszcz, Focus Mall in Zielona Góra, and Focus Park in ¦widnica. Near the end of this year Parkridge Retail plans to open yet another Focus Mall in Piotrków Trybunalski, a complex with 110 stores on two floors. Construction work is in progress on three other sites as well. The Focus Mall in Gliwice with 140,000 sq m of space is Parkridge's largest planned project that will house 180 retail outlets on three stories. Earthworks have been completed, and construction will begin in late March/early April. The developer is running a tender to select the general contractor. The opening of the Focus Mall in Gliwice is planned for 2010. Also next year, Parkridge Retail wants to open its Focus Mall in Jelenia Góra. This mall will have 40,700 sq m of space, three stories and 85 retail outlets. The company's second-largest project (120,000 sq m) is the Focus Mall in Piła; its opening is planned for the first half of 2011.

Other active players on emerging local markets include Echo Investment, Polimeni International, Mayland Real Estate, and Caelum Development.

One of the more attractive cities for investment is Wałbrzych, which has huge potential in the form of former industrial areas. This spring Keen Property Partners Retail will start building the Galeria Victoria complex there-a retail and leisure center with hotel and residential space. The project is worth an estimated 75 million euros, and the cost of building the hotel and residential section is another 20 million euros. The total area of the complex is 43,000 sq m. The two-story mall will include a Carrefour hypermarket (4,600 sq m), about 180 stores selling clothing brands, a home improvement and gardening store (7,000 sq m), a Media Expert electronic equipment store (about 2,500 sq m), and service outlets. Galeria Victoria will be built on a 10-hectare plot at the intersection of 1 Maja and Skarżyska streets in Wałbrzych, along national highway No. 367 leading to the Golińsk border crossing with the Czech Republic. The opening is planned for the spring of 2010.

Mayland plans to build a retail/residential/leisure complex called Bella Dolina in Rzeszów. A 37-hectare plot in the northern part of the city, along Lubelska Street, will be home to a project with a total area of 188,000 sq m. This complex will include a hypermarket, medium-sized stores, a multiple-screen movie theater, a go-cart track, restaurants, cafes, offices, conference facilities, and a hotel. All this will be complemented by residential developments and green areas. The architectural design is being prepared by the Spanish company L35 Arquitectos.

Mayland has ambitious investment plans for small cities. Last year the company started building its Park Handlowy Karolinka in Opole, the Jantar retail and leisure center in Słupsk (to be completed in 2010), and Centrum Pogoria in D±browa Górnicza (scheduled for completion in 2009).

A tenant's market
The market has been a developer's market in the past, but now it is a tenant's market. Shopping mall owners have to offer attractive rents, extra finishing work for free, and other incentives to attract the best tenants.

Tenants also have problems with financial liquidity, and are reducing or phasing out operations. Consulting agencies on the commercial real estate market have their hands full right now, with retailers increasingly eager to sublet their stores. This will work to the advantage of companies that have long vied for premises in good shopping centers but had no chance of obtaining them until now.

The subletting market, almost nonexistent in Poland before, has begun growing because everyone-mall owners and tenants alike-wants to see all the retail space occupied. Subletting is now conducted along much less restrictive rules than before. Of course, the ideal situation would be for a shoe store owner, for example, to sublet to a new shoe store. In the current reality, it's enough if the subletting store sells clothing-men's, women's, children's-or accessories. Neither developers nor agencies are as insistent as they used to be on ensuring tenant diversity. There's a crisis on, and the most important thing is to find someone who will pay the rent.

Time for good plans
For developers, a crisis can be a time of rethinking and planning future investment, in addition to design work and talking with architects. Some of the centers built a few years ago may require a rethink-to diversify the tenant pool, but also to improve the look of the mall and add new amenities. Now is the best time for this.

Magdalena Fabijańczuk


OPINION

Survival of the Fittest
Krzysztof Giemza, director of the Shopping Centers Department at Echo Investment:
This year is bound to see a sharp correction on the market, and developers will have to rethink some of their plans.

Some projects will be delayed, and others will probably be given up altogether. However, interest in good projects will grow, and, paradoxically, tenants may begin to line up to secure space in the best buildings. The ongoing economic slowdown will trigger mechanisms typical of crisis situations.

First, businesses will have to reconsider their development plans. This will mean a reduction in the number of new stores that will be opened. Second, whatever expansion projects are not given up will be carried out in a much more cautious manner. Another factor hampering the development of the retail market will be constraints associated with funding for projects and for tenants.

Due to their reduced purchasing power, retail consumers will encounter psychological barriers and will display less propensity to spend. This, in turn, will probably strengthen the position of local centers-consumers will be less willing to visit distant shopping centers, and interest in shopping abroad will also decline due to a weak zloty.

But in many cases the crisis will have a positive impact on the sector. It can be expected that projects will now be well thought out in terms of functionality and layout and will be blending into their immediate surroundings and the city's urban structure.

Another effect of the crisis, I hope, will be that new buildings under construction will lose their previous showiness and shoddiness resulting from a lack of time and poor planning. I also hope the crisis will contribute to the development of new technologies and innovation, especially when it comes to building maintenance and energy efficiency. Every idea leading to a reduction in rents will offer an important competitive edge. The same goes for marketing, PR, and other activities of this kind. In these uncertain times, confidence will depend on the quality of management, one's ties with the tenants, and the developer's reputation as a guarantee of standards.

As is always the case at a time of downturn, only the fittest will survive. This is particularly true of companies that have been building up their position for a long time and have been geared towards long-term expansion-companies that have taken advantage of the experience they have gathered, have become stronger technologically, and have improved their project management methods. For these companies the coming years will mark only a temporary downturn, while for many others this trying period will mark the definitive end of their brief careers on the real estate market.


OPINION
Time for Good and Cheap Brands
Magdalena Fr±tczak, Retail Director, CB Richard Ellis Polska Sp. z o.o.:

Americans say that at a time of crisis there is nothing better than factory outlets. Though consumers have started economizing, thanks to factory outlets they won't have to give up their favorite brands while not spending too much money on their purchases.

Factory outlets are also developing in Poland. We are still not a very affluent nation, and that's why we cannot afford to buy poor-quality goods. We choose things that are of good quality but not too expensive. That's why I think mid-range products will fare best. We will start economizing on extravagant purchases and foreign trips. Maybe for a time we will also cut down on eating out at restaurants and cafes. Instead of very expensive Tommy Hilfiger collections we will choose Reserved designs by Gosia Baczyńska. The biggest losses will be reported by stores selling luxury brands, but there aren't that many of them in Poland.

Banks are granting fewer and fewer loans for housing. People will continue to live in their old apartments and start renovating them. The money they planned to spend on mortgage loan repayments will largely be spent on consumption. They are buying TV sets, washing machines and dishwashers, thus boosting the economy.

Compared with other areas of the real estate market, modern retail space is doing well. Retail space in Poland has not developed to its maximum yet. Ever since Poland joined the European Union in May 2004, tenants from across Europe who had not had a presence here before, started taking an interest in our market. Our potential is huge. Tenants wanting to have their stores in Central and Eastern Europe, are choosing Poland, even though they could also go to the Czech Republic, Slovakia, Hungary, Bulgaria or Romania. We are a large country that is still reporting economic growth and good conditions for business. So far the crisis has been gentle on us.


OPINION

Demanding Tenants
Grzegorz Mroczek, Head of Lease Department, Caelum Development:
Over the past few months the market has changed drastically for all its players. Due to worsening terms of financing, further growth will be tougher for both developers and tenants.

I think tenants will develop much more cautiously than before. They will be more selective about the markets where they want to be present and also about specific projects. They will only choose shopping centers in good locations and those that have already secured a strong tenant mix. I don't think such projects will have to make any radical changes to the terms they offer tenants.

Of course, tenants are becoming more demanding than they used to be, in part because of the changing market conditions, and in part due to cold calculation, but in effect the terms offered by individual developers will depend on how attractive their projects are.

The situation will develop differently for smaller projects in worse locations, on city outskirts or in small towns, especially where there is strong competition. I think such projects might be forced to change their strategy towards tenants. The question is whether this will be possible. Due to the investment cycle, smaller projects hitting the market today had to be started at least a year ago, before the crisis, which is spreading farther and farther in Poland. This means that the costs of preparing such projects were substantial, since the shopping mall market had been red hot for several years. Tenants have already tested the market of medium-sized and smaller towns and know exactly what to expect of them. Without a doubt, we will see a correction in the retail market development strategy, affecting mainly smaller towns and more difficult projects.

The question is whether projects that will be forced to strongly adjust their financial expectations and increase their spending on rent bonuses or rent holidays will be profitable. Dropping labor prices might help in the short term, but are certainly not enough to compensate for the risk of lower revenue. The euro exchange rate could also help developers who obtain funding in this currency, but I don't think anybody is able to predict how the exchange rate will stabilize on today's uncertain market. We need to remember that we live in a reality in which real estate in general has gone down in value, though no one really knows by how much, as the negligible number of transactions practically rules out any reliable estimate of market prices. That's why it's possible that such projects will simply have to wait for better times.

Ambitious Upgrade
The expansion of Galeria Echo on ¦więtokrzyska Street in Kielce began in September 2008. The developer plans to reopen the mall next year. The project will cost about 80 million euros. The new center will be almost triple the size of the present one. With 66,000 sq m, it will be home to almost 300 stores and service outlets, 2,300 parking spaces, and an entire floor dedicated to entertainment. Galeria Echo's customers will be able to use a gym, fitness center, 12-lane bowling alley, disco, restaurants, cafes and fast-food outlets as well as a play area for children. The seven-screen movie theater will remain where it is.

The project involves a partial conversion of the existing mall and the addition of a three-story retail and service gallery and a seven-story parking garage.

"The new mall is a 'town within a town,'" says Krzysztof Giemza, an architect and director for shopping malls at Echo Investment. "It will be accessible from Solidarno¶ci Avenue via two main entrances as well as directly from the multi-level garage. The new part of the mall is an exclusive department store with indoor streets, architectural features, places to rest, and greenery".
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