Modern Office Space: A Record Year?
September 30, 2013
A record of amount of office space is set to be delivered to the market this year. Office buildings with a combined leasable area of 1 million square meters are currently under construction across Poland. And further projects are in the planning and preparation stages.
Warsaw is the largest office market not only in Poland but also in the whole of Central and Eastern Europe in terms of leasing volumes, existing stock and development pipeline, according to a report on the office markets in the region’s capital cities of Bratislava, Budapest, Prague and Warsaw, published by global real estate services firm Cushman & Wakefield.
The report says that Warsaw boasted the largest total office stock—more than 4 million sq m at the end of June 2013, followed by Budapest, the capital of Hungary, in second place with over 3,164,000 sq m. In the Czech capital, Prague, total office stock is expected to top 3 million sq m by mid-2014, while Slovak capital Bratislava currently has a built stock of 1,466,000 sq m. Office space under construction as of the end of June 2013 totaled over 845,000 sq m across Central Europe, with Warsaw accounting for almost 448,000 sq m and Prague for 291,400 sq m.
“Warsaw and Prague are the dominant markets in Central Europe given the number of projects planned and tenant activity,” says Jonathan Hallett, managing partner of Cushman & Wakefield’s Central Europe region. “Greater supply will lead to growing competition among developers, who will focus on securing as many pre-lets as possible, while tenants are likely to put more downward pressure on rents and demand better incentives in lease packages. This pressure may ease following the improvement in Europe’s economic conditions in the long term. Budapest has reached stability, while Bratislava remains a tenant’s market.”
According to Cushman & Wakefield, the H1 2013 leasing volumes in the four Central European capitals totaled nearly 692,000 sq m. This is up on both the first and second halves of 2012; CE take-up in the first half of 2012 was 625,900 sq m. This highlights rising interest from occupiers who are looking to establish a foothold in the region. Foreign companies, which underpin the majority of the gross take-up levels, are using the highly qualified labor pool, lower occupancy costs, good standard of buildings and economic stability to their advantage. The CE region has also been good at attracting a large number of international companies looking to establish their outsourcing centers and which are increasingly providing advanced business services.
The Warsaw office market in the first half of 2013 was characterized by exceptionally high demand. A significant portion of leases were renegotiated and involved the consolidation of companies aiming to increase efficiency and reduce costs. Supply is also at record levels.
Tomasz Czuba, head of office leasing at Jones Lang LaSalle, says, “During the first half of 2013, Warsaw’s modern office supply exceeded 4 million sq m and approximately 188,000 sq m is expected to be delivered in the coming months. Despite the robust tenant demand recorded in the first half of the year, the vacancy rate remained on an upward trend and reached 10.5 percent due to the large number of projects completed in the analyzed period. However, it should be noted that Warsaw has one of the lowest vacancy rates among capital cities in Central and Eastern Europe. The high demand is a clear sign that the Warsaw office market remains attractive to companies planning to establish or expand their operations.”
According to Jones Lang LaSalle, in the first six months of 2013, gross demand (including renewals) amounted to 334,000 sq m, up 12 percent in year-on-year terms. Total gross and net take-up in Q2 were 178,000 sq m and 130,500 sq m respectively. The largest new transactions in Warsaw in Q2 2013 were signed outside the city center and included: the Office for the Registration of Medicinal Products (13,000 sq m in Ochota Office Park), Unilever (5,400 sq m pre-let in the Eurocentrum Office Complex), and Grupa Æywiec (a new deal, 4,300 sq m in Konstruktorska Business Center). The largest renewals were concluded by Johnson & Johnson (7,250 sq m) and the Royal Bank of Scotland (5,300 sq m, expansion and renewal), both in Wi¶niowy Business Park.
A total of 152,000 sq m was delivered in Warsaw in H1 2013 (76,000 sq m in Q2 alone). The total completion volume in 2013 is expected to be the highest since 2000. Around 188,000 sq m will be delivered in H2 2013, bringing the year’s total volume to 336,000 sq m.
At the end of Q2, the vacancy rate increased further to 10.5 percent in Warsaw, compared with 9.9 percent in Q1. The increase in vacancy is putting pressure on rents. Prime headline rents have been revised slightly downward in the central districts to 22 to 24 euros per sq m per month.
Not just Warsaw
The office market is booming not only in Warsaw. A lot is being built in other big cities as well. This is in part due to the fact that multinational corporations, looking for savings, have begun to set up offices in cities cheaper than Warsaw. The most attractive regional cities for developers include Wroc³aw, Cracow, the Gdańsk-Gdynia-Sopot Tri-city area, and Katowice—urban centers with considerable development potential. This is primarily due to their large number of residents, but also to the development of the modern business services sector (BPO) in these regions.
According to Jones Lang LaSalle, in H1 2013 take-up in the major office markets in Poland (excluding Warsaw) reached nearly 210,000 sq m, up 16.7 percent over H1 2012. In Q2,109,000 sq m of deals were signed. Cracow and Wroc³aw took a clear lead in respect of occupier activity in both Q2 and H1 2013. The largest pre-lets of Q2 were in Cracow. Q2 2013 brought nearly 47,000 sq m of new office space to the market outside Warsaw, of which 84 percent was delivered almost evenly between the Tri-City (BPH Office Park A&B, Oliva Business Park-Alfa, and Porty Gdynia Office Building) and £ód¼ (mainly in Green Horizon phase II and MediaHUB). Other major new additions to the market were Delta 44 in Wroc³aw and Centrum Biznesu Kaskada in Lublin. Currently, according to Jones Lang LaSalle, 512,500 sq m of office space is under active construction in the major cities of Poland (excluding Warsaw), the majority of which is in Wroc³aw, Cracow and Poznań. A total of 191,200 sq m is likely to be completed in H2 2013, mainly in Wroc³aw, Cracow, Tri-City, and Katowice.
According to real estate consultants Knight Frank, in Cracow, the largest regional office market in Poland, the supply of modern office space at the end of June 2013 exceeded 519,400 sq m. In the second quarter of 2013, not a single office project was completed in Cracow, which is the largest city in the southern Ma³opolska region. Seven projects were in progress, with a total leasable area of nearly 58,000 square meters, of which roughly 42 percent is scheduled to be completed by the end of 2013.
In the second quarter of 2013, tenant activity remained at a high level. During this period, 29,000 sq m of modern office space was leased in Cracow, of which roughly 25 percent were pre-let transactions. The heavy demand for office space is likely to encourage developers to launch the construction of some of the projects that are still at the planning stage.
The high demand for modern office space in Cracow is reflected in a low vacancy rate. Based on the latest data, as of the end of the second quarter of 2013, Cracow had over 14,900 sq m of space available for rent. This represented only 2.9 percent of the total stock on the Cracow office market and was the lowest vacancy rate among Poland’s regional cities.
Asking rents in Cracow remain stable. The weighted average rent at the end of June 2013 was 12.5 euros per sq m per month. Rents in Class-A buildings ranged from 13 to 15 euros per sq m per month, while those in Class-B buildings ranged between 10 and 13 euros per sq m per month.
Wroc³aw, the largest city in the southwestern Lower Silesia region, is number two, after Cracow, among Poland’s largest regional markets in terms of office stock. Wroc³aw’s office stock stood at 438,700 sq m as of the end of the second quarter of 2013, with only one new office delivery of 2,800 sq m in Q2. Based on data on office buildings under construction and planned completion dates, it can be expected that by the end of the year, the total modern office stock in the city will exceed 460,000 sq m.
In the second quarter of the year, 23,000 sq m of modern office space was leased in Wroc³aw and some 3,000 sq m was sub-leased, an increase of almost 100 percent when compared to Q1. This high level of leases shows that the sentiment among tenants remains positive. Asking rents in Class-A buildings range from 13 to 16 euros per sq m per month, while those in Class-B buildings are between 10 and 14 euros per sq m per month.
The Tri-City office market is also developing rapidly. According to Knight Frank, the total rentable stock in the Tri-City region expanded by 21,000 sq m in the second quarter of 2013 to about 318,300 sq m. Currently, 49,000 sq m is under construction there in several new office schemes.
Demand on the Tri-City office market dropped in the second quarter. The transaction volume was around 6,600 sq m, a decrease by nearly half compared with the first quarter of 2013. In the first half of 2013, the vacancy rate in the Tri-city rose to 17.5 percent, mainly as a result of the completion of a significant amount of new office space. The new office stock under construction and scheduled for delivery in 2013 may have led to a further—albeit slight—increase in the vacancy rate. Asking rents in the Tri-City show that the cost of leasing modern office space has remained stable since mid-2011. The weighted average rent in the Tri-City at the end of June 2013 was 13.20 euros per sq m per month.
£ód¼ is another major office market in Poland. Knight Frank analysts estimate that at the end of the second quarter of 2013 the total office stock in £ód¼ was around 277,200 sq m. In Q2, the construction of four buildings with a total area of 18,100 sq m was completed, which is the third best result (after those in Warsaw and the Tri-City) in terms of newly delivered office space. In the absence of new projects under construction, the £ód¼ office stock should not change much by the end of 2013.
The vacancy rate in £ód¼ has been the highest among all Polish office markets for several years. At the end of June 2013, around 70,400 sq m of office space was vacant in £ód¼, meaning a vacancy rate of 25.4 percent. £ód¼ is the regional city with the lowest average asking rent. At the end of June 2013, it stood at 11.30 euros per sq m per month.
Poznań ranks fifth among Poland’s regional cities in terms of office stock. At the end of the second quarter of 2013, the city’s office stock amounted to 251,100 sq m. As of the end of June 2013, three projects were under construction, with a total area of around 61,100 sq m. About 30 percent of this space is scheduled to hit the market later this year.
The second quarter of 2013 was a period of intense activity on the Poznań office market. Lease agreements for around 9,100 sq m of space were signed. The lack of new supply in Poznań was reflected in a drop in the vacancy rate, which fell to 16.9 percent at the end of June 2013, from 17.8 percent in the first quarter of 2013. Asking rents in Class-A buildings ranged from 13 to 16 euros per sq m per month, and those in Class-B buildings ranged between 9 and 15 euros per sq m per month.
Katowice is the smallest regional office market in Poland, with an office stock of 205,500 sq m. In the second quarter of 2013, one new office building, with 600 sq m, was delivered to the market in Katowice. At the end of June, four office projects were in progress. It is estimated that these projects will provide the market a combined 28,200 sq m of modern offices, of which only 3,600 sq m is set to enter the market by the end of this year.
After a good start of the year, the second quarter of 2013 saw a significant decrease in rental activity in Katowice. Active demand in the second quarter of 2013 amounted to 8,200 sq m, which marked a more than 50-percent drop in comparison with the transaction volume in the first quarter. The structure of demand was dominated by new leases, which accounted for almost half of the total transaction volume. The small amount of new supply meant that some of the available space has been absorbed by the market, as reflected by a drop in the vacancy rate from 10 percent in the first quarter of 2013 to 7.8 percent at the end of June.
Cause for Optimism
Jaros³aw Zagórski, Commercial and Business Development Director, Ghelamco Poland
Given the current condition of the market in Poland and Europe, the situation in the office sector can be assessed as optimistic, both in the capital and in regional centers such as Wroc³aw, Cracow, and the Tri-City. The Polish commercial real estate market remains one of the most dynamic in Central and Eastern Europe—in 2012, office lease transactions exceeded 608,000 sq m here.
Of course, Warsaw continues to lead the way nationwide as the most attractive destination for new projects. With its transaction volume of around 550,000 sq m annually, Warsaw has an advantage over other European capitals. In other Polish cities there is also growing demand for office space, fueled primarily by companies active in the business process outsourcing (BPO) and shared services centers (SSC) sectors.
In addition to the steadily increasing transaction volume, what also inspires optimism is the level of investor confidence in the office sector, which is best confirmed by the recent successes of Ghelamco Poland. The successful sale of the prestigious Senator and Mokotów Nova office buildings for a total of 241 million euros shows that the Polish market continues to attract investors. An additional argument confirming the stability of the Polish real estate market is that Ghelamco has secured record financing for its Warsaw Spire project—zl.904 million from four leading Polish banks. Especially in the current macroeconomic situation, this positive decision with respect to our company and our flagship project, which—like our other projects—is being carried out in line with the rules of sustainable construction, inspires justified optimism.
Tighter lending policies among financial institutions could pose a risk to the development of the office market. Promising top-quality projects by solid, reputable companies with years of experience and an established market position have real prospects for financial support. Banks also require greater commitment from developers, both in terms of their own funds and pre-letting agreements. The increasingly stringent requirements may lead to a situation in which fewer office projects will be able to secure financing, and consequently the market will greatly reduce the activity of some companies.