Happy days are here again?

This year should see a revival on the office market, but for developers this does not mean a re turn to  the  days of plenty. However, demand is growing from one very specific type of tenant

Mladen Petrov

Nobody expected the office market to pick up in 2009, the year when tenants crossed the word ‘expansion’ out of their dictionaries and replaced it with ‘contract renegotiation’. Their pessimistic mood was reflected in the market data for the first nine months of the year, when the numbers related to demand and rent fell dramatically for each successive quarter compared to those of 2008 (a year now described by analysts as “crazy”).

At the end of 2009, 7.3 pct of office space in Warsaw was vacant, which meant a growth of 5 pct over the year. In spite of this, old hands in the business are not characterizing the previous year as a catastrophe. One of our interviewees puts it this way: “I work from 9 am to 8 pm, but unlike last year I do not have to calm developers down anymore, and only have to talk with actual tenants.” This is a good sign.

Everything’s going to be all right

The fourth quarter of 2009 was a period of an improvement in the general mood in the entire region. Although for the whole year the office take-up in Warsaw reached the level of 280,000 sqm (a 46 pct fall compared to 2008), the demand in Q4 turned out to be 29 pct higher than Q3 (98,300 sqm). Everyone was surprised by this level of annual demand. “Last year was not so bad at all, taking into consideration the current conditions on the market. We estimate that there will be app. 350,000 sqm of office space leased in Warsaw this year,” predicts Bartosz Mierzwiak, national director of the office agency at Jones Lang LaSalle. “We have app. 220,000  sqm of vacant offices in Warsaw at the moment, but we calculate that out of these 150,000 sqm is actually for lease, as the remaining offices do not comply with the requirements of tenants for various reasons. This year app. 185,000  sqm of new offices will enter the market, of which 40  pct have already been leased. So there might not be enough new offices at the end of the year or the beginning of 2011,” estimates the JLL representative. He also adds that 2011 will be the year of the developer – provided that the developer has a project that is nearing completion. Around 145,000 sqm of new office space will come online in 2011.

Jacek Luzar, the leasing manager of UBM, the joint-developer with CA Immo of the Poleczki Business Park complex, confirms this. “The market is slowly starting to run out of big offices with areas exceeding 5,000  sqm,” he notes. So the  situation is shifting in favour of developers. According to  analysts, these will be the  last months of promotions for tenants.

Seek and you shall find

Bartosz Mierzwiak forecasts that the next big trend, following large pre-lease contracts, will be for renegotiations. According to  the Warsaw Research Forum, renegotiations constituted 22  pct of the  leasing market in the  Polish capital last year. Some changes in the make-up of the tenants is also apparent. The proportion of space occupied by banks fell from 22 pct in 2008 to 6 pct last year. “Banks will be back for sure. We can already see them transferring their back-office activities from the centre to districts such as Mokotów or Wola. As the mood cools down, we should see a return to growth in what is a volatile business,” claims Jacek Luzar. Last year was a good one for pharmaceutical companies, whose share in the leasing market grew by 2 pct up to 7 pct. One of the most significant transactions was Abbott Laboratories’ lease of 3,600 sqm in Park Postępu, a  Warsaw project by Echo Investment in the district of Mokotów. While in Hungary, pharmaceutical firms were among the most active tenants – AstraZeneca signed a contract for the lease of 1,500 sqm in Dorottya Udvar in Budapest and GlaxoSmithKline prolonged its contract for app. 2,400 sqm in MOM Park.
   Hungarian analysts are starting to see the situation in a better light, following a very anxious 2009. The main reason for the new-found optimism is that in retrospect the last year was not as bad as many expected it would turn out to be. According to Colliers’ statistics, office rents in Budapest fell by 10 to  30  pct last year. “The majority of tenants decided to take advantage of the circumstances and renegotiate their contracts, and landlords proved highly susceptible to accepting their terms,” according to the head of Colliers International’s office division, Miklós Saly.

Colliers expects vacancy in Budapest to be around the 25 pct mark at the end of 2010. New developments this year are unlikely, especially on a speculative basis. The earliest time that new projects could start up once more would be in 2012. “By that time, projects that were suspended last year in response to  the  conditions could have a competitive edge, since they could be introduced to the market far quicker to meet new demand,” Mr Saly believes.

Government u-turns

“This is a very promising market, the trails have already been blazed and there is no more fear over signing contracts with developers.” Which market is this, you might ask. This is how Bartosz Mierzwiak characterizes one of the increasingly important types of tenant: public institutions. Such bodies can have a number of reasons for moving offices: e.g., one institution may be scattered across town in a number of offices, or new departments may get set up, or the rent in their current premises might not be so good.

The Bulgarian and Hungarian governments had been planning to become developers themselves and build governmental complexes for their own needs. A tender for the architectural design ofa Bulgarian governmental centre in Sofia, which attracted several world-famous architects, including Zaha Hadid and Norman Foster, was eventually won by French architect Dominique Perrault. Modern buildings were commissioned to house ministries, the offices of international organizations and apartments for diplomats, with the launch of the construction work planned for this year. However, the crisis has now finally forced the Bulgarian government to put this ambitious project on the back-burner. A similar situation unfolded in Budapest. In 2007, the Hungarian government announced its intention to optimize administration costs, including plans to build a governmental complex on a site near the west railway station, which would house 11 ministries and the new building of the Council of Ministers. The authorities then took the step of looking for a contractor to build and service the complex for 25 years for the price of HUF 142.5  bln. However, the  project has now been frozen – according to government officials – “for an  indefinite period”.

A big tenant is worth its weight in gold

This is important news for developers. It means that public institutions still remain potential tenants of office space, and in times when the average size of leased offices is no bigger than 500 sqm (according to the Warsaw Research Forum in 2009), a tenant in need of several thousand square metres of office space is worth its weight in gold. In the biggest transaction on the Polish office market last year, the Agency for the  Restructuring and Modernization of Agriculture (ARiMR) signed a tenancy contract with the developers of Poleczki Business Park (UBM Realitaetenentwicklung AG and CA Immo International), leasing 16,500 sqm of office space in the complex. There had been several other, smaller transactions with this type of tenant in the two previous years. The Credit Information Office (Biuro Informacji Kredytowej) and the Public Procurement Office (Urząd Zamówień Publicznych) settled into new headquarters in the 17,700 sqm Adgar Plaza complex in Mokotów, altogether leasing over 4,000 sqm. And the Civil Aviation Office (Urząd Lotnictwa Cywilnego) leased most of the space in the ‘B’ building of Flanders Business Park, owned by Liebrecht & WooD.

The  interest of public bodies in leasing new office space is growing: in 2008 public institutions had an 8 pct share in the  demand for new offices, but last year this figure grew to 12 pct. “We receive a  lot of enquiries from this type of tenant. They also want to take advantage of the market situation, and due to  the large supply they can afford modern offices in good locations,” remarks Łukasz Żelezik, Echo Investment’s office space leasing manager. The latest transaction of this kind to be finalized was for the lease of 1,588  sqm by the General Inspectorate of Road Transport (GITD).

In Hungary the state is a less active player on the office market, even though some institutions have already entered the frame as tenants – as in the  latest transaction, in which the tax authority APEH has rented out 8,000 sqm in the Spirál project in Budapest. Others such as the national postal service Magyar Posta or the state health fund OEP have also moved into rented premises. “Since 2002, institutions and state-owned firms have leased a total of app. 180,000 sqm,” according to Colliers’ Miklós Saly. “We are not expecting them to return to the market in a major way anytime in 2010,” he adds. The main reason for this is that Hungary is holding general elections in the spring. Once a new government is elected, which will in all likelihood be led by the conservative Fidesz party, it will be busy with the transition period and choosing new people to head state-owned companies, so new office leases will not feature high on its agenda.

State office leases are also problematic in Hungary, because they are usually conducted through public procurement procedures, which have a bad reputation. Too often market insiders say that given tenders are drafted very specifically, tailored to the services offered by a bidder that has already been chosen well before the announcement is even made public.

Who is this?

Jacek Luzar of UBM emphasizes that state institutions are no different from commercial tenants in one respect – savings are also the most important factor for them. “The arithmetic is simple. An institution needs several thousand square metres of offices. If they do not have to be located in the very centre, why should they pay EUR 20 per sqm, if offices in Wola or Mokotów cost EUR 15 per sqm? If you multiply these sums over five years, you can see the possibility of making substantial savings,” asserts UBM’s representative.

This was the destination of the  Civil Aviation Office, which moved to a 6,500 sqm office in Flanders Business Park last year. “We had been looking for a suitable location for nearly a year. The reason for this move was our aim to minimize fixed costs,” explains Katarzyna Krasnodębska, the spokesperson of the Civil Aviation Office. 
  What form do negotiations with such a tenant take? Developers stress that you have to be patient. “This is a specific type of client and a very demanding one at that,” remarks Andrzej Brochocki while summarizing his experiences with public tenants, and whose agency closed the biggest transaction on the office market last year. He describes the 6-month negotiations with ARMA as “difficult, but relatively quick and successful”. “The decision making process for public institutions is usually longer, as they are extremely focused on budget matters. But the game is worth the candle,” Mr Brochocki believes.

Developers who have such tenants in their buildings agree on one thing – the rent is paid on time, albeit in złoty. “They generally have to stay within their annual budgets, so they do not want to take upon themselves the currency risk, so developers have to accept this. This does not apply to all institutions and sometimes a tenant pays in euro,” relates Hanna Piskorek, the  director of Adgar Postępu, the  developer of the Adgar Plaza complex. Developers are left with the  hope that they have made good forecasts for the  long-term relationship between the  złoty and the euro. “Sometimes it is worth making a compromise, especially if a tenant is financially viable,” believes Łukasz Żelezik of Echo Investment, who adds that he also has to put in a lot of effort in order to satisfy such a tenant. There were a dozen or so signatures of various decision-makers needed in the  recent lease transaction concluded with GIRT, before the premises could be put into use. ν 

Gergo Racz contributed to this article