A profitable mix

L arge scale multifunctional projects are enterprises suited for hard times. The future lies in moving away from the old monoculture of development. In past decades, the vogue had been for creating a form of architecture that separated the different functions of buildings. One example of this was the urban plan to create a new capital for Brazil with Brasilia, which was designed by Lucio
Costa in 1957. However, as it turned out, this kind of urban area failed in what it had set out to do. Nowadays people expect something completely different from a town - a place where they can live and work," believes Jan Motz, the presidentof the management board of Capital Park.

The investor, through its Art Norblin subsidiary, is preparing for the construction of a multifunctional project on the site of the former Norblin factory in Warsaw. The ArtNorblin complex, which is designed to be vibrant with life and fully integrated with the city, is to be built over an area of 2 ha on ul. Żelazna (on the boundary of Warsaw's central Śródmieście and Wola districts).

The PRC Architekci studio is responsible for its design, according to which the complex will have a useable area of 61,000 sqm, including 39,000 sqm of offices (on the +2 to +8 storeys). The -1 to +1 floors have been designated as service, retail and cultural areas (22,000 sqm). "The documentation for the building permit application has already been submitted and we hope to receive this in Q1 2013," explains Jan Motz. Retail and service areas will also form a significant part of two other Warsaw projects: Eurocentrum Office Complex, which is being built on Al. Jerozolimskie, and the planned Royal Wilanów. For the former project, 2,200 sqm (plus 63,600 sqm of offices) is planned, while 7,000 sqm (plus 28,000 sqm of offices) is to be built in the latter.

Bargaining chip in negotiations
"Drawbacks? No, I do not see any drawbacks in projects of this type," insists Marc Lebbe, the president of the management board of Liebrecht & Wood, which is developing the Plac Unii project in Warsaw together with BBI Development. The scheme, designed by APA Kuryłowicz & Associates, features 41,300 sqm of office space and a retail area of 15,500 sqm, and is due to be finished in the autumn of 2013. "Offices combined with shopping centres are easier to rent than offices on separate plots outside the city centre. A shopping centre provides a varied catering offer, which in the case of Plac Unii will be five restaurants and bars; whereas in a traditional office building we are condemned to the canteen. Besides, it is possible to do a bit of quick shopping after work, something that seems particularly convenient when the weather is like it is at the moment, with winter making an early appearance at the end October," claims the head of Liebrecht & Wood. Is this the sort of advantage that moves the scales in the favour of a multifunctional project? "Indeed," argues Marc Lebbe, "it was one of the arguments in favour of the project for Grupa ING, which has leased an area of 12,103 sqm in Plac Unii. Of course, the key issue in projects of this type is providing separate entrances to the shopping centre and the office building."

For tenants an important argument in favour of operating from a multifunctional project is having clients and business partners in the same building. Other factors that come into play include the recognisability of the brand and the prestige of the building. The names of shopping centres are much better recognised than those of office buildings. "I think that most Warsaw people know what Złote Tarasy is, but the names of even the biggest and the most recognisable office buildings are only familiar to a small group of people, usually connected with real estate and construction," emphasises Ewelina Kałużna, the head of the office leasing department at Jones Lang LaSalle. In her opinion, a small, but significant, group of companies interested in this type of project are firms from the retail sector, such as retail chains, which apart from operating stores also need office facilities for the administration side of their operations.

More good points...
The list of the additional amenities designed to make everyday life easier is much longer. On your way to work you can, for example, take your shirt to the dry cleaner's and pick it up on the way home; you can also take your shoes in to be mended, work out in the fitness club or go the cinema - and even squeeze in a quick bit of shopping for supper and breakfast the next day. "When it comes to multifunctional projects that combine office and retail functions, people appreciate the fact that shopping centres are built in places that are easy to reach. And if it is slightly harder to get there, the centre's owner provides transport for potential customers, such as laying on shuttle buses. So an office tenant is provided with transport for its employees. But the times for customers of the centre and office tenants using the car parks do not clash, which can be seen with Złote Tarasy or Blue City in Warsaw. We work from the morning until the afternoon, while most traffic to and from shopping centres is concentrated in the afternoon and evening. I think this the most important advantage of combining two functions in one facility. However, it also gives rise to some disadvantages, such as the need for increasing the security of the car park area," stresses Ewelina Kałużna. But are tenants prepared to pay more for these amenities? According to the experts, they are not. The rent level is 100 pct related to the location, the quality of the building and the current market conditions.

...and a few drawbacks
Marek Paczuski, a director in the investment department at DTZ, points out a number of drawbacks, however: "Such properties are generally harder to commercialise because of tenants' different expectations over individual area types. For instance, office tenants could experience discomfort at work due to the noise generated by the customers of the retail section. The issue of the management of the entire complex is also significant, as it is harder than in the case of single-function properties and has to be carried out with some skill. Apart from the operating costs, there is the issue of the marketing budget for the shopping centre, something that is not so much of a problem for offices. Besides, due to the much higher flow of customers the retail section is subject to much more rapid wear and tear," he says. Experts emphasise that the management costs of a shopping centre are higher than those for an office building, partly because the communal areas are much larger.

Another difficulty involves raising an amount of capital large enough for such schemes - especially since the end of 2008, when the bank tightened the cash tap. According to research recently carried out by EC Harris, in eight European countries, including Poland, banks are most often and most eagerly tending to finance office projects (26 pct of the loan volume), while shopping centres come second (21 pct); but the banks' interest in retail projects has fallen by 5 pct since 2011, whereas a 4 pct increase has been registered for residential projects. "The message is clear - offices are the basis of such projects," feels Piotr Rusinek, the director of the lenders and investors team at EC Harris Polska. "However," he adds, "I think that in the case of a multifunctional project, where retail, entertainment and offices are mixed in the right proportion, finding the financing should be possible, under certain conditions. The project needs to have pre-leases secured for around 70 pct of the space - that's one thing.

The second is that the project needs to be designed in a way that makes it possible to carry it out in a few stages. It is important for the separate elements of the project to be able to function independently - to have the technical solutions to ensure this, making it possible to sell the complex to investors. Another issue is the recent trend for bringing in a financial partner to provide the equity for the project. A good example of this is Europa Capital for TriGranit's Poznań City Center project. The large scale of such projects requires considerable funds, so banks diversify the risk by forming consortiums. And it is hard to reconcile the different interests of multiple partners." Liebrecht & Wood was one such partner for Plac Unii. The project, which was the brainchild of BBI Development, was later joined by Liebrecht & Wood; and then early this year financing was obtained from Pekao bank. "Our equity was higher than the usual for office or retail projects. Besides, we had managed to secure lease agreements, such as with Grupa ING," recounts Marc Lebbe. Experts currently feel that the banks at the moment usually expect the equity to be at around 35-40 pct. The president of the management board of Capital Bank is considering bringing in a potential partner. "There is a lot of interest in the ArtNorblin project. We are considering a partner that would add a certain value, mainly in terms of a financial contribution," reveals Jan Motz.

Time for some shopping
The products that tend to be entered by investors are "clean" offices and "clean" shopping centres. The largest share of Investor activity over the last few years has gone into retail facilities (usually around 45-50 pct or EUR 1.22 bln in 2011), while offices change owners the most often (usually 40-45 pct of the transaction volume - or EUR 1.16 blnin 2011, when this came to nearly half of all the transactions) - according to DTZ's data. "Investors are not very willing to buy projectsbthat include a number of functions under one roof that have not been functionally or legally separated," says Marek Paczuski. As he explains: "This is due to a number of reasons: commercialisation is more difficult, which has an influence on the security of the income, and the potentially harder exit from such a project. In their strategies investment funds usually have clear instructions regarding their ultimate property portfolio, in terms of what percentage of it should go to offices, retail facilities and, let's say, warehouses. Multifunctional projects complicate this approach and lower the flexibility of the fund manager - for example, when a decision has been taken to lower the allocation of the offices in a portfolio, and this also forces them to also sell the retail section.

Developers are generally aware of these limitations, thus the relatively small supply of this type of development. Besides, it can become something of a vicious spiral: investor interest in buying them is lower, therefore less liquidity is available for this type of project. For instance, when the time comes to wind down a fund and sell its assets, it could be harder to liquidate such properties, which, in turn, will negatively impact the price." What kind of yields can developers expect? According to the expert from DTZ, for a building or complex which includes retail and office functions, the investor will expect a discount on what is usually the case for either a purely retail or office project. "Whether this amounts to 50 basis points or more depends on the actual property," explains Marek Paczuski.

Ch, ch, ch, ch, ch... changes
A multifunctional project, whether it comprises a number of facilities or only one building that combines a few functions, should fulfil a number of basic conditions. Separate entrances and lifts to the offices are the basic criterion that potential tenants pay attention to. The location is another key issue, as it is a crucial factor with properties regardless of their type. A location that is excellent for a shopping centre might not be an attractive setting for an office building. "If you open a multifunctional project to the outside area, as in the case of ArtNorblin, a project incorporated into an urban fabric with a high density of apartments, you need to remember to maintain a level of privacy," explains Jan Motz. "In our enterprise," he adds, "we have given up on the idea of a residential function partly because of the lack of privacy due to the retail component, which will be full of visitors all the time. Furthermore, a lot of new estates are being developed in the vicinity and more are planned." When you look at the direction of the development of modern cities you need to consider the dynamics of the changes over the last ten years. Remembering his frequent visits to the United States, Jan Motz provides the example of Westchester district in White Plains, which has been dramatically transformed over the last few years due to the introduction of new functions. The same changes are happening in Poland. "It only needs us to go back 20 years to compare Warsaw at that time with the current city and trying to imagine what it will look like in ten years' time. I believe that the surrounding area will change drastically. This will depend on the growing affluence of consumers, and also upon the development of infrastructure," concludes Jan Motz. It is worth making sure that these changes come about as quickly as possible.

Krzysztof Domaradzki architect and urban planner and lecturer at the faculty of architecture of the Warsaw University of Technology

Keeping it urban
There was a trend for many years, originating in the modernist period, for dividing cities into functional zones.
This was a reaction to 19th century cities, where factories were built in the centre.

The thinking was that a clear division into functional zones - into where we live and sleep, and into others where we work - would improve the standard of living. However, it was quickly realised that such mono-functionality destroys the urban feel, leaving the urban space less friendly. This is the case because we want to and have to do shopping every day, as well as using different types of services or sorting some official matters. The modern urban environment, particularly in such inner-cities as in Warsaw, should be multifunctional and diverse.

It is also worth creating several local centres to become the focus of city life in big conurbations. It is easy to build up the city centre with office buildings, but much harder to prevent it from coming to a standstill after 5 pm and instead make it more vibrant. In order to achieve this a suitable programme needs to be adopted that is not only commercial but publicly-minded. The city should control the development of important areas. Local zoning plans are too general and allow too much freedom. A developer either has good taste and a sense of beauty - or not. However, more often it is basic economics that rules. An improvement in the quality of urban space must result from society's grass-roots need to live in a better organised, more aesthetic environment. There are different kinds of public campaigns nowadays, such as planting trees in residential estates. But this is still not enough. The problem lies in the fact that too few people understand what the shaping of urban space is about, and even if they have good intentions, they do not know how to do it, resulting in quite the opposite effect. A good example of a multifunctional project in Warsaw that has existed for many years is the "Eastern Wall" of ul. Marszałkowska - Pasaż Wiecha - designed by Zbigniew Karpiński. It was intended to integratethe existing residential blocks, lower-storey buildings and department stores into a well-planned public area. But after the project some of the former character of the place has been lost. In my opinion it has become less friendly for the locals. The city needs a new area where we can enjoy spending our free time. And there is a need for many such areas in Warsaw.