Think globally, build locally

At the end of 2015, the total Polish new office supply hit 8.2 mln sqm, while 643,000 sqm was completed over the year. According to the “Property Times Office Poland” report by Cushman & Wakefield, 56 pct of the new space was delivered outside Warsaw. Currently over 1.4 mln sqm of office space is under construction, app. half of which (765,000 sqm) is being developed outside Poland’s capital city. Kraków continues to remain the leader of the regional cities in terms of both the supply and demand for offices. The city’s office market is estimated at 766,000 sqm, which accounts for 24 pct of the total supply in the main regional cities. Kraków is followed by Wrocław (618,500 sqm), which holds a 19 pct share of the total regional supply, and the TriCity, with 567,000 sqm (18 pct).

According to BNP Paribas Real Estate Poland’s forecasts, these three cities are set to strengthen their positions in the next few years, mainly due to the total of app. 565,000 sqm that is scheduled for delivery in the cities by the end of 2017. This is the result of increased development activity. Developers keep starting new office projects, entranced by the magnetic power of secondary cities. “We are developing projects in Kraków, Wrocław, Katowice, Gdańsk and Łódź. This year we are planning to launch five projects in some of the largest Polish cities, including two projects in Wrocław. Our market research shows that these locations are promising. We want to deliver a total of 120,000–150,000 sqm of office space each year, so we are looking for interesting plots in regional cities all the time,” reveals Rafał Mazurczak, the director of the office and hotel department of Echo Investment, a developer that operates in almost every large city in Poland. This view and development focus is shared by Vastint Poland. “Projects located in regional cities account for the vast majority of our portfolio. Our involvement in the regions will continue to grow,” Roger Andersson, the managing director of Vastint Poland, which has projects in Gdynia, Poznań, Wrocław and Szczecin, among others, tells us. The largest projects completed across regional cities in 2015 were Poznań Business Garden (Vastint Poland), Wrocław’s Dominikański (Skanska) and Gdańsk’s Alchemia II (Torus). The total office area under construction in Poland’s nine largest cities (excluding Warsaw) that is to be completed by 2017 comes to 650,000–700,000 sqm.

Warsaw not that trendy anymore?

The main factors that are drawing tenants to smaller cities are the qualified staff and the large number of students who are willing work for the BPO/SSC/IT sector. Last year the demand for modern office space was so strong that in spite of the high and growing supply, the vacancy indexes across Poland did not go up. Only in Poznań did the vacancy rate increase: from 12.4 pct to 15.7 pct due to the record-breaking new supply. Developers confirm the validity of this data. “Last year 50 pct of the area we leased out was in contracts for office space located outside Warsaw. I think that the share might be even higher this year,” says Rafał Mazurczak, the director of Echo investment. According to BNP Paribas’ estimates, the commercialisation levels for projects still under development in the largest Polish cities ranges from 7.3 pct in Szczecin to 41.6 pct in Kraków. “When it comes to expanding our operations across regional markets, we consider projects that comprise 15,000–20,000 sqm gla on average but we do not say no to larger ones like office parks. We are continuing to work on a project in Poznań, where we have a plot ready. We would like to start the construction of the scheme soon. We know the Poznań office market very well,” explains Rafał Mazurczak. This is not a virgin territory for Echo Investment. In 2008 the company developed the Mata Office Park there. Rafał Mazurczak points out that Echo is also very satisfied with its Łódź, Gdańsk and Katowice developments. “We aim to invest further in the cities we are already present in, as well as where the demand for modern office space is still on the rise. This is partly due to the fact that the Warsaw market will be shaped by increased supply over the next few years. Also, we believe that the regional demand for office space, fuelled by the appetite of the business services sector, will remain high,” claims Roger Andersson of Vastint Poland.

Czech Republic leads the way

“Currently the most promising and active Czech local market is Brno,” says Jana Krajčíková, a research analyst at JLL. “It is the country’s second largest office market,” she adds.

Last year the vacancy rate in Brno dropped to 16.5 pct on 2014, down from 19.6 pct at the end of 2014. This means that Brno, where office stock has reached 482,900 sqm, now boasts a lower vacancy rate than Prague, where the rate stands at 16.8 pct. Brno has also only just recently started to lead the way in terms of leasing volumes. “Over the previous few years, the demand for offices in Brno was low. Building owners started to encourage tenants by offering them lower rents and incentives, such as rent free periods,” says Lukáš Netolický of C&W’s office agency. The results of this approach are now clear to see. In H2 2015 alone, 30,000 sqm of offices, including
renegotiations, were signed in Brno. This represents a 9 pct y-o-y increase. At the same time new leases amounted to 25,000 sqm, a 71 pct y-o-y surge. “In terms of office demand, the most active office tenants are IT, BPO/SSC (off-shore and outsourcing services) and manufacturing,” says Jana Krajčíková of JLL. The largest contract of the last half a year in Brno was the 4,000 sqm lease renegotiation by AT&T in Campus Science Park A and the 3,000 sqm Skypicker pre-lease on office space in Campus Science Park C. Brno has been become a popular destination for many international tenants over the last ten years. These include such companies as IBM, Honeywell, FEI, Infosys Technologies, DHL, Accenture, Red Hat and many others. According to the Regional Research Forum, despite the huge demand only one new office building was completed in H2 2015 in Brno – the 1,500 sqm Polyfunkční Dům Smetanova. Much more space is underway, however. “A total of 69,600 sqm of office space in seven buildings is currently being developed in Brno. The largest projects are the 15,200 sqm building ‘O’, and the 15,000 sqm ‘P’ in Areal Slatina and Campus Science Park C (12,000 sqm). In 2016, 54,600 sqm of office space is expected to be completed,” the Regional Research Forum reveals. Still, many more projects are planned: some are due to be completed at the beginning of 2017, while some others are being prepared. As Cushman & Wakefield points out, most of the planned space will probably be finished by the end of 2016 or in early 2017. The Brno market is likely to offer office tenants equally favourable conditions by the end of 2017 or at the beginning of 2018. Rents have increased only slightly so far. The average monthly rent rates for Brno offices were EUR 12.5–13 in H2 2015.

More space in Ostrava

Even though no office buildings are currently being built in Ostrava, the Czech Republic’s third largest office market, the city is increasingly popular among tenants. According to Regional Research Forum, in H2 2015 the Ostrava gross take-up (including renegotiations) reached 13,500 sqm, an 83 pct increase on H1 2015. Net take-up and subleases amounted to 11,100 sqm, a 50 pct y-o-y surge.

In H2 2015 the largest office lease deal in the city was the renegotiation of GE Money Bank’s tenancy (2,500 sqm) at CTOffice Ostrava. At the same time, a total of 47,200 sqm of modern office space remained vacant, which translated into a 22.7 pct vacancy rate, a 1.3 percentage points drop compared to H1 2015, when Ostrava offered a total of 208,400 sqm of modern office space. Class ‘A’ properties account for 71 pct of the modern stock in the city and class ‘B’ properties make up the remaining 29 pct. In H2 2015, one building was completed in Ostrava – the 3,000 sqm Administrativní budova Vratimovská project.

Rents to skyrocket?

At the moment Polish regional cities can boast lower vacancy rates. The average vacancy rate for Poland’s nine largest cities stood at 10.9 pct at the end of 2015. Prime headline rents in new buildings also remained stable in 2015, amounting to EUR 10–15.5 per sqm a month. This could change somewhat in the future because 180,000 sqm of new offices is expected to be developed in Kraków in 2016/2017, Wrocław expects to see 165,000 sqm of new office premises and the TriCity 140,000 sqm. Lublin is set to see the biggest growth in office supply in the near future (23 pct), while the Wrocław and Kraków office markets are to expand by nearly 20 pct. However, C&W warns that all the new space will result in a further pressure on rental rates.

Brno has no office supply problems. This year, for the first time in the history, the city will see the completion of more new office space than Prague. This is quite an achievement. No Polish city has managed to achieve this so far. The main office tenants in Brno are IT and ICT companies (58 pct), which is why the city is often referred to as ‘the Czech IT hub’. Companies from these sectors mainly look for large areas in Brno. The demand from them is one of rationales for the start of several projects with a total of 50,000 sqm in 2016. According to Cushman & Wakefield, this number will represent the highest amount of office space completed in the Czech Republic since 2007. Nearly all the prime projects in Brno are now almost fully leased. Some office properties are even drawing up waiting lists for prospective occupiers.

Investors also spotted the trend

According to the latest report by BNP Paribas Real Estate, the total volume of office purchase transactions finalised last year in Poland set a new record by reaching EUR 1.3 bln. Interestingly, for the first time in Poland’s history the total value of office transactions concluded on the country’s regional markets was higher than in Warsaw. “Investors’ substantial involvement in this market segment and the forecasts of strong demand from tenants over the next few quarters could result in further yield compression, which currently hovers around the level of 6.5–7 pct for the best projects,” says Anna Staniszewska, the CEE director of market analysis and consultancy at BNP Paribas Real Esate Poland. According to a report by the company, development markets concentrated around smaller regional cities and towns still guarantee considerably lower operational costs, the availability of needed staff and, most importantly, significantly lower rents. Developers claim, however, that these towns or cities need to put more effort into attracting investors. Many of the larger development companies are still not entering smaller markets at this point in time. Others are successfully developing projects in Bydgoszcz or Lublin, which are very popular development destinations right now. Their office buildings are finding tenants and there is still demand from more. The biggest players are monitoring these markets but they are waiting for the right moment and a signal from tenants interested in the regional markets. Smaller cities, which are trying to find a place for themselves on the national office and business services map, are now doing everything they can to attract not only tenants but also the developers to give them the office districts they need.