Rents on a roll

Colliers released their Polish Real Estate Market Report in February and predict falling vacancies in Warsaw\'s modern office stock and large increases in prices by 2009

According to Colliers, in 2005 the Warsaw office market continued the recovery that began in the second half of 2004. Take-up of office space in Q1 of 2005 set a new record of 108,773 sqm, while the total for the whole year exceeded 300,000 sqm.
In recent years, the suburbs have out-performed the CBD (Central Business District) in terms of take-up, as lower rents and fewer traffic problems have been the main factors drawing in tenants. As a result, the vacancy rate for modern office stock in the Warsaw suburbs now stands at 5.5 pct, compared to 12.2 pct for the CBD (although considerably down from the 19 pct recorded at the end of 2004). A notable feature of the increase in demand for office space in the capital is that a shift has occurred away from the suburbs of Warsaw and back to the central district. Throughout Warsaw, demand rose from 322,000 sqm last year to more than 370,000 in 2005; but within the CBD, a 60 pct increase was recorded, whereas the suburbs saw a 7 pct fall.

Quality counts
Colliers\' interpretation of this trend is that "potential tenants are now more able to focus less on costs and more on location and perceived levels of prestige". Headline rents have been falling in the city centre, from a high of around EUR 18-21 per sqm monthly towards the end of 2004, to EUR 15-18 at the end of 2005; and effective rents have seen a 20 pct reduction. When compared to average rents of EUR 14 in the US (Upper South) district of Warsaw, which includes the office hotbed around ul. Domaniewska and ul. Wołoska (Mokotów), the CBD has once again become competitive.
Colliers believe that the Warsaw suburbs have now hit the bottom of the rent cycle, and the inducements which lowered effective rents are now being reined in. Their analysis is that rents in the suburbs will now enter into the upward phase of the cycle. In the CBD, with one major new development coming onto the market in 2006 - Rondo 1. Now that the Lumen building, part of the Złote Tarasy complex has been postponed until April 2007, there could be even greater upwards pressure on rents this year.

Rents to rocket
Colliers\' analysts reserve their most interesting - and debatable - forecasts for the years 2008 and beyond. This prediction is based on an analysis of the pattern for net absorption - the net change in the amount of space occupied in a market, and thus an indicator of whether demand is increasing or decreasing. New supply had consistently outstripped net absorption prior to 2005, and this was reflected in the high vacancy rates of those years (peaking towards the end of 2004). Only last year did net absorption exceed the new supply and vacancies fall. With the postponement of Lumen, in 2006 demand should still be greater than supply, before becoming roughly equal in 2007. But according to Colliers, tenants will find that they have to deal with a choice of only 3 or 4 landlords, and this leads them to make the dramatic claim that headline rents in Warsaw\'s CBD will climb from their current low of EUR 15-18 to over EUR 25 in 2009.

Market still volatile
The picture painted by Colliers of soaring rent levels in the coming years is a rosy one for developers and particularly grim for potential tenants. But before firms start a stampede to sign leases while they remain relatively low, they should reflect on the fact that the supposed peak in 2009 is still a long way off, and much could happen in the meantime, as Colliers\' managing partner Hadley Dean admits: "Warsaw is still a small market compared to western European cities. It would only take a new developer to appear on the scene with plans for a business park to transform the situation."

Nathan North