The landlord strikes back

Experts say that the first half of 2010 brought a noticeable recovery to the Polish office development market. The number of completed office buildings is growing, as is the demand; while rents along with vacancy rates have stopped falling at last. Although we are still far from the pre-2008 state of affairs, things are now improving and the outlook is increasingly optimistic

Recently the market has shown three concurrent trends. The first is that the highest-class of high-rise office buildings are once again being planned in the largest urban centres. The second is for intelligent business parks to be built on the outskirts, bringing together rich complexes of buildings with additional infrastructure – for example, restaurants, fitness clubs and other services. The third trend, although still a fairly niche one, is for the conversion of historic buildings into small office facilities with unusual designs. What is interesting is that there are plans to open office parks in special economic zones, combining office and warehouse facilities to attract potential tenants with the privileges associated with running a business in an SEZ. It is worth emphasising that all of the above offer exclusive offices that would meet the expectations of even the most demanding of customers.

Vacant in places

Traditionally, the most attractive locations have been Warsaw, Wrocław, Kraków and the Tri-City. Unfortunately, vacancy levels remain quite high. They vary from about 1 pct in cities with an office space shortage (such as Lublin or Szczecin), through to 4 pct (in Wrocław), 8 to 15 pct (Warsaw, the Tri-City, Kraków and Poznań), and up to even as high as 25 to 29 pct in cities where the supply easily exceeds the demand (Łódź and Katowice). Interestingly, clear differences in the rates can also be observed within particular cities – between the city centres, where new office development opportunities are currently scarce, and the outskirts, to which large office hubs have migrated. The soaring vacancy rates mentioned above are mainly due to the completion of a large number of projects started before the crisis and the significantly smaller interest from tenants during such difficult times. However, the improved mood, the stimulation of the business cycle and the low demand in previous quarters should have a positive impact on the situation.

Knock-on effect

In 2008 and 2009, rents for all types of office buildings in every location slumped significantly. In smaller cities and office buildings located on the outskirts of Warsaw, rents fell to EUR 12–17 per sqm, while in high-rise buildings in the centre of Warsaw the scale of the price slump was steeper – down to EUR 20–25 per sqm. On the one hand, this was a result of the credit crunch and the significant overall decline of business, cost-cutting by the tenants and the suspension of new projects by developers. On the other hand, the market saw the completion of a number of projects started during the property boom. The excess of supply over demand had a predictable impact, as office owners reduced rent rates and then offered additional incentives for tenants (eg. several months rent-free, etc.) in order to ensure smooth and uninterrupted project management and the punctual repayment of loans used to finance them. A number of tenants faced with such a situation (especially those with agreements about to expire at that time), decided to change their premises for something more cost-effective, and often these turned out to be more attractive in terms of standard or location. This in turn affected the rents in the previously more expensive buildings in the very city centres, which therefore also had to undergo a certain adjustment. The business climate favoured the tenants, allowing them to pick and negotiate until they were fully satisfied. However, currently the reverse trend is observable, caused mainly by the fact that during the crisis no new office space was built for several quarters, the business climate has improved, the demand is still growing, and again – just like in an economic model – owners are beginning to strike back. Although a significant and remarkable increase has yet to take place, prices have now stabilised, and the experts are claiming that 2011 should see rents gradually increase. However, we still have some waiting to do before we see them return to levels similar to those of a few years ago. These forecasts will probably lead to further interest in new premises and expedite the conclusion of contracts before rates start to grow again.

Things can only get better

Global investment attractiveness rankings reveal that Poland is building a strong reputation as a place with a good climate for investment, which is likely to attract an influx of new investors interested in locating their businesses in our country in the near future. Henceforward, we can expect to see a further growth in demand for new office space and an increasing number of such finished projects. All these factors encourage us to look into the future more optimistically and for a new, more attractive and – most importantly – more cost-effective office location.

Dominika Uberman, partner, and Magdalena Brzozowska-Bielska,  senior associate, CMS Cameron McKenna

(Sources of data in the text: Jones Lang LaSalle, Colliers International,  CB Richard Ellis, Cushman & Wakefield)