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The Warsaw Voice » Real Estate » September 28, 2012
The Real Estate Voice
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Offices in Demand
September 28, 2012   
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The market for office properties is booming in Poland and more than 1 million sq m of office space is now under construction across the country.

In the first half of this year, around 92,500 sq m of new office space was delivered to the Warsaw market alone, according to real estate services company Jones Lang LaSalle, with 45,000 sq m of new space delivered in the second quarter.

Poleczki Business Park II developed by UBM/CA Immo, Platinium Business Park V developed by GTC, and Ufficio Primo developed by Kulczyk Real Estate Holding, are the biggest projects completed in the second quarter. They provide 21,000 sq m, 11,650 sq m and 5,900 sq m of office space respectively.

The new supply on the largest office markets in Poland outside Warsaw reached around 39,000 sq m in the second quarter, an amount similar to the volume of space completed in the capital.

An overwhelming 52 percent of this new space was delivered in the coastal Tricity of Gdańsk, Sopot and Gdynia, in buildings such as Garnizon.biz – Omega & Gamma, developed by Hossa, with 9,600 sq m; BCB Business Park – B1 developed by BCB, with 8,900 sq m; and the Jysk premises, with 1,700 sq m. Other projects completed in the second quarter included Wojdyła Business Park II developed in the southwestern city of Wrocław by Wojdyła, with 7,800 sq m, and Victoria Business Center developed by Monti in the midwestern city of Poznań, with 4,800 sq m.

Almost 65,000 sq m of new office space was delivered to regional markets in the first half of the year. This represented an increase of 23 percent on the first half of the previous year. At present, around 490,000 sq m of office space is under construction in Poland’s largest cities excluding Warsaw, with the highest development activity noted in Wrocław, the Tricity area, and Szczecin. If Warsaw is included, the total amount of office space under construction is 1.1 million sq m.

Confidence in Polish market
Andrzej Brochocki, managing partner at the Brochocki law firm, says there is a growing interest in Polish offices among international corporations, which have come to value the Polish commercial property market, especially as a location for outsourcing projects. One example is the Skanska AB company, which has invested 155 million euros on the Polish office property market over the past two years. Its subsidiary, Skanska Property Poland, is developing 116,000 sq m of office space in Poland in five projects—two in Warsaw and three on regional markets. All the buildings are being constructed in line with sustainable development principles and have LEED green-building certification.

“Skanska is an international company with global operations and we have noticed the growing potential of Central and Eastern Europe,” says Nicklas Lindberg, president of Skanska Commercial Development Europe. “The fact that we are placing a special emphasis on investment in Poland at a time when the global economic situation is unstable only proves just how confident we are about this market. Since Skanska finances its projects exclusively from its own resources, we are able to exploit our strength and start new investment projects, despite the changing global economic conditions. Consequently, last year we started seven new projects in Central and Eastern Europe with a combined area of 146,000 sq m, including five facilities in Poland. In 2012, we are going to begin the construction of another seven office buildings in Central and Eastern Europe to provide around 100,000 sq m of new office space.”

At the end of 2011, Skanska started the construction of Atrium 1, its flagship project. The grade-A office building is located at ONZ Traffic Circle in Warsaw. It will have a gross leasable area of 18,000 sq m and will be provided with state-of-the-art green-building solutions, such as a pioneering geothermal cooling and heating system used in only a few office buildings in Europe so far. Atrium 1 will be Poland’s first “deep green” building, meaning a building with almost zero impact on the environment.

High demand for modern offices
Demand for modern office space is still high in Warsaw, according to real estate services company CBRE. In the first half of the year, tenants and property owners signed lease agreements for 298,000 sq m of space, only slightly less than in the same period last year. At the end of June, Warsaw’s stock of modern office space reached 3.7 million sq m, 33 percent of that in the city center.

At present, 700,000 sq m of modern office space is under construction in Warsaw, a figure that represents 20 percent of the existing stock. The eight largest projects account for 50 percent of all office space under construction. In the longer term, the growing volume of office space under construction may exert a downward pressure on average rents. One reason is that 70 percent of the office space under construction in Warsaw is not in pre-let projects. The largest deals made in the first half of the year included an agreement signed by the PTC company to lease 27,000 sq m at T-Mobile Office Park, a pre-let agreement for 12,100 sq m at the Plac Unii office complex signed by ING Group, and a renegotiated lease of 9,100 sq m by Axel Springer at Trinity Park I.

Research by Jones Lang LaSalle on regional office markets in the main Polish cities outside Warsaw—Cracow, Wrocław, the Tricity, Katowice, Poznań, ŁódĽ, Szczecin and Lublin—shows that demand from corporate customers in the first half of the year reached 180,000 sq m, of which 87,000 sq m was leased in the second quarter. As in Warsaw, pre-let agreements accounted for 27 percent of all deals concluded in the second quarter. Apart from Warsaw, the highest tenant activity was registered in Cracow and the Tricity area.

Among the major deals concluded in the second quarter are agreements signed by the State Street company for the lease of 12,600 sq m at CB Kazimierz and 3,100 sq m at Edison, developed by GTC in Cracow, in addition to a pre-let agreement signed by tenants from the financial sector for 4,800 sq m at Bonarka4Business, a project developed by TriGranit in Cracow; a pre-let agreement signed by the Cisco Systems Poland company for the lease of 3,800 sq m at Enterprise Part developed by Avestus in Cracow; a pre-let agreement signed by the Lufthansa Systems Poland company for the lease of 3,500 sq m at Opera Office developed by Euro Styl in the Tricity; and an agreement signed by a telecommunications company for the lease of 3,300 sq m at CB Francuska developed by GTC in Katowice.

Fewer vacancies
Thanks to the high demand for office space, the vacancy rate has decreased steadily. At the end of the second quarter, the vacancy rate on the Warsaw market stood at around 7.4 percent—7.8 percent in the Central Business District, 8.5 percent on the outskirts of the Central District, and 7.0 percent outside the Central District. In other large cities, the vacancy rate ranged from close to 4 percent in Wrocław to 14.5 percent in ŁódĽ. At the end of the second quarter, the vacancy rate remained at a stable level in Wrocław and Poznań. There was a downward pressure on the vacancy rate in Cracow, ŁódĽ and Katowice. The vacancy rate increased quarter-on-quarter only in the Tricity—from 7.0 percent to 9.1 percent.

Rents were the highest in Warsaw and remained at a stable level compared with the end of 2011. Rents for prime office space in the Central Business District ranged from 22 to 25 euros per square meter a month. Rents in the most popular business areas outside the Central District, including the district of Mokotów, ranged from 15 to 15.50 euros per square meter per month. “Because of the weakening of the zloty against the euro and the growing supply of office space under construction, tenants are paying increasing attention to the rents they pay. As a result, we can only expect further increases in rents in the Central Business District, where supply remains limited,” says Joanna Mroczek, head of consultancy and research at CBRE in Poland.

The second quarter also saw stabilization on most of the largest office markets in Poland, with rents for prime locations per square meter per month ranging from 11-13 euros in ŁódĽ to 16 euros in Poznań.


Commentary
Paulina Misiak, head of tenant representation services and associate in the office department of Cushman & Wakefield:
The positive trend from last year continues in Warsaw and most regional cities in Poland. The number of transactions is rising, as is the amount of leased space. As a result of the growing supply of office projects in Warsaw, a rise in vacancies is expected in the short term. Eleven office buildings with a combined space of 110,300 sq m were completed in Warsaw in the first half of the year, almost as much as in the full year 2011. Optimistically, more projects are being planned and carried out, despite the restrictive lending policy pursued by banks. This increase is possible thanks to the growing popularity of pre-let agreements.


Commentary
Aleksandra WołodĽko, General Manager, Greenfields Investment
The Polish real estate market has been growing steadily over the past few years in spite of the global financial turmoil. This has been mainly due to its relatively good economic condition and strong, stable domestic demand for various types of projects. Yet no sector has been developing as rapidly as real estate, with strong emphasis put on development and lease of commercial projects. Demand for commercial and office space has grown in the largest Polish cities, with Warsaw leading the way in terms of space delivered and leased.

The location of a project is particularly crucial to its success or failure. The Warsaw market is focused on two business districts, the Central Business District (CBD) and the Mokotów Business District. The CBD is most frequently targeted by international companies in the financial sector, law firms and corporate tenants, for whom high headline rents are secondary to the prestigious location. The MBD has the competitive advantage of being close to an airport and tenants have a wide range of offices to chose from (1,200,000 sq m GLA) with much lower headline rents. Unfortunately both areas struggle with major problems such as increasing traffic jams and a shortage of parking places (specially unpaid, publicly accessible spaces). Additionally, some tenants complain about public transport as the MBD is some distance from both the existing underground metro line and the one being constructed. An increasing number of tenants are starting to look for alternative locations that could compete both in terms of location and availability of parking. Much interest has been paid to the Wola district, especially to the area close to the future Rondo Daszyńskiego underground metro station (scheduled to be ready in the first quarter of 2014), where a hub of office buildings has sprung up in just the past few years (including Green Corner, Crown Point, Crown Tower, Concept Tower, BPS and the Oracle headquarters, Wola Center) and where several new ones are on the way (for example the Warsaw Spire, Atrium One and Caleidoscope). The Włochy district, mainly along the further part of Jerozolimskie Avenue, is also a good option—developers are putting up large complexes such as Lincoln and The Park Warsaw that attract tenants with low headline rents and plentiful green space. The greenest of Warsaw’s districts, Żoliborz, is a new real estate gem. It is free of traffic jams and offers convenient free parking and retail facilities (Arkadia). Żoliborz is also close to the city center and has been a profitable target for real estate developers—most of the existing Żoliborz offices are fully leased and there has been a shortage of space (buildings such as Athina Park, Żoliborz Plaza, North Gate and many office buildings along Pow±zkowska Street are all fully occupied). One of the few office projects currently under construction in the area is Żoliborz One, with completion scheduled for July 2013. Another area subject to extensive development is Ochota, starting from Plac Zawiszy. The Eurocentrum Office Complex will provide plenty of high standard office space in both the Equator building and several other premises spread along Jerozolimskie Avenue practically to the city borders. Many of these are premises combining office and warehouse space.

The market is still mainly driven by prime tenants looking for A and B+ buildings. Among their main requirements are the technical considerations such as raised floors (with floorboxes as a convenient electrical solution), adjustable air conditioning, suspended ceilings and openable windows. Also important is the number of parking places adherent to specific office space. Most tenants cannot afford underground parking for most of their employees and that is why access to above-ground parking or good public transport is another significant factor in the choice of offices.

When an office is being adjusted to a future tenant, much depends on the assistance of companies creating space-plans—due to the rather uneasy global economy many international companies have orders from headquarters to fit their employees into a smaller space.

More competitive levels of rent, the prospect of less space to lease, more convenient parking and public transport, better technical standards—all of these factors are sometimes the reason why companies move to different locations instead of renegotiating with their current landlord.

Yet the main reason for continuous development is the boom in the real estate market itself, which is slowly recovering from the slump of 2008-2010. Developers are actively planning and constructing new premises that could meet all the technical requirements of an A-Class building, are well located and have been awarded prestigious LEED or BREEAM certificates.

Architectural plans are drawn up in a way so as to provide an employee-friendly, daylight-lit, spacious working environment. That is why office projects that maintain the highest standards find tenants successfully and fast. Such an example could be Green Corner in Chłodna Street (already fully leased although its completion is scheduled for the beginning of 2013) or Zebra Tower.

The increased competitiveness of the real estate market is a factor that acts in favor of tenants, contributing to the creation of a buyers’ market, but also boosting the standard of constructed real estate in general. Developers try to meet tenants’ technical, transport and parking requirements by providing efficient buildings, assistance with fit-out adjustments and flexibility regarding rent and parking. And if such well prepared projects are being put on the market they are naturally beating the competition and attracting prime tenants.
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