Happy days are here again?

Several experts \'Eurobuild\' spoke to seem to agree that the Warsaw office market has finally turned the corner, and that the general trend is for rents to rise over the next few years. In February, Hadley Dean, managing partner of Colliers International, was particularly optimistic about the Central Business District in 2007, predicting rocketing rents

Hadley Dean, managing partner, Colliers International:
Now the market has turned - in Mokotów, rents are EUR 1 up. We\'ve had strong take up, but in 2005 net absorption went through the roof. In the Central Business District (CBD) it was up to 86,000 sqm and in the suburbs it reached 102,000 sqm. There is a very positive net absorption rate at the moment. It will be app. 95,000 sqm in 2006 in the CBD, and is likely to increase around 5 pct during 2006-2007, as the Polish economy expands. In 2004, the question on the lips of tenants tended to be: "how to cut costs?"; now the question being asked is "how can we expand?" - and this is driving net absorption big time.
Confidence is the main thing - developers will see that demand is up. And effective rents will only be 5-10 pct below headline rent levels by the end of this year, as incentives diminish. In 2006, headline and effective rents should quickly merge and then rocket in 2007, with headline rent levels of around EUR 19. It is difficult to forecast more than 2 years into the future; but with so much pent-up demand, companies are going to be screaming out for office space.
2007 is going to be a great year - make sure you get your buildings up then. For 2008-9 - we can only really guess for so far in the future - but this is likely to be the top of the market with rents possibly hitting EUR 25.

Ben Bannatyne, managing director Central Europe, Jones Lang LaSalle:
Everyone has been predicting a downturn for the Warsaw City Center office market. But now that the 22,500 sqm Lumen building in Złote Tarasy has been postponed from September 2006 to April 2007, the whole situation has changed. Now only Rondo 1 (56,000 sqm), of which 40 pct is already leased, is coming onto the market in 2006. Tenants\' perceptions will now change - particularly if they are looking for more than 2,000 sqm.
The turnaround has happened - there is a lot of activity in the CBD.  There was an 11 pct vacancy rate at the end of 2005 in the CBD - I expect a similar figure or maybe even a dip below 10 pct at the end of this year.
Last year, take-up rose from 320,800 to 372,900, and I expect at this year\'s end it will be closer to 400,000 sqm.
Headline rents won\'t change - but we will no longer see such attractive incentives given, such as 18 months free or a full fit-out. Rondo 1 type buildings could be rented out at over EUR 20 to the right type of tenant who really needs to be in the city centre. I believe it is quite possible for rents to be at around EUR 23-25 in 2008.
If tenants are happy where they are, then they should renegotiate now; if they have sub-standard premises, then it\'s time to relocate; if they are able to secure prime city centre space paying EUR 16-17, then they should try to get themselves locked in.

Jarek Zagórski, head of Office Department, CB Richard Ellis:
My feelings about the market are quite positive - but not about rents. During the next 2-3 years, headline rents will be stable, but effective rents may go up a little. Developers will not need to be as aggressive to catch tenants as before, and so will offer fewer incentives.
This is particularly true in Mokotów, where there is a very interesting situation: if you want to rent 4,000 sqm there, it is now impossible. But with the developments on Jerozolimskie, things are different, with some effective rents lower than EUR 10 and landlords needing to be much more aggressive. The market is now much more diversified.
Headline rents in non-central locations average at around EUR 15, while in the City Centre this is about EUR 19-21. We are likely to see a stabilization in rents.
The situation is now balanced - it is no longer a tenants\' market. Most developments now will be pre-leased and will wait for an anchor tenant to arrive before commencing - there is no longer any room for speculation.

Anna Staniszewska, associate director, consulting and research, DTZ:
I believe the market in 2006 will follow similar patterns as in the previous year, because generally the demand is strong for both city centre as well as key non central locations such as Mokotów and Wola. In the short to medium term it is clear that the addition of Rondo 1 (30-35 pct pre-let), the first phase of Prosta Office Centre (35 pct pre-let) as well as two small projects to the office market in the CBD will lead to an inevitable increase in the vacancy rate in 2006 to 15-17 pct. The rescheduled completion of Lumen (with an uncertain delivery date), International Business Center II and further stages of Prosta Office Centre may push the vacancy in 2007 even higher, depending on absorption levels.
Even if the demand level is similar to 2005, it will take time to absorb as much as 175,000 sqm of new office space, which is scheduled for delivery over the course of the next 24 months. On top of the new space to be completed, there is still over 110,000 sqm of existing space to be taken up.
As demand is expected to remain buoyant and there are good requirements in the city centre market, we also expect prime rents to remain reasonably stable in the short to medium term with any downward pressures being felt at older or secondary properties. However, in two years time, prime headline rents may dip again below EUR 20 per sqm.
In 2007 completions could also record high levels and as much as 205,000 sqm (225,000 sqm in 2006) could be delivered with 70 pct located in non central zones.
Beyond 2007 it is difficult to estimate precisely the level of new supply and demand, but we expect a number of projects to commence mainly on the basis of a pre-let. Including schemes under construction due for 2006 as well as those planned for the next 3-5 years, DTZ is aware of planned projects with an aggregate size of 1,250,000 sqm.
Take-up we expect to remain in the range of 250,000 -300,000 sqm p.a., subject to sustained economic growth of, say, 4-5 pct and allowing for an additional 20 pct on top of this figure being lease renewals/renegotiations.
In the longer term new demand may materialise as Warsaw itself is expected to grow rapidly and its growing population will require services.

Richard Aboo, partner, Cushman & Wakefield:
I do share the optimism of Colliers to some extent. Rents are definitely bottoming out and there is a strong likelihood that we will see a short term increase in rents towards the end of this year, especially in the Mokotów area where vacancy rates are very low. In the medium to long term, however, we will see a more balanced market with a steady growth in rental. With a pipeline already of app. 800,000 sqm grade A, tenants will continue to be sought out for and landlords will continue to compete aggressively with prices but more importantly with quality.
In the CBD we will see more activity this year and we predict that there will be a higher proportion of take-up purely due to the availability of office space. The good news is that tenants are once again beginning to appreciate quality as opposed to just purely office space for the cheapest price. Last year there was a record take up of 373,000 sqm, which is extremely positive for the market and should be sustained as more foreign direct investment pours into the market and the already existing companies grow. We will see more large scale deals taking place as companies begin to relocate to newer and more prestigious accommodation.

(nn)