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The Warsaw Voice » Real Estate » February 25, 2011
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Growing Demand for Modern Office Space
February 25, 2011   
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Although tenants in Poland’s largest cities have no problem renting an elegant office, new office buildings are still being constructed. Growing demand for modern office space means good prospects for the industry.

Last year saw a reverse of the downward trend recorded in rents in 2009 on the global office market, according to a recent survey by real estate services company Cushman & Wakefield. Stronger demand resulting from increased business activity led to higher rents in a growing number of countries—including Poland.

“In 2010 Poland saw a surge in occupier demand, almost double that of the previous year,” said Richard Aboo, partner and head of the office department at Cushman & Wakefield in Warsaw. “With vacancy rates falling rapidly and new supply still limited, rents are set to grow in 2011.” In recent years Poland has become more attractive as a place to invest and do business. This translates into much greater demand for new office space among foreign investors, and consequently a revival on the real estate market. But it is mainly those building and renting out very modern buildings who can count on hefty profits on the office market.

Class A in demand
Office space in Poland is usually classified into A, B +, B, C + and C buildings. To date, no uniform system has been developed for classifying buildings into each group. The main disputed issue is a building’s location and the question whether an office building located outside the center of a city can offer everything a tenant needs.

What criteria must be met by a top-caliber office project? According to £ukasz Maciak, a director at Arka BZ WBK Fundusz Rynku Nieruchomo¶ci 2 FIZ property market fund, these include a good layout for the shared space along with the stairs and bathrooms and the need to ensure a sufficient number of high-speed elevators, and enough parking places for employees.

Employees, suppliers and visitors must have easy access to various parts of the building, and a front desk is needed in the lobby to keep track of those entering and staying in the building. An A-Class office building should have raised floors providing easy access to installations such as electrical wiring and IT. All the cables and wires should be in the so-called floorboxes to help maintain order in the office and improve user comfort, and at the same time enable free space arrangement.

According to Maciak, one of the most important factors determining the rating of an office building is work comfort. In addition to systems for controlling temperature and humidity in the office, efficient artificial lighting and access to daylight in at least 70 percent of the space leased, as well as windows that can be opened to allow fresh air circulation, have a positive effect on how employees feel.

Most experts agree that top-class office buildings, in which rents are usually the highest, should be located in the center of a city. This explains why some buildings are classified as B or B+ projects even though they meet the technical requirements for classifying them into the highest group.

Mostly in Warsaw
Unsurprisingly, most modern office buildings are built in Warsaw. According to the latest report by the Warsaw Research Forum, which brings together eight consulting firms operating on the real estate market—CB Richard Ellis, Colliers International, Cushman & Wakefield, DTZ, Jones Lang LaSalle, King Sturge, Knight Frank, and Savills—the supply of modern office stock in Warsaw in 2010 increased by nearly 190,000 square meters to a total volume of 3.44 million square meters.

The biggest projects completed last year included Poleczki Business Park I (buildings A1 and A2) in the Lower South zone, New City Mokotów in the Upper South, Crown Square in the West, and Zebra Tower in the city center.

Zebra Tower, developed by Austrian company S+B Gruppe AG, will be the first office building in Warsaw that will boast a LEED certificate from the world’s leading certification system for real estate in terms of technology friendly to the environment and users. For buildings, the main benefits of meeting the requirements and obtaining a LEED certificate include lower operating costs, increased attractiveness of the property and the availability of healthier and more user-friendly space.

Zebra Tower offers tenants 17,800 sq m of usable space on 16 floors and 124 parking spaces in two underground garages. The building will also have several stores and restaurants. A major strength of the building is that it is easy to access. A metro station is under the building. That modern office space in Warsaw is in high demand is shown by the fact that Zebra Tower was 70 percent pre-leased before it opened.

The Crown Square office building, completed in April 2010 by Ghelamco, is equally modern. This year Ghelamco is marking 20 years in business in Poland. Over this time the developer has delivered over 356,000 sq m of office space. Crown Square is in the city center and offers 16,200 sq m of modern office space. In November, the building won a prestigious BREEAM environmental certificate, and in December it was named Best Office Project of the Year in the prestigious Eurobuild Awards competition.

Ghelamco is currently carrying out two, large office projects in Warsaw. The Mokotów Nowa office building is being constructed in the business center of the capital. The complex will comprise three office buildings connected with one another. Many parking spaces are planned under and near the building, which is especially important in an area that has for years been struggling with a shortage of parking areas. In 2012, in the historic part of the capital, where the no-longer-existing Bank Polski used to stand, an office building called Senator will be constructed. Combining historical and modern features, it will be one of the most interesting and distinctive office projects in Poland.

The developer plans to build a 220-meter skyscraper, the Warsaw Spire, in Warsaw’s Wola district in the coming years. This modern, glazed, “designer” skyscraper will have 50 floors and will be one of the largest office complexes in Europe. Construction will begin in the second quarter of 2011.

According to the Warsaw Research Forum report, demand in 2010 was far stronger than a year earlier and the total volume of lease transactions exceeded 550,000 sq m (compared with 280,000 sq m in 2009). Lease renegotiations totaled approximately 200,000 sq m and accounted for 35 percent of total demand, while pre-lease contracts accounted for around 11 percent.

The largest transactions in 2010 included the renegotiation of Bank Pekao SA’s tenancy of the Lipowy Office Park complex (38,500 sq m) in the South West zone, the renegotiation of Orange’s lease in Renaissance Tower (17,400 sq m) in the West zone, a pre-let agreement signed by Aviva Group in Platinium Business Park IV (13,000 sq m) in the Upper South, and a new lease by PZU (12,500 sq m) in the Empark Sirius building in Upper South. The vacancy rate fell slightly to 7.2 percent at the end of the year from 8 percent in the third quarter. In the central zones the rate was 8.1 percent, and in locations outside the city center 6.7 percent.
Recovery in regional markets
According to Jones Lang LaSalle, there is also a lot of activity on regional markets. In 2010, more than 230,000 sq m of office space was rented there. The supply of modern office space in major regional markets in Poland (Cracow, Wroc³aw, Katowice, Poznań, the Gdańsk-Sopot-Gdynia tricity, and £ód¼) at the end of the fourth quarter of 2010 was 1.82 million sq m, of which 45 percent is located in Cracow and Wroc³aw. In the fourth quarter of 2010, around 29,000 sq m was completed in regional markets, mainly in £ód¼ (Sterlinga Business Centre) and Poznań (Malta Office E). Plans for this year provide for a further 140,000 sq m of office space, including space in the largest office projects: Bonarka 4 Business A&B (16,000 sq m) in Cracow, Oliva Gate (15,900 sq m) in Gdańsk, Teofilów I Business Park (8,500 sq m) in £ód¼, and Wojdy³a Business Park II (7,700 sq m) in Wroc³aw.

Mateusz Polkowski, senior research analyst at Jones Lang LaSalle, said, “We noticed an increase in corporate demand in all major office markets in 2010. A total of 230,000 sq m of space was leased in regional markets, with Cracow and Wroc³aw clearly taking the lead in terms of occupier activity. Take-up was generated by both newcomers (for example, IBM in Wroc³aw and Sony in the Gdańsk-Sopot-Gdynia tricity area) and expanding companies already operating in these cities (for example, Motorola and Capgemini in Cracow).”

Office buildings totaling 238,000 sq m were under construction across major regional office markets, with construction activity most pronounced in Wroc³aw, Cracow and the tricity area—62,000 sq m, 55,000 sq m and 42,500 sq m respectively. This figure does not include a variety of projects whose construction started but was subsequently put on hold—these projects represent a further 69,000 sq m. The largest office projects currently being developed in Poland include the Sky Tower in Wroc³aw, Oliva Gate in Gdańsk, and Andersia Business Centre in Poznań.

New, “emerging” office markets in Poland, such as Szczecin, Lublin, Rzeszów, Bydgoszcz, Toruń, Olsztyn, Bia³ystok and Kielce, are also active in preparing office accommodation for occupiers, most notably tenants from sectors such as business process outsourcing (BPO) and shared service centers (SSC). The first truly modern office building in Szczecin, Oxygen (14,000 sq m), was completed by Echo Investment in the second half of 2010.

At the end of 2010, vacancy rates remained stable in Wroc³aw, the tricity area and Katowice (averaging 2.8 percent, 11.2 percent and 16.8 percent vs. 3.2 percent, 11 percent and 17 percent in Q3 2010 respectively). Slight upward pressures were registered in Cracow, £ód¼ and Poznań, with the vacancy rates at 12.1 percent, 21.8 percent and 11.9 percent in Q4 2010, up from 10.7 percent, 20 percent and 8 percent in Q3 2010 respectively. The slight increase resulted from the delivery of new office buildings in 2010, which were predominately vacant when they came onto the market: Vinci Office Center in Cracow, Francuska Office Centre A & B in Katowice, Sterlinga Business Center, and University Business Park I in £ód¼.

The office vacancy in Poland ranging in most regional markets between 10-20 percent provides a reasonable choice of accommodation for office occupiers in sectors such as BPO and SSC. Wroc³aw, with a vacancy rate of less than 3 percent, is unique in this respect, and this undersupply of office space triggers new development on this market.

Prime headline rents currently range from 11-13.50 euros per sq m per month in £ód¼ to 15 euros per sq m per month in Cracow, Wroc³aw and Poznań. Analysts expect slight upward pressures on the headline rents in 2011 on most regional markets.

Commentary: Only Largest Can Expect Loans
Jaros³aw Zagórski, Commercial and Business Development Director at Ghelamco Poland:
The latest economic crisis did not spare the construction sector. During the economic slowdown, many developers in Poland put their projects on hold and recorded a major drop in output. There was stagnation and the market froze. The implications of the crisis are still evident. Ghelamco is one of the few companies that has not suspended any of its projects over the past two years despite the crisis. Moreover, Poland is one of the Central and Eastern European countries that still offer relatively good conditions for doing business in comparison to other EU countries, which have been far more strongly affected by the crisis.

Today the Polish office property market attracts the interest of both local and foreign investors. The consistent emergence of new land use plans offers an opportunity for further development, making it easier for developers to plan their investment projects, and enables better planning of urban development in the long term. Similar opportunities are presented by the development of municipal infrastructure in the wake of urban sprawl. This is linked with the possibility of obtaining cheaper space, though somewhat farther from the center. One example is Warsaw’s S³uæewiec neighborhood, which has become an attractive location for business within a few years.

The strength of the Polish commercial real estate market is that it has attracted the interest of investment funds for years. Their interest in buying office projects depends on factors such as the location, quality and efficiency of office buildings being constructed in Poland. This trend, temporarily halted by the economic crisis, is regaining momentum, as evidenced by the sale of two newly completed Ghelamco buildings, Trinity Park III and Crown Square.

Another important factor that may influence market fluctuations is the reduced availability of land, especially in central districts. A threat to the development of the office market is posed by difficulties in obtaining funds by developers. Banks have significantly tightened the criteria for granting loans for commercial projects, and with a long list of projects carried out can expect to secure financing.
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