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The Warsaw Voice » Real Estate » October 1, 2010
The Real Estate Voice
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Office Market: Balancing Out
October 1, 2010   
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Poland was the only country among the 27 members of the European Union to record positive economic growth last year, a fact that boosted investors’ confidence in the Polish economy and benefited the market for office space, which has started to show signs of revival. But the long-term prospects of the Polish office market depend primarily on whether or not banks return to their active lending policies.

The capital city of Warsaw has traditionally been Poland’s most important location in terms of office space. The city now provides more than 3.3 million square meters of modern office space. Office properties figured prominently among deals made on the Warsaw real estate market in the first quarter of this year, according to a report by real estate services company Jones Lang LaSalle. This was chiefly due to a single large transaction in which the SEB company paid almost 93 million euros to buy Trinity Park III, an office building completed last year by developer Ghelamco. The total value of transactions conducted on the Warsaw office market was 102 million euros.

More than 10 office projects started in the second half of 2008 and in 2009 are now nearing completion in Warsaw. It is estimated that projects with a total space of 197,000 sq m should be ready by the end of the year. Four new office properties with a total space of 62,000 sq m appeared on the Warsaw market in the first quarter of the year. The largest two are New City Mokotów and Crown Square, with 35,000 sq m and 17,000 sq m respectively. More than 45,000 sq m of new office space should be developed by the end of 2010 in the very center of the city, where no office projects have been completed this year, the report says.

Jones Lang LaSalle analysts highlight a major increase in demand for office space in Warsaw in the first quarter. The demand equaled 122,000 sq m, accounting for 42 percent of the total demand recorded last year. Compared with the first quarter of 2009, demand for office space increased by 167 percent. Mokotów, where demand came to 45,000 sq m, was still the most popular location.

Lease renegotiations accounted for 36 percent of total demand in what marked a significant increase from previous years. Much of this increase was due to an extension of two lease contracts: Hewlett Packard’s contract for 10,300 sq m of space in the University Business Centre office complex and telephone operator Orange’s contract for 17,400 sq m in the Renaissance Tower building. Insurance company PZU signed the largest office space lease contract: it rented 12,500 sq m in the Empark Syrius building.

The second quarter looked less optimistic, according to real estate services company Cushman & Wakefield. Investment in office space development dropped by over 25 percent compared with the first quarter. But, as analysts point out, this situation may prompt tenants to seek the most favorable locations and contract terms. As a result, the vacancy rate, which was on the rise in Warsaw in recent years and reached 8 percent in July, may drop. The availability of vacant office space may diminish significantly by the end of the year thanks to a smaller number of new investment projects and growing demand.

This is also likely to halt the downward trend in rents noted for several years now. In central locations in Warsaw, the average rent now stands at around 20 euros per square meter a month. In office buildings outside the city center, rents usually do not exceed 15 euros per square meter a month. In 2011, developers plan to complete in Warsaw office projects with a total space of around 237,000 sq m. So far, however, they have only started to carry out 30 percent of these projects. It may be expected that, due to a shortage of space, the market will change in favor of tenants in the next 12 months.

Cushman & Wakefield has already noticed a trend toward rent increases throughout Poland, or at least a sharp slowdown of the downward trend. Among the largest Polish cities, rents for office space fell in the second quarter only in Gdańsk and £ód¼.

Despite the drop in rents in recent years, many tenants have been forced to save by canceling their lease contracts or subletting their space. This trend has been particularly noticeable in the largest office complexes completed in recent years.

The first half of the year saw a significant revival on the market for office space in most Polish cities. But despite these signs, developers are still cautious about new projects. In many cases, construction work on new office buildings does not begin until the developer has signed a sufficient number of pre-lease agreements. This usually means agreements for at least 50 percent of the building’s usable space. But despite the substantial increase in demand, it is still difficult to secure such a high share of pre-lease agreements on a market struggling to overcome the crisis.

The total amount of office space in Poland’s eight largest cities not including Warsaw has reached 1.4 million sq m, according a report published by real estate services company Colliers International. In the first half of the year, more than 120,000 sq m of new office space was put on the market outside Warsaw. New office centers in the southern city of Katowice—21,470-sq-m Francuska Office Center and 17,500-sq-m Katowice Business Point—account for over 30 percent of the total space. The Francuska Office Center is a complex of two six-story buildings designed to be used by one or several tenants. The interiors may be divided into individual rooms or designed as open space. The designer of the office complex is APA Wojciechowski studio. Katowice Business Point is another investment project by Ghelamco.

The southern city of Cracow ranked only slightly behind Katowice, with newly completed office space accounting for 26 percent of the total space put on the market outside Warsaw. Two large projects were completed in the city, 18,720-sq-m Vinci Office Center and 11,000-sq-m Avatar.

In the central city of £ód¼, the most important new office project is the University Business Park complex being developed by Globe Trade Centre. It is located in the center of the city at the intersection of £ód¼’s main thoroughfares, Ko¶ciuszki Avenue and Mickiewicza Avenue. Work to build the complex started in March 2008 and the general contractor is Strabag. The complex will be composed of two seven-story buildings with a total space of around 37,000 sq m. The first building, providing 18,760 sq m, has already been completed.

Two office buildings with around 17,000 sq m in the Wojdy³a Business Park were completed in the southwestern city of Wroc³aw.

As regards new lease contracts, Cracow and Wroc³aw seem to be the leading locations outside Warsaw. In Cracow, Capgemini has signed a pre-lease agreement for 10,000 sq m in Quattro Business Park. In Wroc³aw, computer giant IBM has rented 9,300 sq m in Wojdy³a Business Park. The largest renegotiated contracts were also signed in the two cities—a contract to lease 5,300 sq m to IBM in the Galileo office building in Cracow and a contract to lease 7,380 sq m to Nokia Siemens Networks in the Wroc³aw Business Park.

There is a shortage of vacant office space for rent in the cities of Lublin, Szczecin and Wroc³aw, according to Colliers International. The supply of office space in Cracow, Poznań and the Tricity of Gdańsk, Sopot and Gdynia is relatively high. In £ód¼ and Katowice, supply far outstrips demand. The vacancy rate rose to 25.9 percent in Katowice and 28.9 percent in £ód¼, versus 0.7 percent in Lublin, 1.1 percent in Szczecin and 5.4 percent in Wroc³aw. On most regional markets, rents stabilized at 12-16 euros per square meter a month. The highest rates were in Wroc³aw and Poznań, the lowest in £ód¼ and Katowice.

Around 115,000 sq m of new office space is expected to be delivered onto regional markets by the end of the year. Although the amount of space to be completed in the second half of the year may actually be smaller than projected, the total amount of new space delivered in 2010 should reach a level similar to that in 2009. Unless more projects are carried out, some regional markets will start suffering from a shortage of office space in 2011. There is now around 65,000 sq m of office space under construction.

Most Polish and international companies involved in property market research say that the office space market may change significantly in the coming years. If economic prosperity returns, many companies may suddenly see a shortage of modern offices as their supply has diminished gradually over the past 24 months. This is why experts are advising tenants to carefully consider how much office space they need in anticipation of their company’s expansion, especially as many lease contracts expire after less than five years. This means that tenants may have their rents raised or may even be asked to move out if the developer or owner finds a better client.

The fact that the first speculative projects are reappearing in some Polish cities, although developers are still cautious about starting new office projects, may indicate that these predictions are correct. In Wroc³aw, construction work has started on a speculative office project, and there are plans to carry out another such project in the Tricity area if the market continues to expand. If these projections come true, it will be the best proof that the Polish office market may overcome the crisis in the coming years and that it will no longer be a tenant’s market.
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