The renovation game

Old tenement buildings and townhouses on the most exclusive streets in city centres are just asking to be converted into luxury apartments, luxury offices or boutique hotels. But such spectacular renovations are still a rarity in the world we live in and the word ‘modernisation’ covers a multitude of sins. Old townhouses are sometimes converted into office space, but this is rarely class-A standard, and against such a background, those particular projects that turn out to be exceptional are able to stand out even more. “Office space in renovated historic townhouses in Warsaw makes up around 1 pct of the total stock,” reveals Mateusz Polkowski, the head of research and consulting at JLL. “This is a very narrow niche and you’ve got to remember there’s no general rule for it. You can count on one hand the prime buildings where a lot of effort, time and money has been put into their restoration and modernisation to bring them up to the standards of a modern office block,” he admits.

Trying one’s patience

The modernisation of a historic building can never be a one-hundred percent faithful restoration. Changes have to be made to meet the current construction regulations, the building’s new intended usage and the altered expectations of contemporary users. The balance between costs and profits also plays a role. The potential profitability of a project will often determine whether new buildings or extensions are to be added. And when a building is a listed monument, it’s going to be harder to convert it for new functions. Usually, the only part of converting a building that no one has an issue with is the façade, for which the developer will go to great lengths (under the strict supervision of the building conservator) to recreate every last original detail. For the interiors, however, it’s more a question of compromises. The process for achieving such a consensus is essential not only for the building’s restoration but to also ensure that it fits into its modern surroundings. “It’s crucial that solutions are found that allow the project to be completed, while bearing in mind that the building conservator always has the last word. This is quite a time-consuming process and requires a lot of patience. Some decisions will require substantial changes to the architectural plans, and this is going to have an impact on how quickly the project can be completed, making it harder to stick to a rigid time frame – which is why the schedule needs to be as flexible as possible,” explains Karolina Stanisławska-Balcerzak a member of the management board of Budizol, a company that has many renovation projects under its belt – including the reconstruction of the Indigo hotel and office building in Warsaw.

The renovation work itself often represents just the tip of the iceberg of the challenges posed by such projects, since the work on planning stage often starts years before the construction workers even appear on the site. Local residents and other social organisations are generally involved in the project throughout its duration. “In 2015, we converted the historic Oppersdorf Palace, connecting it to our Dominikański office building in Wrocław,” recalls Adam Targowski, the sustainability director for the CEE region at Skanska Commercial Development. “When we were designing the project, we consulted with the public, allowing local residents to visit the palace. For the older people attending, it was a chance for them to reminisce about what the palace used to look like in their youth,” he adds. Added to this, the consultations with the building conservator do not come to an end when the building is handed over for use. “When working on a historic building, you have to remember that each change made to it has to be agreed on by the authorities,” points out Eliza Wielgus, the marketing and leasing manager of Real Management, which until recently was the owner of a townhouse at Krakowskie Przedmieście 34 in Lublin. As she continues: “This includes both the external and internal fixtures, such as the old wooden staircase and the ornamental elements on the façade. If you want to repair or restore them you are going to have to consult the conservator and, obviously, this is going to increase the time it’s all going take.”

They’ve changed our local Palais…

Restoration projects require not only a large budget and reams of permits, but also talent and a feeling for the architecture. One interesting development is Le Palais on ul. Próżna in central Warsaw. This was a highly complex project comprising the comprehensive restoration of two 19th century townhouses together with the addition of new buildings designed to fit in with their historic character. Originally, Le Palais was intended to be a hotel, but these plans were revised in the wake of the economic crisis in 2008. Even the construction work was not without its hiccups. It was held up by the excavation of a gigantic glacial erratic boulder as well as an unexploded bomb from the Warsaw Uprising on a neighbouring site.

“We began the work on Le Palais in 2004 and it was finally ready to be handed over in 2013. Over that time there were three periods when we had to work with Warsaw’s building conservator,” recalls Wojciech Popławski, an architect at the Op Architekten studio, which was responsible for the design of the office project. “Renovating and converting these townhouses required historical research, as well as an inventory, and we also had to consult with the public. By looking at the documentation and the fragments that remained on the building, we were able to recreate the stucco façade, the wooden joinery and the ironwork above the windows. We also faithfully reproduced certain internal features, such as the elegant staircase and the former apartment of synagogue founder Zalman Nożyk, including its wooden mosaic floors, its paintings and its stucco finishings. It was all made accessible to those with disabilities and to meet current fire safety regulations as well as all the latest office requirements. This was equally true for both the historic and the modern parts of the development,” he claims. “The former fixtures have been replaced by more modern versions, but they are often hidden – as was the case with the concrete stairs that replaced the wooden ones. The replacement of the wooden beams with concrete joists also allowed us to use the space under the flooring for installations without having to lower the ceiling heights. The glass panes increased the height of the original balustrades, thus fulfilling modern standards. We also managed to develop the roof and add a terrace, but this cannot be seen from the street so it doesn’t disrupt the historic appearance of the frontage of the street,” explains Wojciech Popławski.

Townhouses are green houses

It’s never clear whether a historic townhouse built about two centuries ago can possibly fulfil the requirements of environmental certification. When it comes to a modern project, the developer, by contrast, is able to control virtually every aspect of its construction. “All the work we did on the Oppersdorf Palace followed LEED guidelines,” claims Adam Targowski of Skanska. “And during the work, we had to put together all the necessary documentation. As a result, in 2016 we were awarded LEED with a rating of ‘Gold’. And the Oppersdorf Palace, as a result, became the oldest building in Poland to be certified,” he adds.

Le Palais was redeveloped by Warimpex, which also made certain the project would meet all environmental certification standards. As a result, Le Palais was awarded a BREEAM certificate with a rating of ‘Good’. The selection of the materials proved to be crucial in meeting the sustainability goals as was the efficient and economic planning of the lighting system. Cycling facilities also helped in the certification process along with the small green square and the insulation that was added.

A classic investment product

Historic townhouses, which are often former palaces, attract an exceptional tenant mix: law firms, governmental department, embassies, and so on. Such tenants in turn attract investors who are looking to raise the value of their portfolios. “Renovated historic properties converted into offices are very popular with investors,” claims Przemysław Łachmaniuk, the head of capital markets at CBRE. “Such buildings are, of course, interesting to investors, and all the more so because they are smaller than office towers, which means that the overall transaction values are relatively lower,” points out Mateusz Polkowski of JLL. “There is very little of this kind of investment product, but it is like the cherry on the cake – more of an addition to an investment portfolio than a basic building block. Such centres are usually well-leased and so investors are drawn to the financial stability of the tenants, which guarantees predictable rental payments over the long term. The best historic buildings have yields of 4.5–5 pct, while buildings that are of a lower quality are about 6 pct,” he says. “This type of asset is very liquid when we are talking about quality offices in central locations. Examples of such transactions that show how liquid these buildings can be include the sale of the Młodziejowski Palace and Le Palais – both in Warsaw. CBRE advised on both of these transactions, which were sold by a fund managed by Patrizia,” says Przemysław Łachmaniuk. “Both transactions were a great success, as the buildings attracted a lot of interest, which was reflected in the terms of the sales transactions. It’s also worth pointing out that in both cases this was the second time the buildings had been sold,” he adds.

Originally, Le Palais was bought by IVG, and after the last sale it was added to the Generali Europe Income Holding fund. Młodziejowski Palace was bought in 2020 by FFA Real Estate on behalf of investment vehicle Midolux 2. This year, ‘Eurobuild CEE’ also wrote about the sale of a townhouse on Krakowskie Przedmieście in Lublin, which had earlier been owned by Real Management. All of these transactions were completed during the pandemic.

Covid immunity

Offices in historic buildings appear to have been virtually unaffected by the coronavirus. In older buildings, there are not so many large open spaces and the work mainly takes place in small offices, which means social distancing is easy to maintain. “We work with stable partners, with whom we have got through the pandemic together. We don’t offer large office areas, which is why our tenants are companies that have more homely requirements. So far the pandemic has not had a significant effect on us or our tenants,” insists Anna Olszewska, the manager of the Bankowy 1 office building in Warsaw.

In the modernised space of a former townhouse it is possible to change the air filters and disinfect the air conditioning system more frequently. “When it comes to the systems designed to improve the safety of users, there are no limits. We currently employ such systems as smoke disinfection for the entire space, which we carry out every three days,” reveals Eliza Wielgus.

“The vacancy rate for historic buildings is lower than the average for Warsaw office buildings. During the pandemic, we saw the subleasing market grow, but such space was almost always in modern office blocks,” says Mateusz Polkowski of JLL. “In properties under the supervision of the building conservator, which have strict divisions between floors, it is much harder to set aside space for subleasing, but you can also be sure that they have been much more resilient to the turbulence caused by the pandemic,” he adds.

Getting all emotional

It takes many years to modernise and convert a historic building. Such a project requires a great deal of patience and dedication. These are long term projects, which could only one day generate a financial profit. “I think what makes a conversion project stand out from a standard construction project is that it is something with emotional value,” believes Karolina Stanisławska-Balcerzak. “These are difficult projects that are costly, time-consuming and unpredictable. If you really want to get involved in them, you simply need to have a passion for them. You have to show a great deal of understanding when all the problems start piling up. But on the other hand, there can be nothing more satisfying than bringing a derelict and dilapidated building that had been an unloved eyesore back to life and restoring it to its former glory, so that it can once again be part of the history of its city,” she adds.