Offices in the can?

Building quality office space is not normally among the highest priorities of warehouse developers. Things, however, are changing as developers are starting to open separate office buildings in their parks. But does this make economic sense?

Mladen Petrov, Zuzanna Wiak

In December 2010, Goodman Group won the tender for the development of the Pomorskie Centrum Logistyczne logistics park. The project, a planned EUR 300 mln investment with an eventual area of 500,000 sqm, will be developed in cooperation with the Gdańsk Economic Development Agency, which is the owner of the area located in the vicinity of the biggest terminal harbour in Poland. Most (60 pct) of the project, which is to be developed within the next 10-15 years, will consist of warehouse buildings. The rest of the area will be occupied by industrial areas, car parks and a class 'A' office building, which the developer planned to build in the second stage of the five-stage project. The building is to have five floors and will offer a leasable area of 16,000 sqm.
Meanwhile, Lublin-based company Wikana Invest is planning to combine warehouse and office functions for its Wikana Business Park complex, which is to be located within the Lublin Special Economic Zone Mielec. Two office buildings are planned for the project, each with a leasable area of 7,000 sqm and a high storage warehouse with an area of 14,000 sqm. However, it is not clear when the project is to be launched because the investor is currently having problems obtaining a building permit. According to the latest schedule, the launch of the construction work is to take place in March or April this year and - depending on whether or not the project will be divided into stages - it could be completed in Q4 2011 or early 2012.
This is very much a non-standard project on the Polish market, as developers of warehousing rarely - and in Poland practically never - opt to combine warehouse projects with office facilities.

An office building in a warehouse jungle
As the focus in such facilities is on the quality of the warehouse space, the square meters designated for offices are not something developers and tenants are losing any sleep over. When building a higher quality stand-alone office building in a warehouse park, the tenants' comfort is not the only thing developers have on their minds. Developers are also trying to bring new tenants to the park who do not necessarily need warehouse space.
"Pomorskie Centrum Logistyczne will be located in the vicinity of the DCT Gdańsk container terminal, which is flourishing. It is the last harbour on the eastern side of the Baltic Sea which services ocean traffic. Also, the location of the plot of land itself within the city limits will create favourable conditions for the development of an office project and success with regard to its further lease. The project is to start within the next few years unless the anchor tenant willing to lease the major part of the building can be found sooner," reveals Błażej Ciesielczak, the country manager of Goodman Poland. The company will build separate office buildings in the area of a logistics centre for the first time. Normally the developer adds small office buildings next to the warehouses, which are, in the company's opinion, much more convenient for tenants. "We have used this type of solution for Toruń Logistic Center, among others. Office buildings 'stuck' to warehouses are easier to extend and there is not much difference in the price between leasing such an area and leasing an area located inside a warehouse hall. They are also more aesthetic," adds Błażej Ciesielczak.

Time for a change
There are other companies, which through developing stand-alone offices in business parks, that want to differentiate themselves from their competitors. In the Czech Republic, CTP Invest, the market leader in terms of warehouse space with around 1.6 mln of industrial, offices and retail space in its portfolio (1.36 mln sqm of warehouse space), is also developing its Axis Office Park projects. Axis Office Parks is an integrated office system developed exclusively within the existing CTPark Network of warehouse properties across the country. The concept is designed to accommodate R&D centres, call centres, laboratory test facilities, software and equipment design and other back-office operations. Two such projects have already been delivered in Ostrava (20,000 sqm, with an additional 10,000 sqm planned) and Brno Modřice (10,000 sqm), and another Axis park is planned for Borská pole Plzeň (10,000 sqm). Additionally at the CTZone Brno business park the firm is planning to develop two office buildings totalling 20,000 sqm.
"CTP was one of the first developers on the Czech market to offer stand alone class 'A' office space within our business parks. We believe such office facilities are a mid-point between industrial parks and typical downtown class 'A' office space. For companies from the R&D sectors these facilities are ideal. Such operations do no need to be located in city centres and are rent price sensitive," explains Paul Deverell, CTP's business director.
Within the two existing Axis projects around 6,000 sqm of space remains vacant at this point. But in Ostrava, GE Money has leased an entire Axis building (12,000 sqm). In Brno, on the other hand, tenants have different requirements. "Several of our clients, such as Acer in Brno, have office-based customer service centres housed within the same building as their industrial space. This can work very well and we have designed the Flexi Space concept to offer such companies a mix of class 'A' office and modern warehouse space in the same unit," adds Mr Deverell.

Lukewarm shower
CTP is not the only industrial developer to come up with a separate office offer. VGP has also developed a 5,000 sqm office building within its VGP Park Horní Počernice in Prague, while Raiffeisen Evolution, also in the capital, has completed an office building in Airport Logistics Park. "These examples have achieved mixed success. The majority of occupiers of warehouse space would in principle prefer to have their offices directly combined with the warehouse space, which makes more sense from a management point of view. Office occupiers not occupying any of the park's warehouse space would only be interested in having their offices in a separate office building in the park as long as the location and building work for them," believes Bert Hesselink, the head of the office and industrial agency at DTZ in the Czech Republic. Real estate investment manager Valad Property Group's head of the CEE region Matt Bann adds that the warehouse properties within the company's CEE portfolio that offer office space are not very popular with tenants that do not need any warehouse space.
In Hungary such schemes are also waiting for market recognition. Separate, stand-alone office buildings can only be found in a very small number of newly developed parks, such as Euro Business Park. Market players are not convinced that Hungary is a good place for such projects, at least for the time being. In 2010, after a difficult year of adapting to the new market realities, the Budapest warehouse market entered a period of stabilisation. Is there going to be more room for warehousing projects with quality office space in Hungary as the situation improves? Tamás Beck, the director of the industrial agency at Colliers International Hungary, has a long list of concerns. "Tenants are very price sensitive, public transportation is not especially good to logistics zones, logistics companies are usually very active - except last year - with smaller office requirements. Furthermore, short term leases are dominating the market, and large deals are lacking as the average deal size is smaller than in other markets. And finally, Hungarian end-user companies are not active players in the class 'A' leasing market, as opposed to Poland or the Czech Republic," explains Mr Beck.

The biggest ones say 'but'
Some players on the Polish warehouse market are also remaining cautious about the concept. ProLogis is not planning to introduce such facilities to Poland or other countries either now or in the near future. Panattoni Europe also does not have any such plans at the moment; however, it is not ruling out developments of this type at a client's request. Segro Poland has a similar view: "Due to the noticeable trend on the market to combine the locations of offices and warehouses, we expect that such projects will enjoy more and more interest. The facilities not only enable a given company to improve internal communication between particular departments, but also make it possible to reduce operating expenses. Depending on individual needs and the requirements of clients, we can provide such solutions, which are particularly advantageous in selected, e.g. 'urban' locations," claims Magdalena Szulc, Segro Business Unit's director for Central Europe.
Tenants on the investment end are rather reluctant to acquire properties boasting separate office buildings. "We've been in the market long enough to observe that this is not the best performing mix. Office users can be reluctant to lease space in such premises. The idea might look good for the developer, but in the long run it may not turn out to be in the best interests of the investor, who also needs to think of ways of keeping the property fully leased. For us, when it comes to office content, the rule is the lower the better. We assess each situation on a case-by-case basis but would normally prefer to develop better office space within a warehouse building rather than investing in a standalone building," declares Matt Bann of Valad Property Group, which is present in Romania, Hungary, the Czech Republic and Poland.