Six of the best

Ewa Andrzejewska, ‘Eurobuild Central & Eastern Europe’: The office market in regional cities – i.e. the big six: Kraków, Wrocław, the TriCity, Łódź, Poznań and Katowice – has been growing more emphatically over the last few years. The increasing demand has been driving new projects.

Tomasz Buras, managing director, Savills in Poland: Last year was a very good one for regional cities: Kraków and Wrocław had extraordinarily impressive figures, as well as Łódź. The best performer, Kraków, ended 2016 with close to 188,000 sqm of offices leased, which makes it the unquestionable leader of the regions. Wrocław came second with demand of 124,500 sqm and the TriCity was third (93,200 sqm). The next positions were taken by three cities of a similar scale: Łódź (66,700 sqm), Poznań (64,100 sqm) and Katowice (40,900 sqm). I think the fact that the average transaction in Warsaw was 1,030 sqm and smaller than in regional cities (1,280 sqm), is important and worth pointing out. Kraków is the leader here again, with nine transactions for areas in excess of 5,000 sqm. This was followed by Wrocław (8 transactions) and Łódź (4), ahead of the TriCity. Many contracts in these cities ranged from 2,000 sqm to 5,000 sqm – and 17 of these took place in Kraków.

Where does all this activity stem from?

From the development of service centres – some began their operations about 10–15 years ago, then they expanded, developed, and now operate on a huge scale. Expansions constituted from 4 pct up to even as much as 14 pct of the demand. We have been observing a similar, 10 pct trend in Warsaw. On the other hand, we also have new centres that are not as conservative: this sector is proving that it is worth being present in Poland, that there is adequate infrastructure in place, there are the skilled people needed – so they are launching their operations in a big way, starting with a few hundred workstations.

Are developers keeping up in terms of supply?

Yes, we are in the middle of a strong development cycle. However, it is worth noting that the vacancy level has not increased, but on the other hand it can be quite high in some cities (Wrocław – 12.5 pct, Katowice – 14 pct). Only Kraków (7.2 pct) and Łódź (6.2 pct) are below 10 pct. However, developers are building speculatively and with some boldness as they can see the development potential. In 2017 the supply of modern office space in Kraków will exceed 1 mln sqm – or more precisely, it will be 1.1 mln. Wrocław will reach the same level a year later and the TriCity will have to wait a bit longer. By comparison, Warsaw reached 1 mln sqm in 1999. In 2017 all six main regional cities will have a total of over 4.1 mln sqm of modern office stock, while Warsaw will have almost 5.4 mln sqm. At the end of 2018 there will be 4.8 mln sqm in the regions (six major cities) and 5.8 mln sqm in the capital. Warsaw has been growing rapidly, but the regional markets are catching up with it. Liquidity is the most important factor for a lot of developers, the awareness that if they change strategy they can exit a project and sell it relatively quickly if need be. The most active developers on the regional markets include Skanska, Vastint and Echo Investment and several local players, such as Buma in Kraków, Garvest in Poznań, Torus and Allcon in the TriCity and Archicom in Wrocław. It is not unthinkable that Ghelamco might return to the regions, while companies that have not built there so far might emerge, such as HB Reavis, which was considering such an option at the end of 2016.

Are leases longer than five years also increasingly popular, such as in the capital city?

Yes, they are. There are more and more long leases, for example, for 10–12 years with an earlier exit option – but also with expansion options, which is an extremely significant point for investors. This shows that the operations of the companies already present on these markets are sophisticated and of more strategic value. This is not merely basic client support via call centres and simple bookkeeping services that can be easily relocated to a different city or country. Every centre of this sort is an important location in EMEA and often global structures. Examples include ABB in Kraków, the recently announced Swarovski centre in Gdańsk and a transaction we advised on: Dolby Digital in Wrocław – Dolby’s largest centre in the world outside the USA. As an interesting side note, I will add that the growth of the service sector generated a 15 pct boost to the demand for hotel services last year. However, coming back to the profile of service centres, they are often R&D facilities – innovation centres employing software programmers, for instance, for household appliance manufacturers. In others we have more sophisticated human resources processes and advanced bookkeeping services. Of course, we should not forget that the job market is currently rather challenging, with unemployment falling to a low level. The demand for BPO/SCC centres has also increased in Warsaw.

Up to now we have been discussing the BPO/SSC sector. Are there any other sources of demand?

Tenants starting new operations, that is, start-ups, are a new group. These are companies that start out in smaller towns, but if their idea passes the incubator stage they find investors and start to grow very fast – exponentially. Developers have reacted quickly to this trend, focusing on the expansion of co-working and temporary offices. For example, Echo Investment has created the CitySpace platform for its large buildings and business parks to be able to provide offices with small areas for short leases and also to help such tenants move to their eventual larger offices. Some interest for office space in regional cities is also coming from the so-called big four – EY, PwC, KPMG and Deloitte – as well as the larger law firms and companies related to business operations in certain regions of Poland. In Silesia these tend to be connected with the automotive business and heavy industry.

What are the rent levels like?

We have not been seeing any major changes. One or two projects are more expensive, with better locations in a city or those that came onto the market at a better time; however, the starting rates are generally around EUR 13–14 up to 15 per sqm.

And are the incentives equally as attractive as in the capital city?

Incentive packages are generally half the length of those in the capital city. Thanks to this the contracts are more transparent, and from the point of view of the investor, this situation is better and more stable.

Which will be the next city to join the ranks of the big six?

It’s true that we have recently been having slightly more enquiries concerning cities from outside the big six. This is still on a small scale, but there is more interest in, for instance, Lublin and Szczecin. Białystok, Rzeszów and Opole are also slowly developing. So far the main problem in these locations has been the lack of modern space that is available straight away; but provided a modern office building emerges in the city, large companies can suddenly start considering it as a potential location for one of their branches. We are currently working on two projects for Lublin: one for a very large pharma firm and the other also for an international company. Why Lublin? For example, because of the pool of labour available.

For Savills – and probably the other consultancies too – the regional markets now constitute a very significant part of our business. Savills has had branches in Poznań and Wrocław since 2007 and 2008, while we opened our Kraków branch last July. Now we are considering the TriCity.