The road out of Mordor

The Polish office market has never had such a varied and rich offer before. Tenants are aware of this and are negotiating hard, while developers are continuing building even though it’s going to Be far from easy leasing all that space

The ‘Mordor on Domaniewska’ Facebook page has been steadily building up a following since it was created in 2013. Its reference to Tolkien’s trilogy, along with the mockery it implies, is by no means without justification. The profile includes descriptions of the everyday lives of the employees who work for companies located in Warsaw’s office basin in Służewiec district – the so-called ‘Orcs’. The incessant crushes in the overcrowded public transport, the lack of other services and the rather long distance to basic urban amenities – these are only a few of the challenges that the army of people working there have to live with on an everyday basis. In addition, the district, which teems with everyday life during the mornings and afternoon peak time, shuts down in the evening and becomes the archetypal office desert. Even the estates that have been built nearby cannot remedy this.

Towards Rivendell

The success of the Facebook page is in itself evidence of a shift in the attitudes of white collar workers. This has already been noted by tenants, and with the current oversupply on the office market and the leverage this gives for negotiating the best terms possible, it is not only better financial conditions they are pushing for, but also the best working conditions for their staff. And they have a lot to choose from. “For the first time in the history of the office sector the Warsaw market has such a varied offer and the vast majority of tenants are able to find offices that perfectly suit their needs and financial capabilities. What is on offer from developers is so broad that you can find offices in the top locations for EUR 25 per sqm per month and also some where the rents are only around PLN 40 (EUR 9). Some time ago rents in Polish currency were a problem for developers. However, in order to respond to tenants’ growing requirements, different financial methods are increasingly being offered to make it possible to secure yourself against currency exchange risks,” explains Daniel Bienias, the tenant representation director in the office agency at CBRE. “In Warsaw we have at least a dozen or so examples of older class ‘B’ premises, which used to be class ‘A’ properties, and are characterised by excellent locations in the city centre or on the outskirts. Tenants are able to accept a slightly lower standard but the owners are obliged to improve the quality of the space,” adds the director at CBRE. However, although there is no need to revolutionise older buildings, cosmetic changes are still not enough – a concept needs to be devised under which the building will not grow old and will still be able to draw in tenants. They latter are now much more educated and will not be convinced just by a few renovations to the reception area. A high quality technical environment is needed, with the right air-conditioning, improved ventilation, an IT infrastructure and the possibility of arranging the area as open space. Such buildings should also offer a high standard environment, that is, they should be in good and fashionable locations with many restaurants nearby. This is particularly appreciated by younger employees, as they prefer to live in city centres with all the attractions and possibilities on offer – and tenants recognise this. “When we were looking for new premises for Westwing Polska we were interested in a top quality building in the centre of Warsaw. The location of Spektrum Tower in the heart of the Warsaw business district has excellent access, which is a significant advantage over other locations,” explains Tomasz Kasperski, the founder and general director of Westwing Polska, after signing a lease for 1,000 sqm in the office building. However, location is not everything. “Because we operate in e-commerce, the latest fibre-optic network in the building is of key importance for us. Another argument in favour of the tower was its simple and subtle interior design. The aesthetics of the place is important for us because one of the most fundamental aspects of Westwing’s operations is inspiring and educating users in terms of design,” explains the founder of the company.

Tenant migration mostly takes place from older buildings to newer ones. One example of such a transaction is the move of Ove Arup & Partners from an office building on ul. Królewska, in the inner city centre, to a new complex – Gdański Business Center, on the northern boundary of the central Śródmieście district of the capital city. “Our employees are used to easy access to their workplaces, which is why we were looking for an office with excellent transport links to every district in Warsaw. The fact that the latest technology has been used in the building is also not without importance for us,” says Andrzej Sitko, the director of Ove Arup & Partners, which is to occupy 1,600 sqm in the building. The decision to choose a specific location has to be made in a well thought-out manner, after a detailed financial and quality analysis. “Developers who are purely in the process of building are very flexible. In order to lease their space they have to implement a very aggressive lease policy. They are able to offer a variety of incentives, financial contributions, rent holidays and interior fit-outs. In order to compete on the market they have to offer packages in which the tenant does not have to pay anything – they simply move to a new finished office according their needs. There are even cases where the developer sponsors the furniture,” claims CBRE’s expert.

Rent is not everything

The large amount of office space under construction also means that there is a wide choice of the latest facilities under construction. The situation is interesting for tenants because rents are still being pushed down. “Furthermore, the growth in the competition is encouraging developers to make more concessions, not only when it comes to the financial terms offered but also in terms of contract provisions,” argue Colliers International’s analysts in their latest report. “Financial issues remain a very important element for practically every firm. It should be noted that the expenditure required for leasing an office normally constitutes app. 7–8 pct of a firm’s costs, which is a significant proportion of the profit and loss account. There are some voices saying that tenants are now able to spend higher amounts to provide their employees with such comforts, since they consider the interior design and the access to public transport to be very important aspects,” remarks Daniel Bienias. The tenants themselves speak in a similar vein. “Multifunctionality, the quality of office space and a convenient location – these are the main reasons for where we decided to move,” explains Tomasz Nawrocki, the managing director of Sad, the largest seller of Apple products in Poland, which has moved to the Plac Unii complex in Warsaw.

Quality counts everywhere

Ensuring a suitable provision of amenities for employees is not exclusively the domain of firms that lease offices in Warsaw. Projects offering the right quality of space also have a crucial advantage in regional cities. “Having the right quality of space for our growing shared service centre, the ideal location, easy access from all directions and extended infrastructure including a medical centre and retail and sports facilities in close proximity – these were the criteria our ultimate location was supposed to fulfil. So it was not just office space that Olivia Business Centre offered,” says Robert Góra, the director of the ThyssenKrupp shared service centre in Gdańsk, which has leased an area of 5,000 sqm. In addition to this, Capgemini Polska, which opted for an office area of 5,600 sqm in Silesia Business Park in Katowice, paid particular attention to the location, ease of access and the quality of office space as well as the flexibility of the contract. “We have long-term development plans related to Katowice. It is a strong location for projects in the modern business services sector, enabling us to continue our dynamic growth, with access to educated staff as well as a developed transport and office infrastructure. We decided to open our offices in Silesia Business Park to provide our team with the most comfortable working conditions of the best standard in the area, ease of access to different districts of the conurbation and to have the opportunity for further expansion at the same time,” explains Marcin Nowak of Capgemini.

The requirements of tenants from the BPO/SSC sector are also higher than they used to be, so developers in this segment of the office market are having to provide much improved products, particularly considering the fact that such tenants are responsible for the majority of leases in provincial cities. “In 2014, BPO/SSC centres leased app. 268,000 sqm of offices outside Warsaw. This clearly shows that if it was not for the business service sector, the office market outside the capital would not have developed at such a speed or reached such a scale. It might have even stayed at the same stage it was a few years ago,” claims Mateusz Polkowski, the director of the market research and consultancy department at JLL. “BPO/SSC companies are responsible for 81 pct of the lease contract volume in Wrocław and 69 pct in Kraków,” he adds. The business services sector is currently undergoing one of the most dynamic growths of any sector of the Polish economy. According to ABSL, foreign service centres themselves employ over 130,000 people across the country and the number is expected to grow. “McKinsey forecasts that employment in the sector could even increase to 600,000 people over ten years,” says Jacek Levernes, the president of ABSL and a member of the board at HP Europe. “The impressive development of the sector has led to the revival of the job market in the regions and is also transforming the business mentality of some of the largest cities in Poland,” he adds.

Interestingly, the sector is increasingly looking towards Warsaw. It has actually been present in the capital for some time, but so far the city has not managed to attract a significant slice of this business, mainly due to the local rent levels. However, the access to large numbers of qualified specialists is beginning to draw in companies specialising in the supply of more complex outsourcing services. “Apart from traditional sectors such as services, financing and consulting, Warsaw is also attractive to tenants from the BPO and SSC sectors,” claims Paweł Skałba, a partner and director of the office leasing department at Colliers International. He gives as an example of this phenomenon KMD Poland, an IT supplier for the governmental and private sectors in Denmark, which is to move into 6,000 sqm in the Gdański Business Center. “Warsaw is attractive even for Romanian and Bulgarian based companies from this sector that provide subcontracting services for western clients. They are not even discouraged by the rents. Such companies need a team of qualified specialists. And they have their requirements in terms of the location and office standards. Some hi-tech companies, such as from the IT and computer game sectors, pay particular attention to the location and standard of the offices. The level of rent is of secondary importance, as it is the prestige and comfort that they can offer to their employees that counts. The ‘Google effect’ is very much in evidence here,” adds Paweł Skałba.

Developers build, tenants arehappy

According to Colliers International, 1.2 mln sqm of new office space is currently under construction in Poland, 673,300 sqm of which is in Warsaw. Regional cities are also characterised by strong activity by developers. Most of the new office space is under construction in Kraków, Wrocław and the TriCity. This means that tenants will have an even greater choice and developers will have to try even harder to lease their space, even though they are already approaching the limits of their abilities in this department, as people in the sector are pointing out. In order to keep their show on the road, the larger players have to build and sell constantly. However, there are some voices saying that this is becoming unprofitable. The real estate market is dynamic but not dynamic enough for rents to change dramatically over a month or two. There are people who claim that we are currently scraping along the bottom and if tenants want to do good business, now is the time. If we reach a vacancy rate of 18 or 19 pct in Warsaw, there will of course be better negotiating conditions for tenants; but when it comes to large-format tenants, who have to plan their moves well in advance, they might not be able to take advantage of this more favourable environment. Meanwhile, developers are having to bend over backwards to satisfy tenants’ needs and to monitor the competition closely. They need to do all this in order to ensure that their projects hit the supply gap. Besides, tenants are also closely observing the real estate market and trying to negotiate contracts at times that are most beneficial to them. There has been more talk of flexibility on the leasing market because corporations have adapted their strategies in this regard. They now have to be flexible enough to change their model of operations in a short period of time – and this has meant a more changeable demand for office space. “Contracts are increasingly often featuring provisions that make it possible to rapidly increase and decrease the area leased by as much as 15–20 pct. Tenants are also giving themselves this flexibility by negotiating sub-leasing rights with the owners,” remarks Daniel Bienias. The situation on the office market in Warsaw is a particular challenge, as the vacancy level could increase to 18–20 pct within the next two years. The general demand among tenants is quite strong, though, and the absorption – the entry of completely new tenants and the extension of current contracts – has been good in the last few quarters. “The absorption could turn out to be higher than in 2014, though a great deal will depend on whether the negotiations of large contracts do not stretch out into 2016. A few leasing contracts for app. 7,000–12,000 sqm each are currently being negotiated,” reveals Paweł Skałba. There is much optimism over the general economic trends for the near future and this is creating favourable conditions for the development and maturity of the Polish office property market. There are many challenges that lie ahead for players in this sector, but they could be regarded as a natural part of the rigours of competition. The winners will be both the developers, who will become even more professional, and the tenants, as they will be able to obtain an ever-improving product. Office workers should also have reasons to be more cheerful. Admittedly people are not going to stop referring to ’Mordor’ on social networks at any time soon, but the offices there should eventually resemble those in more developed markets.