The return of the tenant

Office & mixed-use development
The first three months of the year happened to be the worst quarter for many years for the office market in Poland, but now demand is slowly returning. Landlords are counting on being able to complete their current negotiations by the autumn – and the development market should be back on track in two to three years

At the end of the first quarter of the year, Polish property agents were all wearing rather long faces. As Tomasz Czuba, the head of office leasing and tenant representation at JLL, points out, over this period there were only 162 leasing transactions and only one of over 10,000 sqm. Renegotiations took a far larger share of the market than normal and the number of new leases slumped. “Over the last few years, we have only seen lower quarterly figures in 2009, during the financial crisis. For example, the 2,000 sqm recorded for such a big market as Łódź is way below the city’s potential,” he explains. The largest fall in demand could be seen in the regions, where it dropped by up to 55 pct y-o-y. In Warsaw, the demand in the first quarter fell by 20 pct y-o-y, which means that across the country it was down by around 40 pct.

Tomasz Czuba of JLL

Green shoots of recovery

Nonetheless, it looks as if the worst of this is now behind us. “Since March we’ve seen a greater number of enquiries, although there were no meetings – for obvious reasons – until the middle of April. Later, when we were coming out of the lockdown, there was an avalanche of viewings, as potential clients started venturing out to look at office space. And since that time there has been more and more of them,” reveals Richard Aboo, the chief commercial officer at Immobel Poland. Adam Ambroziak, the office director at Cream Property Advisors, sees the situation in much the same way and points to the growing number of office space reservations in Warsaw: “The Warsaw office space that was recently available is now often booked up when I ask about it. This is a clear signal to me that we are returning to some kind of normality,” he believes. In his opinion, those tenants who had previously held back due to all the Covid-related turmoil, have now managed to sort out their affairs enough to think about leasing offices again. “They no longer consider renegotiations or relocations to be temporary or interim activities, but instead they’ve already started taking long-term decisions,” points out Cream’s director.

Adam Ambroziak of Cream Property Advisors

After all, the most characteristic feature of the market over the last 18 months has been the fact that many tenants have been playing wait-and-see. They have also been prolonging their leases or trying to use the instability of the market to reduce their costs, even though many companies haven’t suffered any kind of huge impact on their revenues due to Covid. “Generally speaking, such cost cutting succeeded and resulted in new terms from landlords. Now we’re seeing the balance returning to tenant-landlord relations and that starting rates and general rental terms, including financial incentives, are similar to what they were before the pandemic,” claims Adam Ambroziak.

The main sources of demand that predominated on the market before the outbreak of Covid are also returning. Chief amongst these was the business service sector. Such companies are now developing their services and expanding across Poland once again. “This bodes very well for what’s going to happen in the future,” believes Tomasz Czuba.

What do we need?

One thing that is certainly not helping developers, however, is that it seems to take rather longer to negotiate a lease than it did pre-Covid. According to Richard Aboo, it’s fair to say that if a lease took around six months to negotiate, then today it’s more likely to take eight or nine months. The reason could be that tenants are not yet sure exactly how they will operate in the post-Covid world. “Companies are often having much greater difficulty in specifying the criteria their future offices should meet. They don’t seem totally sure about how many people will work in the office and how many from home or in a hybrid format. What can you do if only 20–30 pct of your team return to the office? The briefings we are getting from our clients are often not totally clear on this point and all this raises a lot of questions. For example, we don’t know how much space is needed for informal meetings, or how large the common areas or recreation space should be. We often don’t even know how many work stations will be required,” admits Richard Aboo. All of this is complicated by the fact that new attractive offices are playing a crucial role in enticing workers back to the office. “This is the biggest headache today: how to attract employees back to the office. That’s why you can’t approach leases the same way you did 10–15 years ago, when it was all about the cost of each square metre. It’s now the case that a difference in rents of one euro is no longer that important – what’s crucial is how the office is going to be used. Usually, the lease doesn’t play a big role in the operational costs anyway, and definitely what counts more is what can be gained by leasing an office that suits your needs,” he adds.

Richard Aboo feels that right now, and more than ever before, the best thing for helping tenants to reduce the time they spend on the leasing process and to identify what their true needs are, is a workplace management study. The relocation process needs to begin with talking to the management and their employees, who should fill in a survey. For example, it’s worth asking them if they actually want to return to the office – and if they do, what they imagine working with other departments would be like under such new circumstances. Only once all their opinions have been expressed can any conclusions be drawn as to what kind of office is required. “Post-pandemic, when the circumstances tenants find themselves in still aren’t clear, workplace management has become more important than ever before,” insists Richard Aboo.

Developer optimism

In April, Immobel topped off Central Point – an 85m high office tower with 19,000 sqm of space, which is located at the junction of ul. Świętokrzyska and ul. Marszałkowska in Warsaw. It seems the company is not worried about a possible lack of demand for this space. “This building stands out so much from the competition that there should be no problems with leasing it. It is situated near a park and above where two metro lines cross, and it’s also one of the tallest buildings in the area, which means that even on the eighth and ninth floors there are excellent views. I think older buildings in locations that are not quite as good are going to have bigger problems,” suggests Richard Aboo.

Ghelamco is also feeling quite relaxed about leasing. In May (just over a year after the outbreak of Covid in Poland), the company completed its Warsaw Unit development, which is currently around 50 pct leased. According to the company’s CEO, Jeroen van der Toolen, its successful commercialisation was the result of the company’s rapid response to the pandemic and being able to determine what the new needs of tenants were going to be. The company put a lot of resources into researching this question and into what measures could be taken to make office space safer in light of the epidemic. He believes that this was a very good move, mainly because there has been a clear change in tenants’ attitudes. “In recent years everybody talked about cost savings, energy costs and making buildings more sustainable. Now we’re having to think about how we can make buildings pandemic proof,” he says, pointing out that what tenants are now looking for is a safe office environment. “In the Warsaw Hub and the Warsaw Unit, we have implemented various measures to help reduce the spread of the virus. For example, we have installed UV lamps in the air supply pipes. We’ve also changed the parameters for the air humidity to make it less conducive to virus transmission. The tenants are very happy with these measures and I think we have even secured some new tenants for our buildings because they saw that they had been well-prepared and we provided them with all the right arguments for bringing their employees into offices with a safe environment,” reveals Jeroen van der Toolen.

Jeroen van der Toolen of Ghelamco

But in the second half of the year all this interest from potential tenants is set to translate into solid numbers for leasing figures, according to many of those working in the sector. “I think that between the third and fourth quarters there’s going to be a large rise in the number of transactions, since many of these leases we’re talking about should be signed in Q3 at the latest,” says Richard Aboo.

Caution! Caution! Caution!

The actual levels of supply and demand on the office market will continue to depend on how the situation with Covid progresses, as developers themselves admit. Even though, according to JLL, the vacancy rate for offices in Warsaw was at a healthy 11.6 pct at the end of Q1, and currently stands at an acceptable level for both developers and tenants, if another lockdown was imposed it could prove far more disruptive to the real estate market. Unfortunately, no one working in it has any say over how such events will transpire, so that the only thing to do is to watch them unfold and approach decision making with caution, especially when it comes to choices that are going to have long-term ramifications. “I think developers will have to approach office projects much more conservatively, as without a high level of pre-leases they cannot make hasty decisions. Under certain circumstances, for example, they might choose to convert an office into a residential project or go for a more conservative hybrid model – where the zoning plan allows them to do so,” suggests Adam Ambroziak. Investors might also be putting pressure on developers to act more cautiously, since due to the pandemic they have been increasingly favouring diversified portfolios. “Buyers want to wait and see. They want to concentrate on something more predictable and are thinking about more diversified portfolios and scale,” comments Adam Ambroziak.

Questions over the supply

Both real estate agencies and developers are convinced that soon there will be too little office space available on the market. “A supply gap is going to appear in Warsaw because today we can see how many commercial investment projects are planned for the 2021–2025 period,” argues Adam Ambroziak. But the low number of office projects that have been granted building permits might be a growing cause for concern. “Last year only two office building construction permits were granted and the year before that there were seven. So when you consider that in 2019 and 2020 permits were granted for less than 200,000 sqm, then even with the current drop in take-up there’s going to be a shortage in the delivery of space for 2023 and 2024. So, when looking at the availability of the space, much of which is concentrated in a few big projects, I believe that we are now in a dip – but also that in 2022 the take-up is going to come back and we are also going to see an increase in rents in the second half of 2022,” predicts Jeroen van der Toolen. Richard Aboo believes that this supply gap is a factor behind the reluctance of some tenants to spend too long over deciding to lease office space. “It could also be one of the reasons for the current recovery: if they want to have good space without paying through the nose, tenants need to act more decisively,” he points out. JLL is also convinced that everything is more or less heading in the right direction, as Tomasz Czuba disagrees that the market is currently in a state of uncertainty: “Even though further lockdowns might be imposed, it’s unlikely that they will have such a drastic effect on the market as those we’ve already has.” As he is keen to assure us: “We’re already over the worst.” Fingers crossed!