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The Warsaw Voice » Real Estate » February 23, 2010
The Real Estate Voice
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Demand Revives for Office Space
February 23, 2010 By Michal Jeziorski   
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After a period of stagnation last year, the office market is beginning to revive. Tenants who hesitated to rent new space just a few months ago are returning to the negotiating table.

The global economic crisis has not spared Poland's real estate market. In late 2008 and early 2009, planned office projects and those at the initial stages of development were halted as demand for new office space dropped significantly. But developers are looking hopefully to the future because the first signs of stability appeared halfway through last year.

Companies entering the Polish market and those leasing space in old buildings put their decision to move into modern office space on hold. Now that the situation is stabilizing, tenants are slowly returning to the negotiating table. While space available in large cities is enough to meet demand for a few more months, it will run out sooner or later, experts say. Many developers have halted their projects due to difficulties with obtaining financing, which could lead to a shortage of office space on the market. This offers an opportunity for investors using alternative sources of funding. New office projects are needed, experts say, as the availability of office space in large urban centers is still low compared with other European countries.

Demand first declined in late 2008. The drop was accompanied by an increased supply of office space as builders completed projects that they started in the days of prosperity. Estimates show that a total of 550,000 square meters of net space hit the market last year, most of it in Warsaw, where total supply topped 3.2 million sq m. Vacant space increased across the country; in Warsaw it grew to 8 percent last year, from 3 percent in 2008. Rents in new leases dropped by 20 percent year on year.

Optimistic forecasts
In 2009, the office market reported transactions worth a total of 354 million euros, 64 percent less than in 2008. Despite this, forecasts for 2010 are optimistic because the office market is still perceived as more attractive than housing and retail space.

German real estate investment funds are the biggest investors on the Polish market, but there are also prominent market players from Britain, France and the United States. These include Commerz Real, SEB, DEKA, Credit Suisse, GLL, RREEF, IXIS, JP Morgan, Heitman, HSBC, First Property, and KanAm.

Investors focus on Warsaw and other large cities with prime locations. Long-term leases, for 10 years and more, are especially sought-after. Poland's robust economic performance is an added incentive for investors. Poland stands out in Europe, especially compared with countries such as Portugal, Ireland, Greece, and Spain, analysts say. Investors see opportunities for further development in this country, and hope that this will translate into growing real estate prices and higher rents.

According to Biuro Inwestycji Kapitałowych SA, the supply of modern office space in large urban centers is about 5 million sq m. Of this, 65 percent is in Warsaw. The rest is in regional cities such as Cracow, Wrocław, the Gdańsk-Sopot-Gdynia Tricity, and Poznań. There has been remarkable growth recently in modern office space in regional cities, experts say. Asking rents there range from 13 to 16 euros per sq m per month. In Warsaw, this is 16-25 euros.

Building to suit
New trends include growing demand for build-to-suit projects, or buildings developed for specific tenants in mind. This means that a company can move to new headquarters without having the funds to finance the construction of a new building. The tenant only agrees to pay the rent, and receives the extra option of buying the property after the lease period is up. Close ties between the investor/tenant and the developer help reduce business risk to a minimum.

As long as the economy boomed, the predominant trend was to complete largely speculative projects, including projects for which leases had not been signed. Developers relying on foreign capital dominated the market for commercial space. They built large projects, financing them with low-interest loans. The crisis brutally corrected the financial leverage and limited the possibilities for finding tenants for many speculative projects, analysts say.

Pre-let contracts have gained popularity. These are leases signed before a building is completed. Apart from attractive rents, pre-let contracts include provisions for certain modifications in the building such as a different look for the staircases. Tenants can also choose the most attractive floors, for instance with the best view or a terrace, or can even have their logo placed on the building's facade. A pre-let contract gives the tenant a lot of flexibility, for example guaranteeing extra offices when the company develops or the option to give up some of the space after a certain time.

Land prices up
Meanwhile, land owners are not bringing down their prices in the hope of making up for the losses caused by earlier decreases. Buyers are counting on bargain prices, so transactions are few and far between. Even so, there is a growing interest in purchasing land for the construction of large commercial projects.

According to analysts, a sizable group of market players are attached to their plots' historical value regardless of new market trends, so asking prices remain high. Last year the difference between asking and final prices reached 30-40 percent, with asking prices firm from the second half of 2009. Warsaw has even seen a small increase in asking prices, analysts say, which shows not so much that the value of real estate is growing but that investors are increasingly interested in purchasing real estate. The most expensive land for office buildings in Warsaw costs from 220 to 700 euros per sq m of gross leasable area (GLA).

Asking prices in Wrocław are 160-350 euros per sq m of GLA, and in Cracow-180-250 euros. At the same time, analysts at Colliers International have noted a 15-percent drop in Katowice, the Tricity area and ŁódĽ. The biggest changes have been reported in ŁódĽ, where prices have dropped by 20 percent on average regardless of location and now range from 100 to 200 euros per sq m.

The office market seems to have gotten over its worst phase, experts say. The only worrying thing is the attitude of banks, which are still hesitant to grant loans for commercial projects. If this trend continues, there could be a shortage of space a few months from now. This is where developers with alternative sources of funds could step in.
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