Not all roads lead to Rome

Countries in Central Europe are not usually so large. Their economies and administrations are mainly focused on the biggest cities – the capitals. However, as the countries develop, more and more offices are appearing in large provincial cities

Emil Górecki

Poland – the biggest and the most populous country in this part of Europe, can also boast of having the largest office markets outside its capital city. There are a number of big markets to be found in the country – in Kraków, the TriCity, Poznań, the Katowice conurbation, Wrocław, Szczecin and Łódź. According to the estimates of CB Richard Ellis, they collectively have app. half as much modern office space as Warsaw itself – over 1.9 mln sqm – but nevertheless this is still a good result. The vacancy rates in these cities vary from app. 4 pct in Szczecin to 6.5 pct in Wrocław, 19 pct in Katowice and as much as 24.3 pct in Łódź. Each of these centres has at least a few hundred thousand citizens, developed industry and a good educational base. As a result major tenants and professional developers are moving in.

Despite being a small country, the Czech Republic is both densely populated and urbanised. This is why outside Prague demand exists for office space in Brno and Ostrava, where at the end of Q1 there was 274,000 sqm and 106,000 sqm of modern business stock respectively, with 16.8 pct available in Brno and 22 pct in Ostrava. “Only these three cities have significant amounts of modern ‘A’ and ‘B’ class office space. Therefore we are not monitoring other cities,” explains Jana Novotná from the research department of the Prague office of CB Richard Ellis.

The road to emancipation

“Sofia is still actually the whole country in Bulgaria. All the administration and economy of the country is concentrated here. We have a few secondary cities such as Plovdiv and Varna, but their office markets are very weak,” relates Michaela Lashova, manager of the capital markets department at the Forton agency in Sofia. She goes on to add that the office stock in cities other than the capital tends to be located in large converted apartments or old administrative buildings. On the other hand, the tenants are small local firms or involved in servicing the local market, such as energy companies. “So far professional developers have not been willing to enter the markets of regional cities, because it is possible to get from Sofia to Plovdiv in under an hour,” adds Ms Lashova.

However, according to Lori Collin, who is a senior consultant at the Bucharest office of Jones Lang LaSalle, the potential of such markets has been noted. “We believe in the potential and possibilities of Cluj-Napoca and Timişoara, and this is why we have being monitoring both of these cities. They already have a certain amount of modern space and parties willing to lease them. Romanians are well-educated, they speak foreign languages, and the costs of running businesses are relatively low here. This is encouraging for foreign investors,” explains Lori Collin.

The capital - a country in a nutshell

Hungary, however, is only Bucharest. The capital city has 1.7 mln inhabitants, 60 pct of the industrial production in the country, and the overwhelming majority of universities and colleges. The second biggest city is Debrecen, with just over 200,000 inhabitants. According to Orsolya Németh of the Budapest office of Cushman & Wakefield, the office markets of Debrecen or Miskolc are not of great importance and are not monitored quarterly by the agencies. “There is no modern office building worth mentioning in these cities and such projects are not built there, so we do not collate data on them – although if a client makes such inquiries, we are able to look at these markets,” she explains.

Krzysztof Witkowski

president of the management board of Virako

New projects show faith in the market

Łódź is a very shallow market. As little as two or three years ago there was practically no modern office space here. There was only around 30,000-40,000 sqm of modern offices in the city, and then suddenly developers were planning over 100,000 sqm of office space within a few years. The situation cannot be compared to the data for Warsaw: over 3 mln sqm of office space and a vacancy rate of a few percent. Vacancy in Łódź exceeds 20 pct, but this does not look as terrifying in square metres, because our market is not so big. One GTC project – which for Łódź is huge, with 40,000 sqm of space that is still not fully-leased – was all it took to spoil the statistics. On the wave of optimism at the time, developers believed in this city and in the fact that they would easily be able fill the finished facilities. And in my opinion it would have been difficult to do this even without the credit crunch. I estimate that the market will be able to absorb several dozen thousands of square metres of currently vacant office space in the next 2-3 years. The commercialisation of our Forum 76 Business Centre, which has app. 7,000 sqm, will take several months longer than we expected. The building we finished last year is app. 80 pct leased, but we are reaching the final stages of new negotiations. I think that it will be nearly 90 pct leased by the end of the year. Then it will be time to exit the project and start new ones. We are thinking about two projects: one similar in size to Forum 76, and a slightly bigger one – a typical office building for back office type companies. This shows our faith in the office market of the city. I would like to believe that the demand will come from local companies, but what needs to change in order for this to happen is the mentality of their owners, who seem not to want to show off. We try to demonstrate to them the effectiveness of space use and the increasing efficiency of the local workforce. However, coming round to such a view takes time. On the other hand, there are companies looking for bridgeheads to establish centres of the BPO type. In this category Łódź is in competition not only with other Polish cities, but also with those in the Czech Republic and Romania. Rents, however, have finally stabilised after last year’s correction.

Waldemar Lesiak

director of the department of office projects at Echo Investment

local Markets are worth the greater risk

The capital city’s office market has the strongest demand and higher rents. Secondary markets are different – it is much more difficult to sign a preliminary lease contract there. Therefore banks are much more cautious over providing the finance. Each such project is a challenge for us, which is however worth taking. The measure of Echo Investment’s success is the negotiated margin level and our ability to meet the deadlines of the project time schedule and commercialisation schedule. In the last two difficult years we have managed to lease at good rates 22,000 sqm out of the 30,000 sqm available in the Malta Office Park project in Poznań. Our next success – and a slightly unexpected one at that – is the Oxygen project in Szczecin. This city’s market is slightly more burdened with risk; however, we have managed to lease 9,500 sqm out of the 14,000 sqm available and negotiations over the remaining space in this already completed office building should be finalised by the end of the year. Unfortunately, we have had to freeze, reduce and divide into a few stages the Aurus project in Łódź because of market conditions and the presence of strong competition in a relatively small market. This is a more profitable move than a price war for tenants. The second disappointment is Gdańsk; however, the reason here lies with an unclear local land utilisation plan and the exceptional cautiousness of officials, as a result of which we have been 
ordered to build a car park for 900 vehicles in a project with an area of 20,000 sqm. Errors and ambiguity are common in land utilisation plans; however, in other cases we have encountered more willingness from council officials to clear up these inaccuracies. The office plans of Echo Investment concern both Warsaw and secondary cities. However, this is conditional on having positive results from our analyses of the price of the land on offer as well as its size and location. We are also taking into consideration the specificity of the office market in any given city, as well the demand and the competition present.

Richard Ness

investment director of the Red Group development company

Turning away from the regions

Last year we finished the third stage of our office development The Orchard in Ostrava. So far at least 90 pct of the office space is leased. Companies such as RWE, Komerčni Banka, HSBC and Česká spořitelna bank have decided to lease space in the building. We are working very hard, using all our local contacts to fill the remaining space. Last year was particularly difficult for the market, but signs of improvement are already visible now. And finding tenants for a project in Ostrava is as difficult as finding them for a project in Prague. Also, the level of revenue from the project is currently satisfactory. Are we considering future office projects outside Prague? Not at this point. We are focusing on our Q5 Waltrovka project and this is why we are not looking for investment possibilities elsewhere. Do we have strong competition? I can say that, especially with regard to big space projects, the competition is much stronger in cities outside the Czech Republic: in Wrocław, Kraków and Bucharest.

Tsahi Tabakman

CEO, Business Park Varna

Light at the end of the tunnel?

The fact that from the middle of 2009 until now not a single leasing transaction has taken place on the Varna office market speaks for itself. There was a lot of optimism on the market before the critical year of 2008, when we were heading towards hard times. The credit crunch meant that growth would not be as big as previously expectated. Today in Varna there are completed office buildings that are totally empty. AFI Europe’s Business Park Varna is the largest office project outside Sofia. Eventually we plan to develop eight buildings, but this will be in the far future. Three buildings have already been completed. The first and second buildings are fully-leased and over 90 pct leased, while the third building, which was completed in 2009 in the middle of the crisis, is now around 25 pct leased. We have not lost any tenants due to the crisis, but a lot of firms have had to relocate to lower class premises due to budget cuts. Rents have fallen across the city by around 20 pct. We will not be proceeding with the construction of any other buildings until the latest one is at least 80 pct leased. When is this going to happen? It’s hard to tell. In the short-term, the available office space in Varna is more than enough given the decreased demand. [Editor\'s note: according to Colliers International, total office stock in Varna has reached 177,600 sqm, while the total amount of office space in the active pipeline in the city is 77,300 sqm. The vacancy rate currently stands at 27 pct and is expected to continue to increase.] Nevertheless, we are finally also seeing some positive signs. Over the last two months we have observed increasing interest coming from tenants such as IT companies and call centres. One of our tenants has even signed a new contract, expanding its premises three times. And yet we are far from recovery. In the long run we remain optimistic: Varna is a city with potential, the second largest in Bulgaria, with a well-educated and prosperous young labour force.

Tomasz Chenczke

chairman of the management board of Centrum Development and Investments

sentimental journey

Offices in CDI’s projects usually have a supplementary function. The exception is Okrąglak in Poznań, which is to have 5,100 sqm of office space and only 1,000 sqm of retail space. It is a very important project for the city, both architecturally and sentimentally. Originally, the whole building was to have a retail function, but now it will not come up to the requirements of modern retail. Because of its importance, it will have no problems in terms of commercialisation. We are planning to lease app. three quarters of the space to small tenants, such as law firms, local companies and so on. We are not anticipating having any problems with filling the facility, because of the local sentiment and the excellent location. We are also interested in extending this project onto adjacent sites. A city promenade could be built with shops on the lower floors and offices on the higher ones. I am not worried about the Poznań office market, especially taking into consideration that Okrąglak will be opened in over a year’s time.

Mariusz Kozłowski

member of the management board of developer Globe Trade Centre

depth  in The Polish market

Globe Trade Centre is present in seven Central European countries with its office projects, but we have only decided to enter the markets of secondary cities in Poland. This is connected not so much with the size of the cities, but is more to do with their depth. I would divide the secondary office markets in Poland into two kinds. Mature ones, including Kraków and Wrocław, in which large demand has already been generated by the companies that are present there. And the second kind, including cities such as Łódź and Katowice, that are to a greater extent dependent on demand from the outside, eg. BPO companies (business process outsourcing). Even Łódź is currently enjoying growing interest. We believe in the potential of this city because it is situated close to Warsaw and is a centre offering a relatively cheaper workforce. The advantages for a developer being present in a secondary city include the rather limited competition and the considerably lower costs of construction and land purchase. Cooperation with tenants in the capital city and in secondary cities is actually similar. In secondary cities they sometimes need more time to make a decision because decision makers often work in Warsaw or come from abroad. However, client profiles are different, e.g. the above-mentioned BPO companies or smaller 
local companies.

Wojciech Rumian

director managing development projects of Hines Polska

Costs compensate for lower rents

The office markets of secondary cities are neither easier nor more rewarding than those for the capital city. However, we certainly still believe in them, the proof of which is our presence in Łódź (Sterlinga Business Center), Gdańsk and Katowice (Rondo Towers). Companies that have been operating in Warsaw for many years and wanting to develop further are looking for such forms of growth that will be the most effective with regard to the costs of running businesses. This is why not every investor wants to have all their operations concentrated in Warsaw. Service centres, regional offices and bookkeeping offices – they can operate in a much cheaper way in the cities where the office space rental costs and the costs of employment are lower. One obstacle to such development can be an insufficient amount of office space. Most of the available office space in secondary cities does not come up to the basic standards. I admit that vacancy rates in these cities are quite high, but this cannot only be explained by the weakness of these markets. The construction of many office buildings started during the final stage of economic prosperity and they are now being put into use. Taking into consideration the global economic collapse, it is not the easiest time for the commercialisation of office facilities – even in the biggest cities of Western Europe. I estimate that secondary office markets are still under-saturated in terms of office space and the maximum saturation in cities such as Kraków, Wrocław or Gdańsk should reach app. 600,000-800,000 sqm in the next dozen or so years.

In secondary cities rents are considerably lower compared to Warsaw. The economic success of investment enterprises outside Warsaw depends first of all on finding land at a reasonable price, adjusting the product to expectations and the potential of the market, and the optimisation of construction costs. Tenants in secondary markets will never pay rents similar to those in the capital city if their main aim is to lower their operating costs. Prestige – if it can be priced in any way – remains the domain of company headquarters in Warsaw.

Ovidiu Sandor

director of ModaTim Investment

The privilege of pioneers

Timişoara is the second biggest city in Romania, it has 370,000 inhabitants, and our Business City Centre project is the only modern office project here. This fact alone puts us in a privileged position. That is why I am not anxious about finding tenants for the 35,000 sqm of space. We will finish the third stage in October and the building already has contracts signed for 70 pct of the space. International companies that care about their image, such as consulting companies, are looking to open their offices here, as well as those that require very high quality space, such as the IT industry. Finding tenants is not very hard, although of course harder than before the credit crunch. It is hard to say exactly where it is better to invest – in Bucharest or in secondary cities. However, many office buildings have been developed in the capital city in the last few years, so now the competition is strong there and there is a lot of vacant space. One reason for us to be cheerful is the fact that the costs of construction have fallen by app. 30 pct and rents per sqm are in the region of EUR 13-15, which is a satisfactory level. In the future we plan to continue investing in the office sector in Timişoara, but so far we are only thinking about this.

Radoslav Bekő

chief leasing officer at HB Reavis

A hard way to  earn a living

Secondary cities usually do not have the appetite for a lot of class ‘A’ office space. Košice, a city in the east of Slovakia, is an exception to this rule. It is the second biggest city in the country, and the most important metropolitan centre in this region, with an international airport, decent infrastructure and a good pool of qualified workers. These are factors that are encouraging to investors, i.e. our potential tenants. In our Aupark Tower Košice project, which has a leasable area of over 11,500 sqm, we are not focused on any kind of tenant or industry. However, our tenants are mainly international companies that need a central location, a convenient car park and high quality space. It is not easy to find clients for a city other than the capital. It is, however, possible, with a lot of effort and a very clear campaign inviting companies to locate in Košice – and so we have been signing new contracts. The commercialisation of office buildings in secondary cities is certainly a harder way to earn a living than in the capital city, though.

Mirosław Zalewski

a partner of TPS Otwarta Przestrzeń

Port of call

We have observed a revival on the TriCity office market recently, especially compared to the previous year and the beginning of this one. The demand is coming from two directions: from international companies that have unfrozen their decision-making processes for the development and opening of new offices, as well as from local entities. So far this has not translated into the launch of projects whose construction was suspended last year. Instead, our company, as was stated in earlier announcements, has started the construction of a new Gdańsk project: the first building (with a total area of 18,000 sqm) of the Olivia Business Centre office project, located on the main street in the very centre of the city. We have already secured the finance for this project, as well as the first leasing contacts. In our experience, office space rent rates have not fallen as low as had been expected in earlier pessimistic forecasts, i.e. down to EUR 10-11 per sqm per month. We are not complaining. In fact, just the opposite, since local companies that have not considered changing their offices so far are interested in moving into a really representative location with no problems with connections or parking.