Pretty vacant – but sitting pretty

Empty offices in the capital of Poland currently make up as much as 14.1 pct of the city’s total stock, according to the Polish Office Research Forum (PORF). This constitutes a y-o-y increase of 1.1 percentage points, but the growth dynamics in terms of vacancy is particularly noticeable when compared to the final quarter of 2015. From this perspective, the growth is almost 2 pct. This represents an area of app. 672,000 sqm of immediately available office space (growth of 100,000 sqm over one quarter). It was the completion of 113,000 sqm of offices in Q1 that was the main factor behind the sudden surge in the vacancy rate.

Analysts unconcerned

“In 2016 we are passing the peak of the supply wave in Warsaw. An office area of almost 280,000 sqm was completed last year, but this year it will be app. 480,000 sqm and next year there will be another 390,000 sqm. According to our forecasts, the supply peak will mean that vacancy will be pushed up to 16 pct by the end of this year,” was the explanation given by Tomasz Buras, the managing director of Savills Polska, to Eurobuild TV. Apart from the completion of the larger number of offices in Q1 compared to last year (a 29 pct increase), PORF’s analysts have also noted tenants’ reduced appetite for new space. An area of 142,000 sqm was leased at the beginning of this year in Warsaw compared to 170,000 sqm a year earlier. “We are less worried about the vacancy resulting from the completion of new space. The fact that there is vacancy in older office buildings is more significant for the market,” believes Tomasz Buras.

Chance for investors

His optimism is shared by Richard Aboo, a partner and director of the office department of the Polish branch of Cushman & Wakefield. “We should not be too concerned. The office market in Warsaw is healthy. We had an excellent last year and there’s much to suggest that this one will also be successful,” he argues. “The current growth in vacancy is a result of the increased supply and this is no surprise to us, but we need to take note of where the vacancy emerges. These are mostly older buildings in less attractive locations. They represent a challenge for their managers, but also a chance for opportunistic investors who might come up with a fresh concept for their future functioning,” insists Richard Aboo. If investors accept this scenario, they will certainly be able to make a mark for themselves. “At the end of 2015, app. 74 pct of the vacant office area in Warsaw was located in buildings aged five years or older. Office buildings more than ten years old amounted to 45 pct of the vacant office area. Withdrawing properties from the market for redevelopment or changing the function of older office buildings abandoned by their tenants has a positive impact on the vacancy rate,” believes Mateusz Polkowski, a director in the market research and consultancy department at JLL.

There should be no shortage of parties interested in Warsaw offices. “We are expecting a further influx of new capital from Canada, Australia, South Korea, China, Singapore, Malaysia, Hong Kong and South Africa,” says Piotr Mirowski, a partner at Colliers International and director of the investment consultancy department.

Developers staying calm and flexible

Misgivings also cannot be heard emanating from developers, at least not on the record. “We do not see any great threat from the growth of vacancy in older buildings, since they are designed for other users than our projects are. Because of this we are planning new projects in Warsaw. Browary Warszawskie is a good example of this. We can see that the market is very competitive, leading to the growing requirements of our tenants,” says Karol Klin, the regional director of Echo Investment.

Magdalena Kowalewska, the new operations county manager of Immofinanz Poland, is also accentuating the positives. “Since finalising the full acquisition of Empark Mokotów Business Park in summer 2015, we have managed to sign leases for a total of around 30,000 sqm. Furthermore, we are also succeeding in terms of leasing out our remaining office portfolio. The situation in the office sector in Warsaw has been challenging for some time. But we strongly believe that having an adequately diversified portfolio with the right offer for particular clients as well as being flexible have played a major part in our office success in the Polish capital.”

However, the situation remains challenging, and developers, even though they are painting a pretty picture, are aware of them. “On the one hand, 2016 could be one of the most demanding years in history. On the other, those developers who are monitoring the market, listening to tenants’ needs and offering tailor-made solutions can rest assured. The growing supply of office space and the high vacancy rate will affect the owners and landlords of older class ‘B’ buildings. If they want to gain new tenants, they will have to show more flexibility than they have so far, and sometimes they may even be forced to carry out renovations to a larger or smaller extent, depending on the technical condition or standard of the building,” argues Stanislav Frnka, the CEO of HB Reavis Poland.

The majority of market players believe that it will be older office stock that will bear the brunt of the excess of vacant space. This is maybe the case, but it is not the whole truth. “It will not only be the owners of the older office buildings that particularly rent well in the centre (11–13 pct vacancy in five-year-old buildings or older in the CBD and the fringe) who will be faced with a significant challenge, but also those developers who are commercialising their facilities that are under construction. For the buildings that are scheduled for completion this year in the city centre and fringe, 50–55 pct of the space is still available for lease, while up to 70 pct is still waiting for tenants in all the office buildings that are currently being developed in this district (with planned completion dates in 2016, 2017 and 2018),” points out Katarzyna Gajewska, a senior consultant in the consultancy and market analysis department at CBRE. She expects the vacancy at the end of the year to exceed 16 pct. “In 2017 it could grow further, to 18–19 pct. With such a large supply of buildings under construction this is no cause for alarm – it’s just that the market needs a little more time to absorb the new space,” she adds. The owners of older buildings have one more ace up their sleeve. Even considering the quality of the space they have at their disposal, the prices they are offering are attractive – EUR 8–10 per sqm is no exception. This is the case because the loans on older buildings have generally already been repaid, but for newer ones the revenue will still have to be split with the banks. What is for certain is that the Warsaw office market has entered a very interesting development phase. The question of who will win and who will lose is clearly an interesting one, but the most important thing is that the market remains dynamic.