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The Warsaw Voice » Real Estate » July 2, 2010
The Real Estate Voice
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Timing, Not Location
July 2, 2010   
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Choosing the best moment to start a project can ensure success for a developer, but he has to take a risk, Jarosław Zagórski, Commercial and Business Development Director at Ghelamco Poland, tells Magdalena Fabijańczuk.

One of Ghelamco’s latest projects, the Senator building on Bielańska Street in downtown Warsaw, is an office project blending historical architecture with modern materials. What tenants do you have in mind for the Senator?
We build speculatively, not for a specific tenant we have already identified. Of course, due to the building’s character and its prestigious location, there is a group we would particularly like to get interested in this office space—financial, law and consulting firms. Even now we are seeing a lot of interest in the building. We believe in this project, which is why we are starting construction without any pre-lease contracts and using only our own funds.

What will be the rent per square meter in the Senator?
23-25 euros per sq m, depending on the location within the building.

You recently completed the Crown Square building in Warsaw’s Wola district. Is the process of finding tenants for new office buildings in Warsaw a tough task today?
There aren’t all that many opportunities to lease 3,000 sq m or more as a single module in a new building around central Warsaw. I’m talking about finished projects with an occupancy permit. Of course, there is still the subletting market, but this is slowly fading. I think the issue of subletting was and still is being blown a little out of proportion—it doesn’t pose any sort of competition for developers completing new office buildings. Subletting is a short-term option for small businesses, fine for a start-up period. It has to be remembered that it involves many restrictions. Above all, you need to accept the entire contract that the primary tenant signed with the owners. The subtenant comes into already arranged premises, while large companies and corporations have their own requirements as to office decoration and layout. That’s why we think companies’ diminished willingness to relocate is a bigger problem than subletting. When their contract expires, one option is to stay in the same location, and it often wins out because it’s usually cheaper. Before the crisis, companies were more willing to switch to new offices. Today they are more conservative, waiting, not wanting to make that decision. It’s harder to convince tenants that it’s worth relocating. Slowly, though, we are seeing this trend change, with more and more companies noticing the advantages of relocation.

Is relocation really worth it?
Yes, though it takes some effort. A new office can be 100-percent tailor-made to suit the company’s current needs. Leases are signed for five, seven years. That’s a long time. Very often a company will change over such a period. It can shed or gain employees, add new functions, new departments. Moving can also be a kind of psychological measure. A few years ago one of our clients told me that after working 10 years in one place, he wanted to rent a new office to revive his company a little, give it some new energy.

Tenants are demanding new incentives, discounts. How do you compete for tenants?
It’s not quite true that extra incentives from developers first appeared during the crisis. Things like rent-free periods were also offered before the crisis, though it is true that the scale of these incentives has changed and there are more of them. This is still a tenants’ market and that’s why they can negotiate quite a lot today. Developers are also more willing to negotiate. This makes it a good time for signing new contracts, because effective rents that we can negotiate today will be unattainable over the next few years. Land prices are unlikely to go down any further, construction costs are on the rise. With the current rent levels, building will soon become unprofitable.

Market analysts warned at the beginning of last year that there would soon be a shortage of office space because construction had halted. But offices are in good supply and there are still vacancies. Meanwhile, Ghelamco is starting two projects: Senator and Mokotów Nova, and planning a third: the Warsaw Spire. Do you expect a significant increase in the demand for office space soon?
We want to position our product in the right place and time. There is huge inertia on the real estate market. The investment process for an office building has its proper cycle, it takes time, we cannot deliver it to the market at the moment when the need for it emerges. Commencing construction just before expected growth in demand is a developer’s risk. All the schools teach you that success in the real estate business is guaranteed by the three “l’s:” location, location, location. I disagree, I think it’s not location but good timing that is a guarantee of success. You can lease the same building for 13 euros per sq or for 20 euros—it all depends when you can offer it to someone.

Do you mean things will get better?
They have to. Warsaw is still at the bottom of the list of European cities in terms of office space per resident. At the same time, it is perceived as a good place for locating business. I’ve said this before but I will say it again: I’m not happy with our decision-makers for doing so little to pull Poland out of the Central and Eastern European basket. After we coped so well with the crisis compared to other countries in the region, there was a strong chance for this.

Warsaw has potential, but what about Poland’s regional cities? When will the office market grow in Cracow, Wrocław, Poznań, ŁódĽ?
The regions are pegged to the global economy much more closely than Warsaw is. Warsaw is a deeper market, it is self-propelling. Regional cities, on the other hand, are shallow markets; they have little office space, built quite recently, so tenants still have binding contracts, there’s no movement. The only factor that could change anything are BPO (Business Process Outsourcing) projects, but these have slowed down due to the crisis. Once the global economy gains momentum, new prospects will appear also for regional markets.
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