New Europe, new premises

‘Eurobuild’ takes a tour of CEE CITIES to see how the first wave of EU countries ARE doing in the office sector compared with the lateR-comers and the candidates

The CEE states can be roughly divided into four categories: the Visegrad countries, the new EU members, EU candidates and the rest. The Visegrad countries – Poland, the Czech Republic, Slovakia and Hungary – were the first of the former Soviet bloc countries to join the EU (in 2004), and are all now exhibiting signs of maturity, such as stable rents and an end to the yield compression of recent years.

Poles of attraction

According to Anna Staniszewska, associate director of consulting and research at DTZ Polska: “It has been a remarkable year for the office markets both in Warsaw as well as in Poland’s key regional cities.” Warsaw has the biggest office sector of any city in these countries, with a total stock of 2.7 mln sqm at the end of the third quarter of 2007. It is also rather different from the other capitals in the region in that 2007 saw significant rental growth for prime properties of about 25-30 pct, and according to Joanna Mroczek, associate director of the research and consultancy department of CB Richard Ellis in Warsaw, for more exclusive buildings the increase was even greater: “In 2007 prime city centre rents increased by around 40 pct (from EUR 24 in Jan 2007 to EUR 33 in Dec 2007).” She adds, however, that: “In 2008 the increase will be much smaller – up to 3- 5 pct per year.” For prime locations such as Rondo 1 (jointly-owned by London & Regional Properties and Macquarie Global Property Advisors) and Grzybowska Park (owned by AIG/Lincoln) in the heart of the city, rents currently stand at around EUR 30-EUR 33 per sqm monthly. This surge in rents can be put down to the continuing huge demand for office space combined with inadequate supply coming on to the market. The biggest developer in terms of office space in 2007 was ING Real Estate, which opened both the Lumen (23,500 sqm) and Skylight (19,500 sqm) sections of the Złote Tarasy complex. Vacancy rates in the centre temporarily rose with the completion of Złote Tarasy, before the high demand pushed it down to around 3 pct at the end of 2007; but these are certain to fall with a small volume of new stock coming to the market before early 2009. This includes the aforementioned Grzybowska Park (10,000 sqm) due in Q1 of 2008 and the 20,000 sqm Atrium City from Skanska in Q1 of 2009. In the first nine months of 2007, leasing deals were signed for 350,600 sqm – 65 pct of which was for properties in non-central locations. DTZ estimates that this will have risen to a record level of around 400,000 by the beginning of this year, excluding renegotiations. (In 2006, the total take-up with renegotiations was 412,200 sqm.) The biggest deal of last year was Bank Millennium’s pre-lease of 22,400 sqm of space in the Harmony-Polifonia Office Center developed by Harmony Office Center, the first stage of which is due to be completed this month. Anna Staniszewska claims that: “We can now speak of there being a landlords’ market again, with tenants queuing up to get sufficient volume of office space.” But she adds that: “For how long – it is difficult to say. The market fundamentals are still sound. So we forecast that rents for prime properties in the Central Business District should grow further, while staying stable in other non-central locations due to fiercer competition between the landlords.” In these other main office districts of Warsaw, such as Mokotów to the south of the city centre, the level of rents is much more steady, at around EUR 15‑16 per sqm monthly. Rents are also likely to stay at this level in locations along the al. Jerozolimskie corridor.

In the provinces

Investment in regional cities has been given a huge boost by the interest of Business Process Offshoring operations (BPOs), attracted by the low-cost of high quality personnel in such locations. The most important of these regional office markets are Wrocław, Kraków, Poznań and the TriCity. Wrocław currently has 152,000 sqm of office space, with even more than this currently in the pipeline, including the 36,000 sqm Sky Tower due to be completed in 2010, Bema Plaza (23,000 sqm) from Ghelamco and the 26,000 sqm Grunwaldzki Center from Skanska – both scheduled for completion this year. Capgemini, Siemens and Volvo have all outsourced operations to the Lower Silesian city. In 2007, Silver Forum from IK Development (15,000 sqm of office space), Arkady Wrocławskie by LC Corp (8,000 sqm of office space), and the Legnicka Business House from AKG Accord’Next (6,000 sqm) were all delivered. Most of this new space is now leased. Rents in the city stand at around EUR 12-13, and at EUR 14-15 per sqm monthly in the newest developments. Kraków is another beneficiary of the BPO sector, with Motorola, Shell, ASC and Delphi having all opened service centres in the city. The total stock in the city has now reached the level of app. 190,000 sqm, which should increase by another 80,000 sqm by the end of 2009. The vacancy rate in the city is now around 1.5 pct, with city centre rents at EUR 13-15 in the centre and EUR 11-12 elsewhere in Kraków. Prime rents, however, are more in the region of EUR 15-17. Other regional cities outside the big four are also beginning to catch the eye of investors. One of these is Katowice, where it is possible that the amount of office space might increase by 200,000 sqm in the next 2-3 years. Out of this, 45,000 sqm will be supplied by Silesia Towers during phase II of the Silesia City Center development by TriGranit of Hungary. Echo Investment is also planning a 70,000 sqm business park, while GTC intends to develop a 40,000 sqm office complex in the city.

Łódź is currently lagging behind the other big cities in Poland in terms of office space, which according to Colliers International now stands at 92,000 sqm, out of which only 30 pct could be categorized as Class A. However, the agency is also estimating that by the end of 2009, 190,000 sqm of office space could have been added to this total, in such complexes as: Textorial Park (12,000 sqm) by St. Paul’s Developments Polska, the first stage of which is due to open this quarter; Cross Point from Mermaid Properties, opening in 2009 and providing another 35,000 sqm; and the 58,000 sqm Fabryka Biznesu, 10,000 sqm of which will be ready in March, with the remainder completed next year. The lack of stock has led to a chronically low vacancy rate of 0.4 pct, with rents being in the region of EUR 13-15 per sqm monthly.

Over the mountains

In the Czech Republic, Prague dominates the scene, with 2.14 mln sqm of office stock by the end of the third quarter of 2007 and a further 77,000 sqm expected to have come online by the end of the year, according to the Prague Research Forum. The office vacancy rate dropped to 5.25 pct in the third quarter, with the inner city districts of Prague 3 and 4 having the lowest vacancy rates of 1.3 pct and 1.5 pct, respectively. In the city centre, prime rents have now stabilized at around EUR 19-20 per sqm monthly and at EUR 15-17.50 in the inner city. In the suburbs, rents average at around EUR 13‑14.50per sqm monthly. Major recent completions include the E-Gate in Prague 6 (16,855 sqm) developed by Agana, Oasis Florenc in Prague 8 (14,393 sqm) by the Aviva Central European Property Fund and the Park Building 11 from AIG/Lincoln in Prague 4 (7,836 sqm), as well as the Palladium shopping and business centre by European Property Development (19,500 sqm of office space).

The only other significant office market in the Czech Republic can be found in Brno, which Colliers International claims currently has just over 200,000 sqm of stock, the vast majority of which lies in the city centre. In 2007, app. 70,000 sqm of this total was completed; and by the end of 2009, around another 100,000 sqm is expected to have been added. Vacancy rates, which have been on the slide for the last year, stand at around 25 pct in the inner city and at 15 pct in the suburbs.

And into the plains

Budapest is the third major capital city in the CEE with a considerable office sector. The total stock for the Hungarian capital is now app. 1,450,000 sqm – 188,000 sqm of which came in the second half of 2007, greater than for the whole of 2006, according to Colliers International. Most of this was delivered outside the central business district, where only the 5,000 sqm Vorosmarty complex was completed by ING Real Estate. With an absorption rate greater than the new supply, vacancy in Budapest has now fallen to around 12 pct. There is, however, a great deal of activity in other parts of the centre, especially in the Vaci ut and airport corridors. The former saw the completion of the first 16,000 sqm phase of Atrium Park, being developed by Wallis Real Estate. The airport corridor, based around Ulloi ut, is the location for several pipeline projects, including the Konyves Office Building (20,000 sqm, Neo Center (16,000 sqm) and the K1A Office Building (16,000 sqm). The new additions to the office market in central Budapest have not affected the vacancy rate in the centre of around 10 pct, as take-up is currently at the same level as the new supply. In non-central districts, such as South Buda and South Pest, the office market expanded by around 125,000 sqm in the second half of 2007, bringing the total class A office stock up to 686,000 sqm. Chief amongst these new developments are the Gateway Business Center (34,600 sqm) from the Ablon Group, the Arena Corner Office Building (28,000 sqm), the B.S.R. Center (21,400 sqm) and Infopark D (18,400 sqm). With a net absorption rate of app. 115,000 sqm, the vacancy rate is estimated to have increased to around 13 pct in non-Central districts.

Spoilt Bratislava for offshoring

The final Visegrad capital, Bratislava, is also attracting considerable off-shoring. Colliers International’s figures now show that the Slovakian city now has around 450,000 sqm of total office stock, with a further 150,000 sqm expected to be completed in 2008. More than half of the current stock is located in the Old Town of the city, with the districts of Petrzalka, the New Town and Ruzinov some way behind in terms of office development. The largest pipeline projects will all be coming to these parts of the city, and include CBC and Aupark Tower from local developer HB Reavis (34,700 sqm and 29,130 sqm respectively), Lakeside I (24,100 sqm) from TriGranit and Galvaniho III (20,000 sqm) from Linder. The effect of these new developments should be to push the vacancy rate up from the 2007 average of 7 pct to around 10 pct in the first quarter of 2008. Office rents range from EUR 10 to EUR 16 per sqm monthly, with the level for prime properties hitting EUR 18. Rents for class B properties vary between EUR 7 and EUR 12.

Office Balkanization

The office markets in the two newest EU states are now following the pattern of the Visegrad countries. In the Romanian capital Bucharest, the high demand for office space led to the vacancy rate dropping to a historic low of 0.02 pct at the end of the first half of the year. This figure is expected to remain close to zero throughout 2008, only possibly picking up in 2009. The current total stock of class ‘A’ office space was increased by 174,000 sqm in 2007 to nearly 650,000 sqm, 372,000 sqm of which is in prime locations. However, the amount of office space in secondary locations is presently growing at twice the rate of that in prime areas. Another
370,000 sqm is expected to be added to the total for the whole city in 2008. Recent leasing deals signed for existing buildings have been at the level of EUR 17.7 for prime properties and EUR 14.6 per sqm monthly for secondary ones. However, for pre-leases, transactions are currently being signed at EUR 17.1 and EUR 13.5 for prime and secondary locations respectively.

In Sofia, Colliers International’s figures show that the amount of modern office stock has been increasing at a rate of 100,000 sqm per annum for the last 3 years, reaching the level of 606,500 sqm for class ‘A’ and ‘B’ properties by the end of the first half of 2007. There is currently 330,000 sqm under development in the Bulgarian capital – most of which is in the suburbs of the city. The vacancy rate has remained stable throughout the year at around 5.1 pct, but increases have been seen in suburban areas, whilst central districts have witnessed a fall in vacancies. Rents for class ‘A’ properties range from EUR 15-22 per sqm monthly.

…and the candidates are

Taking a look outside the EU, in the Croatian capital of Zagreb, the total amount of modern office stock stood at around the 525,000 sqm mark at the end of 2007, according to CB RE’s estimates. The app. 70,000 sqm of office space that was added to the total in 2007 is, however, less than half of the new supply the previous year. The shortage  of new stock has resulted in a fall in the vacancy rate from 13.5 pct at the beginning of the year, to below 8 pct now. Compounding this is a lack of pipeline projects, with vacancies predicted fall to around 5 pct in the next 6 months. The landlord’s market engendered by this has led to the expectation that average rents for prime properties will exceed EUR 17 per sqm monthly in early 2008. The rents for class B offices are currently in the region of EUR 13.5. 

Turning to the Ukraine, according to Colliers International, the total amount of modern office space in Kiev is estimated at around 850,000 sqm. In 2007, 240,000 sqm was added to this sum – app. 50 pct more than in 2006. A similar growth in stock is expected in 2008. Most of the new supply is absorbed – 102,000 sqm was taken in the first half of 2007 – leaving vacancy rates at a mere 2 pct. Rents increased by 18 pct in the first six months of 2007, but this growth is now slowing. Average rents in Kiev at the moment stand at around EUR 42 mln for Class A properties.

Joanna Mroczek of CBRE sums up the overall state of the CEE office markets: “There is low growth in terms of stock and retail – in 2008 this will be a little slower than in 2007. And this has been caused by the general financial and economic situation – with a number of property funds considering a change in strategy due to the impact of the credit crunch. But there is no big issue at the moment.” n