Years of plenty still lie ahead of us

Rafał Ostrowski, ‘Eurobuild CEE’: The economy has been slowing down in Poland and globally. How will this impact the Warsaw office market?

Mikołaj Laskowski, head of office agency, BNP Paribas RE Poland: This year and the next will definitely be good for developers in Warsaw.

Małgorzata Fibakiewicz, managing director, office class sector and strategic projects, BNP Paribas RE Poland: We certainly have a good year ahead of us. However, due to the shortage of space I think that tenants should speed up their location decisions. 2014–2017 were more laid back in this respect. Now they have to realise that dragging out such decisions can result in being left without the particular premises they had their eyes on or without the features that were important to them.

Why?

ML: Because we have an unprecedented situation on the market. It’s only the beginning of the year, and within the city centre and near centre it’s difficult to find a unit of more than 5,000 sqm that a tenant could move into in 2020. All the larger spaces that will be delivered during this time have already been leased. This is a situation that we have not had so far in Warsaw.

What percentage of the space in the centre is already covered by pre-leases?

MF: Around 45 pct of office space in projects that are currently under development in the city centre is already leased.

I remember being asked some
anxious questions a few years back about the possibility of over-supply on the Warsaw market in 2020 and 2021. Was any of this justified?

MF: When developers started planning the almost mass – in terms of volume – development of buildings around Rondo Daszyńskiego a few years ago, the obvious question arose of whether there would be enough tenants for all this space. However, this coincided with a few phenomena that were to the benefit of the neighbourhood, such as the deteriorating reputation of the Mokotów business district due to infrastructure problems that arose there. We also saw a greater desire from some tenants to move closer to the city centre. The shared services sector was also growing very rapidly at that time. Some of those companies expanded into regional cities, of course, but also within Warsaw. As more buildings appeared, it gave tenants who could no longer grow in the premises they had a new opportunity to relocate. The financial services sector, which needed large volumes of space, was also thriving back then and a few consolidations took place. A number of such companies then decided to move into the central zone, due to it being the geographical heart of the financial sector in the country.

ML: We didn’t have so many high-rise buildings back then, either. Now you can see just how eager companies are to move into skyscrapers.

Mikołaj Laskowski,
head of office agency,
BNP Paribas Real Estate Poland

The demand for offices in Warsaw hit 878,000 sqm in 2019 – a record
figure. Will it be higher in 2020?

MF: That year was really special. The two sectors that generated the largest demand for offices were the financial sector and the shared services sector. MBank’s lease of 45,600 sqm in Mennica Legacy Tower was the largest in the city’s history. Is there a chance of a repeat performance this year? Probably not. The growth rate in the shared services sector has started to subside. And this is not due to the fact that on the country level we don’t want to have such centres in Poland any more. We have simply started to run out of people, and thus labour costs have increased. Therefore, someone making a location decision would probably consider whether to choose regional cities other than Warsaw. And if not regional markets, then perhaps in neighbouring countries? So I’m not expecting record-breaking demand this year. Nevertheless, it will continue to be stable. And looking back, the demand has actually been steady for the last few years.

ML: The demand will be quite high, although I agree that it probably won’t break any records. However, given that the buildings to be completed this year are already virtually fully-leased, new supply will not grind to a halt. The space that is now being leased is for early 2021. The new supply did grind to a halt in recent months, so we have skipped a cycle and now we are leasing ahead. It will take some time for it to get back into balance. Maybe one or even two years.

The vacancy rate in the much-
maligned Mokotów district has now reached 13.4 pct. What will it be like in the future?

ML: If we look at this more closely, a lot of this free space is in the older buildings, which are largely empty and are now waiting for ​​the owners to come up with some new plan for them. Either they will renovate these or change them into residential buildings. There are also a lot of buildings that have some but not huge amounts of vacant space across the district, which adds the total. But this will gradually decrease. The vacancy rate will also fall when buildings are demolished or repurposed, and such changes are probably on the cards. The vacancy there may therefore appear to be very high, but if we look at it more closely, it may not be as serious as it seems.

MF: I would say that the Mokotów business district in Służewiec was also a kind of lesson for the local authorities, developers and tenants themselves. It was a district designated for office projects and built almost from scratch. And this was a mistake. Because the office projects were not followed by the right mixed-use development and infrastructure. So the district basically died after business hours. Now it’s changing and will continue to do so, but there’s still a lot of vacancy.

ML: I think it will always be a place where tenants will always be happy to occupy buildings. Because not all the buildings are that old. The transport links have certainly improved. Służewiec has undergone something of a transformation, too – new residential blocks have been built, so there’s a bit more life there. Many of these apartments are available to employees and can be rented. Hotels, which had also been lacking in the district, have also opened. So the district will continue to change and to keep on functioning. But as Małgosia mentioned before, there is a huge window of opportunity for function change, remodeling and repositioning for some of the properties in the district. Hence there will be a chance for very attractive mixed use offer for the tenants as well as the residents of this district.

What can we expect for the Warsaw office market in the near future?

ML: The importance of service and retail in office buildings will continue to grow. The pace of life entails that we need to have everything close at hand – everyday life services, such as pharmacies, groceries, dry cleaners, hairdressers… the basic things we need and use every day have to be as close to where we work as possible. However, this has been a noticeable trend for some time now. In Poland the first evidence of this happening was when retail began to shift from larger formats to smaller local stores. Perhaps not even because plots were in short supply, but due to consumers expecting to be able to shop closer to home. Office building workers also started to feel that it would be nice to have a dry cleaner or a hairdresser at hand and it would be great if there was a pharmacy. Nursery schools are now opening in office buildings, where they haven’t been seen for many years. If they’re there again now, then it’s because there’s a need for them.

What else will become more important?

ML: Workplace strategy will become increasingly commonplace. A few years ago, when these services became more widely available, companies were wary of them. Only now are we in a position to assess the effectiveness of this approach. In a few years no building will be able to function without the introduction of a workplace strategy to a certain extent. It will become a pre-condition for tenants when choosing a new location.

Could this trend be reversed in the event of an economic slowdown?

MF: I don’t think so. Looking at the demographic trends, the pool of labour has been shrinking, which means finding the right personnel has become more of a struggle. When several companies are fighting over a particular employee, such a candidate will no longer choose who to work for based on which company it is or how much it will pay. They will look at the access, the quality of the space and the office environment. We have to factor in how much the labour shortages are impacting the costs of arranging space. Fit-out costs have increased by 30 pct in the last two or three years alone – and fit-outs that take just three months have now become rare. It had until recently been possible to have a decent – simple but functional – office fit-out for EUR 300 per sqm, but today you need to add hundreds more to these costs.

ML: I think there has already been a degree of re-adjustment to the economic situation, so the trend shouldn’t suddenly go into reverse, even if there is a slowdown. People today have much higher expectations of what the workplace should be, and so there will be no return to how things were ten years ago.