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The Warsaw Voice » Special Sections » February 23, 2012
The Real Estate Voice
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More Modern Office Buildings
February 23, 2012   
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There was a distinct revival on the Polish market for office space in 2011.
According to analysts from the Emmerson company, the most visible sign of this revival was an increase in demand among tenants. As a result, rents increased in cities such as Warsaw, Wrocław, and Cracow, and they may continue to grow in 2012. Transaction rents in the Polish capital hover around 24-25 euros per sq m per month in the center and around 15 euros in non-central locations. In Wrocław and Cracow, rents are 15-16 euros per sq m per month. Among the largest regional cities, Łódź is the cheapest, with rents ranging from 11 to 13 euros per sq there.

With the increase in demand, the supply increased as well. It was fueled by the fact that, especially in the capital, there is a gap between demand and supply, resulting from fewer new projects started in 2009 and 2010. Moreover, some major developers who previously focused exclusively on the housing market decided to try their hand on the office market as well. On the one hand, this is due to the need to diversify business operations in uncertain times, but it also stems from a desire to take advantage of the positive trends in this segment. A total of nearly 1 million sq m of new space is under construction in Poland, over half of it in Warsaw. The volume of investment in office buildings in 2011 exceeded 800 million euros, up from around 580 million euros in 2010.

The revival on the office market has been particularly evident in Warsaw. According to the latest research by CBRE, an international real estate consultancy firm, total office take-up for Warsaw in 2011 reached a record level of 573,000 sq m. This is the best result in Warsaw ever achieved on an annual basis.

“A comparatively positive economic outlook is still driving demand for office space in Warsaw, and we are particularly pleased with our recent deals, as it proves global corporate expansion plans are continuing despite European economic pessimism,” said Colin Waddell, managing director of CBRE Poland. “In 2011, CBRE observed a further revival on the real estate market, which began yet in 2010. Positive economic results have stimulated the property market to increase activity. The demand for office space has been improving every quarter and, basing on the current level of inquiries, we expect approximately a 10 percent yearly increase within the next two to three years, supported by general infrastructure improvement in the city.”

According to CBRE, the Warsaw office market is clearly speeding up: 226,000 sq m was leased in the city center and 347,000 sq m in non-central locations. The demand for office space is growing, while vacancy rates remain at a relatively low level of around 6.7 percent and should not exceed 8 percent by the end of the year. The largest build-to-suit lease deal last year was made with telecommunications company TP SA, which rented out 43,700 sq m in a facility that is still under construction.

Total modern office stock at the end of 2011 amounted to around 3,600,000 sq m. Only 14 office buildings were completed last year, totaling 120,000 sq m. That was the lowest supply level recorded since 1998. At the moment, there is around 530,000 sq m under construction, with 38 percent pre-leased in total.

A number of bigger projects are planned for completion in mid-2012. These include Business Garden at the corner of 1 Sierpnia and Żwirki i Wigury streets and the Senator building at the corner of Bielańska Street and Solidarności Avenue. The most popular Warsaw zones, in terms of both take-up and new planned developments, are the city center fringe, the Mokotów district and the Jerozolimskie Avenue area. CBRE predicts that around 300,000 sq will be completed this year in Warsaw, 60 percent of which will be located in non-central areas.

Away from the center
Office complexes located outside city centers are increasingly popular across Europe. Examples include the La Défense business district in a suburb of Paris in the Haut-de-Seine department, and London’s Docklands. This trend has also reached Poland. “The development of modern business districts requires the construction of infrastructure to enable easy access to other areas of the city,” says Łukasz Maciak, of Komercyjne Fundusze Nieruchomości Arka, the investor behind the Teofilów Business Park. “Priorities include road infrastructure and public transportation as well as key national and international transport terminals, which means train stations and airports. These are among the main criteria for companies in choosing a location.”

According to Maciak, “In addition to easier access, an office location outside the city center has several other advantages. Lower lease costs are certainly the most important of these. Lower prices of land outside city centers make it possible to reduce the costs of a project and consequently have lower rents and maintenance fees. This may mean significant savings especially in the case of land in perpetual usufruct and other long-term leases. Moreover, investment projects outside the center usually offer a much greater availability of parking spaces.”

Poland still has far less modern office space per capita than Western Europe. The modern office space market, especially in regional cities, has a much shorter history, which explains why the modern office stock in Poland is much smaller. What’s more, in a less affluent country, fewer companies can afford a modern office, so most small and medium-sized companies are headquartered or rent office space in older buildings, often converted from former industrial facilities; many others use residential premises for business purposes.

Consequently, the office stock available in city centers was generally sufficient to satisfy the demand, Maciak says. However, as demand grows, large office parks, and even clusters of office parks are beginning to emerge in all regional cities across Poland, forming non-central business areas. These complexes comprise not only modern offices but also facilities intended for light production and research and development or laboratories. Special economic zones are often established as well.

Examples of the rapid development of non-central areas are increasingly numerous. A key example is Warsaw’s Służewiec Przemysłowy area, which is home to projects including Horizon Plaza, boasting the largest floor area in Warsaw, at 3,700 sq m, Marynarska Business Park and Park Postępu. Another rapidly developing site in Warsaw is the area around Poleczki Street, with Poleczki Business Park, the largest multi-purpose facility under development nationwide.

In Wrocław, the capital of Lower Silesia province, new projects are being developed near the airport and the beltway. Strzegomska Street has become the new business district of the city, experts say. The street is home to projects such as Business Garden Wrocław, Wrocławski Park Technologiczny (Wrocław Technology Park), and Wojdyła Business Park.

In Łódź, in turn, the Teofilów Przemysłowy area is developing near a future beltway and road S14, which will connect the western part of the city with a freeway. Mindful of the planned development of Łódź, investors are locating their projects in Teofilów. In 2011, Teofilów was where the largest amount of new office space in central Poland was delivered to the market—including the Teofilów Business Park and the new headquarters of the Rossmann company.

Growing demand on regional markets
Although Warsaw is the undisputed market leader in terms of office space, a growing number of office buildings are also being constructed in other major Polish cities. Regional cities generate almost a third of the total volume of lease transactions in Poland. According to a report on the Polish office market by real estate services company Jones Lang LaSalle, major regional office markets such as Łódź, Cracow, Katowice, Poznań, the Tri-City area and Wrocław recorded strong results in the fourth quarter of 2011. Total demand from corporate customers in the first three quarters of last year on these regional markets exceeded that recorded in all of 2010. The annual take-up in regional markets, along with the 50,000 sq m registered in Q4 2011, reached almost 280,000 sq m. Cracow and Wrocław took a clear lead in respect of occupier activity in both Q4 2011 and the entire year. The largest deals in Q4 included: UPS (5,700 sq m, Wrocław); Heineken (4,400 sq m, Cracow); Amber Group (4,200 sq m, the Tri-City) and Enea (4,000 sq m, Poznań).

Much greater construction activity was also recorded in six key regional cities. The regional office markets saw almost 74,500 sq m of new office space added to the market in Q4 2011 (the largest amount since Q2 2010, when almost 99,000 sq m entered the market). Fifty percent of the new supply is located in just three buildings: Olivia Business Centre – Olivia Gate in the Tri-City, Quattro Business Park II in Cracow, and Park Biznesu Teofilów I in Łódź.

Rents may go up
According to Jones Lang Lasalle, at the end of 2011, Warsaw vacancy rates remained stable at 6.7 percent. Among regional cities, vacancy rates also remained stable in Wrocław, Cracow and Poznań, with slight downward pressure in the Tri-City and Katowice. Only Łódź saw an increase to 19.1 percent from 17.5 percent, reflecting delivery of Park Biznesu Teofilów I where commercialization has not yet been completed.

Prime headline rents in Warsaw increased in 2011. Prime office space now fetches between 22 and 25 euros per sq m per month (some triple-A buildings quote rents even higher than that) and from 15 euros per sq m per month in non-central locations.

Prime headline rents in regional cities currently range from 11-13.50 euros per sq m per month in Łódź to 13.50 euros per sq m per month in Poznań.

Forecasts for this segment of the real estate market are optimistic on the whole. “The volume of new completions coming to market in Warsaw in 2011 was the lowest since the mid-1990s,” says Anna Kot, head of the office department at Jones Lang LaSalle. “However, work began on several new office projects thanks to which the situation will improve in the second half of this year in terms of supply. We forecast that in 2012 the market will see the entry of around 254,000 sq m of modern office space, twice as much as in 2011 and 26 percent more than in 2010. However, it should be noted that more than 60,000 sq m of the expected office supply this year will be delivered to owner-occupiers.”

Currently more than 1 million sq m of office space is under active construction in Poland, which constitutes a 100 percent rise y-o-y. Warsaw and Wrocław remain the most active markets in this respect, with around 592,000 sq m and more than 100,000 sq m of modern office space under construction respectively. Interestingly, Szczecin and the Tri-City come next.

“After the record-breaking 2011, the situation on the demand side in Warsaw will remain positive throughout 2012,” Kot says. “The 2012 outlook for prime headline rents varies depending on the location. We see potential for an increase in rents in Warsaw, Wrocław and Cracow. In 2011, slight downward pressures on prime rents were seen in Łódź, the Tri-City and Katowice.”
A.R.

Commentary
Office Space in Demand
Rafał Krzemień, board member at Grupa Polski Holding Nieruchomości S.A.:
In 2012, demand for modern office space in Poland will continue to show an upward trend. Warsaw will remain number one in terms of leased space, but this segment of the property market will also develop in regional cities. An important trend may be pre-let deals, which last year accounted for more than a fifth of all transactions on this market.

Poland’s good macroeconomic performance encourages investors, who are still eager to do business in this country. The number of deals made last year confirmed a trend whereby demand for office space has been growing for more than five years; demand increased by nearly 40 percent during this period. This suggests that the Polish market for office space will still be one of the strongest in the region.

The owners of office buildings in Warsaw do not have to worry about tenants being interested. In 2011, an all-time record was set here in terms of rented office space—nearly 600,000 square meters, and despite this the supply is still insufficient to meet the needs of all tenants. In particular, there is a shortage of modern office space meeting the expectations of foreign customers. Companies are also eager to locate their headquarters in Wrocław, Cracow and Poznań, where further projects are planned in 2012. The inadequate supply and the continued fast growth in demand may result in a slight increase in rents in these cities, particularly in the case of the most modern space. This is especially true of space in well connected areas of the city, with adequate infrastructure and well-designed areas under lease.

Pre-lease agreements became increasingly common in the third quarter of last year. In the current situation on the market pre-leases are a good option for both the tenants and developers or project managers. In a situation in which securing a bank loan for an office project requires a lot of pre-leases, the project manager and the future tenant must work together already at the stage of starting construction.

Due to the insufficient supply of office space, customers prefer to secure the best space for themselves—for example, floors with an interesting view or a terrace—already at the stage of construction, and increasingly often before it even begins. This is especially important for those businesses which need large office modules, for example about 4,000-5,000 sq m, or are planning further intensive development. Such agreements often guarantee businesses the option of renting additional space in the office building and reserving space that suits them most.
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