There’s something in the air

Investor optimism is back. New buildings are now starting to rise up once more. How will this affect the skylines of city centres?

Mladen Petrov

Developers have long been consumed by an obsession with skyscrapers. The capitals of Central and Eastern Europe were supposed to become new Manhattans, and had even started to evolve in this direction – albeit only in the form of visualizations. This vision of a high-rise zone in the heart of Warsaw seemed to be evidenced by the existence of such office buildings as Warsaw Financial Center (168m including the aerial), Rondo 1 (192m) and Warsaw Trade Tower (208m), to add to the highest building in Poland – the Palace of Culture and Science (230.68m), which was built in the 1950s. Other skyscrapers were supposed to join them. Things are somewhat different in Sofia, where the 104m Rodina hotel built in 1981 remains the tallest building. Pre-credit crunch, the dynamic Bulgarian economy had created favourable conditions for bolder visions, as investors announced their plans to transform the city’s skyline. The record was supposed to be taken by Krapsi, which was planning to build two office towers, with the taller of the two designed to be 270m in height. The town of Burgas, with 200,000 inhabitants, was to have its own 26-storey office building. What do all these projects have in common? Their eventual fate. They were all put on the backburner, supposedly to wait for better times. This is an affliction that is not only limited to our region: according to Reuters, during the crunch the construction of 
142 skyscrapers was frozen across the world, which constitutes 10 pct of all projects of this type – completed or otherwise.

A good head for heights

Such a course of events could have been predicted. The connection between the ambition to build skyscrapers and an approaching crisis has already been confirmed and explained by the so-called ‘skyscraper index’ prepared by Andrew Lawrence, head of research at Dresdner Kleinwort Wasserstein. According to his observations, construction plans for the highest buildings in the world are usually drawn up just before an economic crisis and are at the same time an omen of the impending crash. It is not hard to find examples of this. The Empire State Building (443m including the spire) was completed at the beginning of the Great Depression in 1930, the World Trade Center (526m) and the Willis Tower in Chicago (formerly the Sears Tower, 527m including the spire) were opened in 1973, just before the stock market crash of 1974-1975, and already in the middle of the oil crisis. The most recent example is provided by Dubai, where Burj Khalifa (828m), the highest building in the world, has also become the greatest monument to the insane, credit-fuelled growth of the emirate.

How did it all come to this? Lawrence explains it thusly: first of all, in a good economic climate cheap credit fuels the growth in prices of construction plots. At the same time companies start to come up with bolder development visions, connected with the greater need for office space. When land is expensive and there is a high demand for offices, skyscrapers are the best solution. Thirdly, access to capital allows developers to employ the expensive, state of the art technologies needed for this type of project. All three factors tend to coalesce and culminate as growth periods come to an end.

Early bird catches the worm

Lawrence’s skyscraper index does not mention the skyscrapers which have been completed despite hard times. What do they represent? Such examples can be found in countries that are still crisis-afflicted, such as Bulgaria and Latvia, where the construction of the Z-Towers project in Riga is soon to be launched, with Finnish company YIT being the contractor. The investor, SPI Group of Luxembourg is to build two towers in the capital city, featuring a Sheraton hotel in the 29-storey building, while the second, 31-storey tower will contain 26,000 sqm of office space for lease.

At the beginning of this year the first hole was dug for the Capital Fort office project on the outskirts of Sofia. The investor, Fort Noks, a company from the iron industry, decided to go ahead with construction despite forecasts warning that the vacancy rate in the capital city might exceed 20 pct at the end of the year. Ironically enough, the investor was convinced into take these steps by the fall in the price of iron. Looking a few years ahead, it decided to invest EUR 60 mln of its own cash in a 126m skyscraper (80,000 sqm). According to the investor’s calculations, even if rents slump to EUR 6-7 per sqm per month – twice as low as current rates – the project is likely to pay for itself in a long run.

What does “the long run” mean? In the case of the Empire State Building, it took 20 years for the building to turn in a profit. Analyses confirm that the breaking-even period for such expensive and large-scale projects is around 15-20 years. The case of Civis Center in Sofia, a frozen 100m tower development which was planned by the Spanish company Riofisa, shows that the credit crunch holds no favours for skyscraper projects. The office space in the building costs EUR 1,500 per sqm, while in other exclusive projects the cost comes to only EUR 600. The differences result among others from the specificity of the construction process, more expensive lifts, and solutions such as ‘intelligent building’ control systems. Moreover, because of the higher project cost, the office market needs to have slightly higher and more stable rental rates. When the American architectural studio Atkins, the designers of the concept for Fort Capital, familiarized itself with the leasing rates in Sofia, it only had one question to ask the investor: “Are you really sure you want to go through with this project?”

Everything is going to be fine?

Representatives of Belgium-based developer Ghelamco have yet to reveal the costs for their latest Warsaw project, but they insist that skyscrapers do not always have to be so expensive. A feasibility study carried out by the company has shown that the project’s costs are reasonable. In their view, because of projects such as Ghelamco’s Warsaw Spire and the second line of the underground, the boundary of the Śródmieście and Wola districts will eventually become the de-facto financial centre of the capital city. Construction work is to start on ul. Towarowa at the end of this year and will take until 2013.

Warsaw Spire is an office complex with a total area of 100,000 sqm. The project includes two 55-storey buildings and a tower 200m in height. Analysts are claiming that this new space will be enough for the moment, but the market of the capital city can absorb only one project of this sort within the next five years. However, the success of Rondo 1 has spurred many companies into action. A new project is planned for the same neighbourhood by Atlas Estates – the 39,000 sqm HPO building. Atlas Estates is currently looking for another investor for the project and for a main tenant. “The continuation of work on this project is conditional on a contract being signed with an anchor tenant for a minimum of one third of the whole area,” claims Nahman Tsabar, general director of Atlas Estates.

The Jewish Community of Warsaw is still looking for a partner to carry out a project on ul. Twarda 6. A valid planning permit for the plot of land has already been secured, allowing for the construction of a building app. 160m in height. Negotiations with potential investors, who include a large Scandinavian company, a group of US investors and a possible partner from Poland, are currently underway. The cost of the project is estimated at EUR 200 mln and the plot itself is worth app. PLN 100 mln. One of the options that the Community is considering is exchanging the site for other finished properties in the city. They have also not ruled out giving up the land in exchange for the construction of the Community’s headquarters and a Jewish community centre in another part of Warsaw.

If Ghelamco and Atlas Estates’ projects were finished today, the supply of office space in the city centre would increase by nearly 15 pct. In the district of Śródmieście, where the biggest correction in rental rates took place last year, there is currently 1,124 mln sqm of office space. Last year the vacancy rate in the capital city increased by 5 percentage points to 8 pct. “I believe that incentives for tenants will expire by the end of the year. Rents, although not yet increasing, are stable. Developers can afford to look 2-3 years ahead,” believes Richard Aboo, a partner at Cushman & Wakefield.

According to some observers, the fact that another 200,000 sqm of offices will have entered the Warsaw market by the end of 2011 brings into question how rapid the supposed improvement in the office market is going to be. And if that were not enough, construction work on projects with a combined area of 160,000 sqm is soon to start. “The situation is improving. Tenants are looking for top quality offices – and not just for savings outside the city centre; but they do return when the economic climate improves,” explains Richard Aboo. He goes on to add that: “A skyscraper has an additional value for such tenants as companies from the financial sector, consulting companies and law firms. They can plan the development of their companies within the building, just as in the case of office parks. The space is available and the location is very attractive.”

Last year the district of Mokotów managed to maintain stable rents at EUR 14-15.50, after having fallen from EUR 18, while city centre rents went down to a level last seen at the end of 2006. According to the latest report from CB Richard Ellis, rental rates in the city centre were around EUR 21-23. By contrast, the highest rents in the centre reached heights of EUR 30-40 per sqm in 
Q4 2008. “The CBD is more expensive for many reasons. An excellent location in a very good building simply costs money, but during the crisis this district had to compete with cheaper areas, and this is what forced the reductions,” explains Richard Aboo.

Tenant-friendly rents

Mokotów is indeed more steady when it comes to rents, as by contrast they are more varied in the centre, from EUR 20 to 30. In this regard Ghelamco has adopted a stable rent policy. This means that its rents will be in the EUR 20-25 range, so they are closer to the Mokotów levels. For this project, Ghelamco will try to create demand for prestige offices, attracting tenants with the fact that it will not build another empty office building next door. A square will be developed around the building, as well as comprehensive public-friendly infrastructure. Ghelamco remains optimistic and believes there are tenants on the market looking for such high-quality office space. 
   Daniel Bienias, the leasing manager for the Warsaw Financial Center who is starting work for CB Richard Ellis this month, has few doubts about this. The WFC building had a vacancy rate of 20 pct in May 2009, with a leasable area of 50,000 sqm. It finished the year in a better position – 10 pct of the area remains available for lease. 
“Of course we had to adjust to the market conditions like everybody else, and our rent currently amounts to EUR 23. Skyscrapers are popular with tenants because for one thing there are still not many buildings like this. A good building is more crisis-resistant, but there are, however, some exceptions."

How will the new skyscrapers change the rules of the game? “It will be difficult. New players on the market are starting the fight for clients with more expensive plots and loans with less favourable terms,” predicts Daniel Bienias. In Q1 this year, 122,000 sqm of offices were leased in Warsaw. This would have been good news if it were not for one important detail: as many as 70 pct of the transactions concerned locations outside the city centre.

How will the new skyscrapers attract tenants? Their strong point will certainly be the new technologies they feature, including a nod to ecological construction, which is particularly appreciated by Western tenants – and it is they who will make up the main source of the demand for such offices. “After two years of hardship, tenants be will rethinking their needs and making important decisions about relocating,” believes Daniel Bienias. 
  Richard Aboo adds that: “The Warsaw market belongs to the aggressive players. There are, however, experienced companies here, so I believe that this time fair play will rule in the fight for tenants. Time is on everybody’s side – every developer that finishes a building between 2011 and 2013 should be in a strong position. ν