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The Warsaw Voice » Real Estate » April 8, 2009
The Real Estate Voice
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Bracing for Office Shortage
April 8, 2009   
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The supply of modern office accommodation in Poland will not keep pace with demand. For this reason, tenants whose leases run out in the next two years should secure future accommodation now, according to Bartosz Mierzwiak, associate director with Jones Lang LaSalle. He talks to Magdalena Fabijańczuk.

What is the forecast for Warsaw for the next few years?
The supply of new modern office accommodation in the capital this year is likely to be in the region of 280,000 sq m, of which almost 60 percent is already leased. A quick calculation tells us that there is just a little over 100,000 sq m still available. When we take into account last year's demand, which was 523,000 sq m, it is absolutely not enough. In the long term, if demand remains at this level and supply at 100,000-115,000 sq m, then demand will still have to be met over the coming years.

Sixty percent of new office accommodation already leased is a high figure at a time of economic slowdown. How would you explain this figure?
Demand for modern offices in the capital was not fully met last year. Many firms were unsuccessful in finding accommodation. They lasted out this period and leased buildings that will be completed this year. Analysts forecast less demand for modern office space in the last quarter of 2008. Yet, against expectations, the three months proved to be the liveliest of the whole year. Firms took some time before reacting to the first news of the crisis.

Businesses did not put their brakes on until 2009?
The situation changed. The economic slowdown weakened demand, but the question remains by how much. This is difficult to predict because two scenarios are possible. Let's return to the 100,000 sq m still available for lease in Warsaw. Should demand be at a level of 300,000-350,000 sq m, then 100,000 sq m is still not enough and firms will start to lease accommodation that is planned for future construction. But this does not have to be the case if firms decide to renegotiate existing leases en masse. In uncertain times it is easier to remain where you are and not risk a move; to wait and then, after some time, to make the decision to move. Moreover, subletting could take off. Today the subletting market concentrates on small offices of 200-400 sq m in area. It is still not a strong trend. Once tenants start to sublet areas of several thousand square meters then we will be dealing with secondary demand of market significance. To sum up, the scenarios are as follows: either the number of lease renegotiations and sublets results in less demand. or subletting remains at a low level, thus generating demand for the coming years.

In that case what can we expect in Warsaw in the next two to three years?
Pre-let contracts will be key for the office market in 2010 and 2011. Buildings, which today lack financing, will not get it without pre-lets for at least 50 percent. However, pre-lets, or contract signing on buildings still at the design stage, are not common on the Polish market. Firms most willingly sign contracts when foundations are being laid or the facades are going up. But tenants have to understand one thing: supply will falter before demand, particularly in 2010 and 2011.

A tenant whose lease expires in two years traditionally thinks that they have lots of time to secure themselves accommodation for the future. I am thinking above all about big tenants who require up to 20,000 square meters. The best time for them to enter the market is two to three years before their leases expire. They can pick a building that is at building-permission stage and sign a straightforward pre-let agreement. Of course, there are certain risks: that the developer does not acquire financing, that the building is not completed on time and so on. However, the advantages are clear. The tenant becomes a partner who provides financing for the project, and the developer will be more flexible in negotiations. If a firm misses this moment and does not start to look for new accommodation until six months before it needs to move, then it could happen that there is no choice. At a time when investors are fighting for every tenant this could sound absurd, but in just a few months it will be a fact. More so because we already know today that supply in Warsaw in 2010 will not be greater than some 150,000 sq m.

Do other big cities have the same potential?
Some cities, particularly Cracow and Wrocław, enjoyed a huge investment boom in 2006-2007, mainly as a result of interest from foreign firms. Developers saw that this could be good business and all the big players in Poland started to buy land in Cracow, Wrocław, Poznań, Katowice, ŁódĽ and the Gdańsk-Sopot-Gdynia Tricity area. Large firms relocated their Business Process Outsourcing (BPO) centers to Poland and this drove the market.

However, conditions for foreign investors started to worsen as the zloty strengthened and wages rose. Firms pulled BPOs out of Poland. However, demand for modern office accommodation from local firms appeared very quickly to take their place. Polish firms started to think about a move to better office buildings. And then suddenly it was the end of 2008: a halt and zero decision making about signing contracts. Developers reacted very quickly. Internal demand disappeared, BPO demand had died earlier, and developers put a halt to all investments that could still be stopped.

Does this mean that there is a complete standstill in big cities outside of Warsaw?
No, because in recent months BPOs have been returning to Poland. The zloty is cheaper by the day and finding workers is easier. Poland is a safe and attractive country for investment. We foresee a huge wave of BPO investment and, as a consequence, a need for modern office space. Thankfully, some space is still available and developers are continuing with some projects in the larger cities. However, this does not change the fact that cities outside of Warsaw, despite high future potential, will develop more slowly in the short term than expected even in the middle of last year. In the last few years, markets such as Cracow and Wrocław have matured greatly. Other cities have started to catch them up and interesting projects have appeared.
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