Steady state in leasing

Public administration bodies in Poland at different levels are leaving their premises in old tenement houses in droves. Such buildings often require extensive renovation. Even though these offices are usually located in the central areas of the city, the costs of operating buildings that are completely energy inefficient are so high that even the fear of accusations by the tabloids of wasting public money is not deterring the public sector from venturing into the commercial market. More and more of such tenants are coming onto the market, thus refuting the notion that the trend for new premises for public institutions is some kind of temporary phenomenon. In Warsaw last year, Poczta Polska decided to change its offices and leased an area of 12,600 sqm in the Domaniewska 37C building from Polski Holding Nieruchomości, which is also a state-owned entity. The General Directorate of National Roads and Motorways (GDDKiA) also leased 11,700 sqm in Green Corner from Skanska Property Poland. Two years earlier the Poleczki Business Park complex (which is being developed by UBM and CA Immo) was chosen by the Agency for Restructuring and Modernisation of Agriculture. A number of tenders have also been announced by smaller units at the regional and borough level under the public procurement act. The West Pomeranian Marshal's Office has been looking for a 900 sqm office in Szczecin for the Department of Rural Development Programmes as well as 800 sqm for the Regional Centre for Social Policy. Whether they have found these yet is not clear, because it takes two weeks for information to be confirmed by the institutions themselves.

Officials stand guard
The thing that differentiates public tenants from private companies is how they choose their office space. Public administration units come under the public procurement act, and even though the selection of office areas is excluded from this procedure, sometimes these units announce tenders anyway. "They are usually unlimited tenders announced in the press. It sometimes happens that these processes are not continuous and you need to wait for a long time for them to be concluded," says Jacek Luzar, the sales director of UBM. Jarosław Zagórski, the commercial director of Ghelamco Poland, agrees: "Tender procedures are much more extended for public institutions, but the biggest inconvenience is their drawn out decision making processes," he points out. What else has been changing in public officials' approach to office space leasing? "Public entities are increasingly using the services of experienced agents and are holding tender procedures through a consultant or an agent whenever possible," reveals Marcin Mędrzecki, the director of the CEE investment service department at Colliers International. These bodies insist that everything takes place transparently and according to the guidelines, stating clearly what they need and what their requirements are in the tender procedures they prepare. "Technical conditions are often specified by acts or directives. You can count on more flexibility when it comes to commercial entities, for example, with regard to the construction of archives or the installation of specialist fittings. For public institutions there is no room for manoeuvre," explains Łukasz Żelezik, the senior leasing manager of Echo Investment. And what matters most to them? "The public administration pays a great deal of attention to the price - the monthly rent and the operating costs included. This constitutes half the points that can be awarded in a tender procedure. The location of the buildings is also important, as well as their transport links to the rest of the city - these constitute app. 20 pct of all the points that can be obtained. Such clients prefer central areas and focus on the convenience of the access to a given location. They also care about the availability of parking spaces for the building or in its immediate vicinity," adds Jacek Luzar. Institutions that generate a lot of people traffic are not likely to opt for premises in business parks on the outskirts. Even if a given office is not visited by the public, they need to ensure appropriate transport links for their employees. For example, developer UBM has opened two bus routes in order to ferry such employees between their offices in Poleczki Business Park and other public transport connections. Sustainable development certificates for the implementation of environmentally-friendly solutions in a building, which sort of came into fashion on the office market only a few years ago but have since become the norm - are also an important factor for tenants from the public sector. "Issues such as image and space efficiency are growing in importance, and this is something the older buildings where most of the potential tenants from this group have traditionally been based cannot offer. We can expect that just like companies from the private sector have already done, they will start paying more attention to sustainable development standards," predicts Jarosław Zagórski. During the leasing process, Polish public officials expect high standards and offers at an appropriate level, which makes them similar to their foreign colleagues. Jarosław Zagórski points out that both EU and Polish entities look for areas in good locations that are cost-efficient and functional. The credibility of the developer is also crucial in the process of public tenant acquisition. Public entities often carry out rigorous checks on their achievements and their market history.

Demanding but reliable partners
Even though negotiations with public tenants are by no means simple and the formalities that need to be resolved by the whole procedure tend to be complicated, developers still appreciate clients from the public sector. "A public institution or a state agency provides a project with credibility in the eyes of financial institutions, which is a great advantage when raising funds for the construction of a project," emphasises Jacek Luzar. Moreover, despite the fact that such clients do not provide any guarantees, the state treasury is responsible for them - so it would be hard to find a better recommendation. "One common requirement in signing a lease contract involves exempting the public entity from securing the lease contract, i.e. providing a bank guarantee, due to the fact that all the liabilities are taken over by a state-owned subsidiary," explains Anna Duchnowska, the director of the office owner representation department at Colliers International. "Our strategy involves building a good tenant portfolio - and the quality of the portfolio is evaluated on the basis of the stability of the cash flow and suitable levels of profitability. Leasing contracts with well-managed public institutions guarantee this," adds the representative of Echo Investment. Thus the negotiation process is unlikely to discourage developers, even though the demands could be unusual. "One restriction in the case of public institutions could sometimes be the denomination of rents in złoty," says Richard Aboo, a partner and head of the office department at Cushman & Wakefield. "In 90 pct of cases rents are converted into złoty, the operating costs have to be described in detail, and what the tenants pay for has to be exhaustively explained, because these are issues public institutions are very sensitive about. At the moment the advance payment for operating costs in Poleczki Business Park amounts to PLN 15 per sqm. Public administration also expects turn-key finished projects, sometimes even including furniture. And the structure of the office space is unusual. Normally only 20 pct is so-called open space, and the rest is earmarked for rooms and studies," reveals the sales director of UBM.

More, more, more
UBM is currently participating in a number of tender procedures for a combined area of 10,000 sqm. However, representatives of the company do not want to reveal which proceedings they are taking part in. "We are obliged to keep business secrets," insists Jacek Luzar. Łukasz Żelezik also mentions the current activity of this sort of tenant, pointing out that the market is seeing significant interest from public institutions. "The growing share of these entities in overall transactions has helped the Polish market to mature and develop, which is a good thing. A glass façade or the proximity of large commercial entities in an office park will soon become the norm for public entities, as is the case in Germany, France or Belgium. Modern offices mean more effective and efficient work, and consequently savings for all of us taxpayers," he adds. This results from a number of factors, with profitability being the most important. Leasing a new office is less expensive than maintaining their current locations - usually large inefficient buildings. "Indeed, more and more public units are looking for locations in modern office buildings. This is a natural market trend and public administration units are putting more emphasis on the quality and style of their offices. The cost of a major renovation project that a given unit would have to carry out in its current location is so high that it is worth choosing an alternative for a higher rent in a modern building, in the process moving to a class ?A' office area finished to the latest standards," emphasises Anna Duchnowska. A decent modern office for public bodies is not a whim but a justifiable necessity. However, much needs to be done before we can compare the Warsaw office market to the European Union district in Brussels as a location for public institutions, so we still have something to work towards.