Going public

The office leasing market may not have suffered quite as badly under the impact of the pandemic as some of the other real estate sectors we cover in this publication, but it has certainly taken a hit, with the postponement of many decisions over relocations. The enforced switch to home office and hybrid styles of working and the prospect of this becoming a permanent trend has also complicated matters, creating a cloud of uncertainty over what the levels of demand might be once we are finally out of the Covid woods.

And while office developers and office management firms might complain about the impact on their leases of insufficient government support for businesses during the present crisis, the silver lining is that there does seem to have been a marked uptick in commercial leases from the public sector. According to a Q3 2020 report by Savills, in the first nine months of last year, state publicly-owned entities more than doubled their market share of the volume of commercial office space they lease in Warsaw to almost a quarter of the total. In other locations, such as the (admittedly small) Lublin office market, as much as 38 pct of the take-up last year was due to such tenants. But it needs to be pointed out that all of this was against the background of an overall slump in demand – the third quarter of last year actually turned out to be the worst since Q2 2010 in terms of office take-up.

“Offices of government bodies and state-owned companies have been associated so far mainly with older buildings. However, as the market continues to grow, the public sector is increasingly opting for relocation to modern office buildings. Paradoxically, it is frequently driven to do so by savings that modern offices can generate, among other things, due to lower service charges or an option to lease a smaller office but with a more efficient layout,” stated Savills Poland’s head of research Wioleta Wojtczak in the report.

Out with the old

The notion that such institutions are looking for cheaper-to-run and more modern alternatives to the old public and often historic buildings they often occupy is borne out by the experience of Marta Wiewiórowska-Kudła, the leasing manager of real estate developer, investor and management company Hines Polska: “This is a new trend that has been developing for several years. The main reason is the growing awareness of public institutions that older buildings are expensive and inefficient, as is having offices in several locations. In addition, employees and clients of public institutions increasingly expect adequate standards of work and service. This prompts these entities to look for more user-friendly and safe locations, which private sector office buildings undoubtedly offer,” she explains.

A different view, however, is provided by Monika Sułdecka-Karaś, the regional director of Knight Frank’s Kraków branch: “In their public buildings such institutions do need to check whether they are paying the market rate, but cost-cutting is not a major factor in their relocations – this is more the case for relocations of private companies.” In her opinion, it’s often the need for temporary accommodation during renovations of public buildings that leads them to turn to the commercial sector: “Sometimes they need to upgrade their existing buildings or to relocate to a different part of the city or perhaps the building they are in has to be demolished. But publicly-owned, historic buildings still have to be used. So it’s not the case that public institutions would prefer to be in commercial office buildings in general,” she points out. This idea certainly makes sense in the context of the pandemic, when different regulations have been imposed for sanitary reasons, prompting the need for the renovation of many public offices, as Monika Sułdecka-Karaś goes on to add: “The rules might change for public service institutions – for example, they might not be allowed to host so many visitors as previously, or they might need wider spaces, or new regulations might require improvements to the air-conditioning or hygiene installations. But there is no general rule when it comes to the reasons why they look for such premises. Among the examples I know of are cases where public institutions have had the need to upgrade their own buildings to bring them up to acceptable modern standards and the renovations and installation of modern air-conditioning is going to take maybe two years. So in the meantime they look for temporary space provided by the private sector.”

Stable genius

The largest transaction by such tenants last year was the lease of 47,000 sqm in Generation Park in central Warsaw by state insurer PZU in June, which also happened to be the largest lease in the history of the Polish office market. Poczta Polska (the Polish Post Office) also extended its 19,800 sqm lease in the Domaniewska Office Hub in the city’s Służewiec district in 2020. Out of Poland’s main cities, Warsaw is clearly the leading location when it comes to this kind of tenant. But there are still significant transactions by similar bodies taking place around the country, such as, in Kraków, the lease of 5,500 sqm in the Moon Office by the National Science Centre and 5,400 sqm in the Astris office building by the Agency for Restructuring and Modernisation of Agriculture (ARMA), as well as in Katowice – the lease of 7,600 sqm in A4 Business Park by PKP Cargo. Public tenants also have the advantage for landlords of not just leasing significant amounts of space but for signing long leases and being relatively stable. “I would venture to say that this is the most stable and predictable sector these days. Public entities rather decide on a longer lease – for at least seven years. This results from their long-term strategy, but also requires a financial contribution from the landlord to finish the space, as most state-owned companies do not have the additional resources for this,” says Marta Wiewiórowska-Kudła. “These are generally stable tenants,” concurs Monika Sułdecka-Karaś of Knight Frank, “and most are able to sign a long lease - the minimum contract is usually around five years.”

So what advantages might a modern office property developed by the private sector have over a public building? For one thing, it is likely to be more expensive and more difficult to renovate an old or historic public building, if it is necessary to do so to remain in it - especially if what we talking about is a listed monument. But there are also other economies and advantages to be gained from moving to private offices, as Marta Wiewiórowska-Kudła of Hines Polska explains: “Today, private sector buildings are generally more economical. New facilities are distinguished by a well-thought-out floor layout, therefore the offices have better access to daylight. As a result, more workstations can be arranged, and thus the space can be used more efficiently. Additionally, contemporary office buildings are equipped with modern technology, including green solutions, which enable the reduction of the maintenance costs, for instance, by optimising the consumption of utilities. If tenants are moving from an older building to an existing, modern office they have the equipment of their predecessors at their disposal, including fan coils, electrical (e.g. computer and low-current) installations or floor boxes. This allows them to save on selected elements of the space arrangement. In addition, existing office buildings already have stable and optimised parameters for their individual installations – the heating, cooling, ventilation and power consumption – which has a direct influence on the office maintenance costs.”

Another advantage for public bodies that need to bring their offices up to date is the advanced ICT (information and communications technology) infrastructure that commercial buildings generally offer. This can include devices for amplifying GSM and LTE (wireless broadband) signals, so that the users of the building can stay connected even in such places as the lifts or the car park. Other installations can ensure increased security against cyber attacks as well as continuity for IT systems. For instance, one of Hines’ buildings, Wola Center in Warsaw, has its own generator that can guarantee a backup power source for tenants in the case of an outage of the city’s grid.

In the euro zone

It would seem, therefore, that when it comes to office space, both the public and private sectors have a lot to offer each other – especially right now, when the pandemic has both depressed the leasing market and led to new health and safety regulations being introduced. And yet there are a number of issues that might be discouraging office property owners from chasing after this kind of tenant. One is the fact that Polish public entities are often obliged to pay rent in złoty rather than – as is usual on our market – in euros. “Not all developers are happy with this, especially those who have financed their projects with loans in euros,” admits Monika Sułdecka-Karaś of Knight Frank. “The general rule for the banks issuing these loans is that the rent should be paid in euros or the equivalent. So if a public body insists on paying in złoty, the banks would have to allow some kind of exception. If we are talking about the lease of space in an existing building that’s, say, ten years old, this isn’t such an issue; but if the office building is still under development, the developer has to make some kind of arrangement with the bank,” she adds.

Another complication that deters some landlords from engaging with such tenants is that such leases are generally put out to tender by the institution, a procedure that might be unfamiliar to many owners. “Office developers and owners have to fulfil all the conditions stipulated in the documentation of these tenders when making their offers. Of course, the price will generally be the most crucial factor – but the security aspects and the power supply to the offices, for example, could prove to be very important too, in some cases,” explains Monika Sułdecka-Karaś. But as she goes on to say: “This is still very comparable to the list of stipulations that might be issued by the headquarters of a multinational corporation to a local branch. Maybe not all public bodies require tenders and it can depend on the value of the contract if one is needed, but in my experience there always seems to be a tender. In cities, where such tenants tend to be local authorities, the tenders will be publicised on certain websites or in certain journals and then questionnaires sent out to building owners and developers to see if what they offer fulfils the public institution’s needs.” It also has to be expected that state tenants will often refuse to agree to include collateral in the lease agreement, such as deposits, bank guarantees or contractual penalties. However since it is actually technically impossible for a state body to go bankrupt, this isn’t really an issue.

Overall, a public institution is not a different kind of animal to a tenant from the private sector, more of a different breed – one that has to be handled differently but that also has advantages for the landlord, especially in terms of stability and given the current make-up of the demand. A little extra effort and expense from office property owners is all that is needed to tap into this. Savills estimates that negotiations are currently underway with the public sector right now for around 125,000 sqm of modern office space in Warsaw alone, so in the present situation it would be wise to make such an effort.