Warsaw and much more besides

A strong and expanding economy, together with a record level of FDIs, have brought with them a substantial increase in the demand for modern office space in Warsaw and across Poland

Moreover, domestic companies are looking for cost reduction and are moving their back-office functions to regional cities such as Łódź, Lublin or to the Silesian conurbation (Katowice). The overall modern office space stock in the 6 major office markets in Poland amounts to 3,550,000 sqm, out of which Warsaw’s stock accounts for over 72 pct. Growing demand has triggered increased development activity and many new projects were started. The new supply in all six major cities should reach 730,000 sqm by the end of 2008 of which two thirds will be delivered in Warsaw alone.

 Supply and demandin Warsaw

 In the fourth quarter of 2006 the modern office stock in Warsaw amounted  to 2,557,100 sqm. Non-central locations (NCLs) accounted for 59.6 pct of Warsaw’s total stock. The new supply increased in 2006, settling on just over 183,000 sqm. The largest supply increase (30 pct) was seen in Upper Mokotów and in the City Centre Core. The positive trend will be sustained in the next few years as the supply is expected to reach at least 200,000 sqm in 2007 and 300,000 sqm in 2008. In 2007, 40 pct of new stock will be delivered in the CBD, whereas in 2008 only 25 pct (of those under development) will come on to the market. A limited number of new developments in the City Centre will keep the CBD market biased in favour of landlords for the next 2-3 years. In 2007, the market will remain unbalanced as expected demand may exceed supply; however, in 2009 and 2010, the substantial new supply should balance the market and might even increase the vacancy to around 10 pct out of the centre.

In  2006  the  gross  take  up  in  Warsaw  increased  once  again and  reached  a  record  level  of  412,200  sqm  (10.5 pct more than in 2005). Additionally, net absorption rose 30 pct, settling at 243,000 sqm. The largest demand levels were seen in Upper Mokotów  (97,500  sqm),  in  the  city centre (72,500  sqm)  and  on  the  edges  of  the  city centre (western fringe – 61,250 sqm, eastern fringe – 52,750 sqm). The largest growth in demand has been felt in Ochota-Ursus-Włochy, where it rose by 33 pct reaching 55,000 sqm. As the health of the Polish economy and GDP improve, the demand for office space in Warsaw in 2007 should remain at a high level. However, absorption may fall due to a limited number of planned completions. Because of the lack of supply companies will sign pre-leases to secure the office space that will be developed in 2008 and 2009.

Rents and vacancy in Warsaw

 Due  to  the  rapid growth in demand  and  the limited  supply, the vacancy rate in Warsaw has once again dropped significantly. In 2006 the average vacancy rate dropped by 2.8 percentage points to 5.37 pct. The vacancy rates in the CBD and NCL converged, due to the large absorption in the CBD. The largest decrease could be seen on the fringes of the city centre, where the vacancy rate dropped by 10 percentage points. In 2005, Upper Mokotów showed one of the lowest vacancy rates in Warsaw and during 2006 it dropped again to 2.9 pct. An increase in available space was observed in Ochota-Ursus-Włochy, where the vacancy rate increased to 10.2 pct. The low supply in 2007 will lead to a further drop in the vacancy rates in Warsaw, with average rates falling even below 4.5 pct. The availability of space in Warsaw is likely to increase over the next few years, as the supply should be substantial.

Rents in 2005 were stable, however growing demand coupled with an insufficient supply in 2006 changed the market situation. Rents in the CBD increased by 10 to 20 pct depending on the location. Prime rents in the best locations exceed EUR 24 per sqm.  As new large projects will be delivered no sooner than mid 2009, rental rates may increase even further and settle at around  EUR 26-28  per sqm. The NCL market is expected to show different dynamics. Although the vacancy rates are low, new large projects delivered in 2009 and 2010 may oversupply the market and maintain pressure on rental rates (EUR 13-17). Among other NCL locations, Upper Mokotów and Wola are showing the highest rental rates (EUR 15-17). The vast amount of new developments in Upper Mokotów should keep effective rents at the same level, but it is probable that the headline rent might increase slightly.

A typical lease term is between 5 and 10 years, but landlords may agree to shorter lease terms for space in older buildings. The scale and scope of incentives have changed in the last twelve months. In the CBD, rent free periods range from 2 to 6 months, but in the NCL landlords are more flexible and rent free periods are between 4 and 12 months with landlords offering additional discounts.

Regional demand

 The regional markets have experienced a large increase in demand, triggered mostly by the FDIs. International corporations are opening shared services centres as well as business processing centres. Such operations usually require in excess of 1,000 sqm and can reach sometimes over 10,000 sqm. On the other hand, the demand for space generated by local companies is rather small (around 50-200 sqm). Medium-sized requirements are still rare in regional cities. The differences between these two types of clients can also be observed in the differing office standards that they require and the typical lease length. Foreign companies usually expect ‘B+’ and ‘A’-class buildings, whereas local ones are usually satisfied with ‘B’-class or lower. As far as the lease length is concerned, local companies prefer short lease terms (3 years) or even agreements for an undefined period, whilst foreign companies prefer longer periods, from 5 to 10 years. The lack of medium-sized requirements puts some constraint on the development of the market. The largest demand for new office space can be observed in Wrocław and Kraków, however other cities are also getting more attention. Regional markets are still immature compared to the Warsaw market.

Compared to Warsaw, regional markets are quite small in terms of the stock of modern office space. The next largest markets are Kraków and Tricity with 239,000 sqm of office space each – 10 times smaller than the Warsaw market. In 2006, the increase in supply was unimpressively small, around 2 pct (except Poznań, where the supply rose by 6 pct) compared to 2005 – when modern office stock rose by 8 pct. Limited supply and growing demand have reduced the availability of space. Units of 1,000-2,000 sqm are a rarity on the market, especially in  Krakow and Poznań. Since the majority of supply will be delivered in 1.5 year’s time, regional markets should become more balanced by the end of 2008. The majority of new office space will be delivered in Wrocław and Kraków. The average size of a new building is around 6,500 sqm. Most of these are located close to city centres but not in the core area.

Business parks are currently on the rise in regional cities, as developers are targeting sizeable tenants for their buildings. The majority of such parks are being developed on the city centre fringes or on the outskirts in the vicinity of local airports (Strzegomska Business Park in Wrocław, Kraków Business Park). The availability of land in these areas enables international developers to acquire sites and start the building of such office parks.

Regional rents

 Occupancy costs in regional cities are lower than in Warsaw. Average rents are similar to Warsaw’s NCL. Rents range from EUR 11-16, where Kraków and Poznań have the highest prices. The rent for

‘A’-class buildings is EUR 14-16 and for ‘B’-class buildings stands between EUR 11-14. Even though the rent level is a function of demand and supply, rents usually do not exceed EUR 15. The lowest prices of EUR 11-12 can be achieved in non-central locations in B class buildings for large tenants. The large demand from single tenants cannot be met by the existing buildings and they have to wait until the whole new project is developed. This is positively influencing the market raising the total stock and putting no pressure on rents. The limited supply in 2006 and high demand pushed down vacancy rates significantly during the whole of last year. Vacancy rates are around 3-8 pct, where the lowest rates can be found in Kraków and Wrocław. Supply in 2007 will rise substantially and vacancy rates may increase.

Incentives are usually scarce and restricted to short rent free periods. Additional costs such as service charges are lower than in Warsaw and range between EUR 2.5-4. Rents for parking spaces are also lower. Above ground parking spaces are usually free in business parks, but paid ones cost between EUR 20 to EUR 40 per lot. Rents for underground parking spaces range from EUR 40 to 90.       

Jakub Marszałek,

Alicja Sitkowska,

Piotr Szmilewski

Cushman & Wakefield