Offices defy the gloom-mongers

The most serious concerns and uncertainties for 2015 included the situation on the Warsaw market. However, what has happened in Poland’s capital city probably came as surprise to everyone. According to estimates of the Polish Office Research Forum (PORF), the total take-up in 2015 came close to 834,000 sqm, a 36.3 pct increase on 2014. The two most popular Warsaw destinations were the Upper South zone (229,300 sqm leased) and City Fringe (227,000 sqm leased). Between January 2015 and December 2015 new contracts (43.1 pct) had the highest share in the entire demand structure, followed by renegotiations of existing contracts (32.4 pct). Pre-leases made up 14.9 pct of all new lease transactions.

According to PORF, Warsaw’s largest transaction concluded in 2015 was a 21,000 sqm pre-lease agreement with Samsung, which is to move into the Warsaw Spire complex soon [the project’s developer claimed it was a 22,500 sqm lease – editor’s note], 17,500 sqm renegotiations of MBank’s Pałac Jabłonowskich lease as well as a new 17,500 sqm contract with PZU for office space in Konstruktorska Business Center.

“This year will be a challenge for the market, because the competition among developers has continued to intensify. However, the Warsaw market should be regarded as one of opportunities. Tenants can choose from world-class office projects in excellent locations in the city, negotiate decent rent terms and take advantage of the well-developed road infrastructure as well as develop their businesses with the highly qualified staff available,” claims Łukasz Kałędkiewicz, head of office department at CBRE.

Supply goes up

And there is plenty to choose from on the market. At the end of Q4 2015 the supply levels of modern office space amounted to nearly 4.66 mln sqm in Warsaw, reflecting an annual growth of 277,600 sqm. The largest amount of space, 91,400 sqm, was delivered to the market in Q3 during the year. 218,300 sqm of the newly-delivered space was developed outside the city centre. Nearly 29.8 pct of modern office space available in the city is located in city centre office buildings in the city centre while 28.1 pct – in buildings located in the Upper South zone (Mokotów district).

In the course of 2015, 23 new office buildings with a total of 278,000 sqm of space were completed in Warsaw. The largest projects put into operation last year included Postępu 14 (34,300 sqm, the Upper South zone), Royal Wilanów (29,800 sqm, the Eastern South zone, Wilanów district), Spectrum Tower (a 27,300 sqm modernization, Inner City Centre) and Domaniewska Office Hub (27,000 sqm, the Upper South zone).

This year a record amount of office space, a total of over 450,000 sqm, could be delivered to the market, particularly in the city centre. This is app. 60 pct more than the average supply recorded over the last five years. According to CBRE estimates, the new office space market could swell by additional 670,000 sqm by mid-2018.

Vacancies under control

Together with the absorption of less than 200,000 sqm (a 2016 forecast), the new supply could considerably boost the vacancy rate, which has been in a downward trend over the last year. According to PORF, the office vacancy rate for Warsaw at the end of 2015 amounted to 12.3 pct, which translated into 571,600 sqm of vacancies. This constituted a slight drop compared to the end of 2014, when Warsaw saw a 13.3 pct vacancy rate. In the city centre, 13.3 pct of stock remained vacant (down from 15.2 pct) whereas the rate amounted to 11.8 pct (down from 12.4 pct) outside the city centre.

Finding tenants could be particularly difficult for owners of older properties, whose tenants flee to the burgeoning new buildings. Yet, this circumstance fuels the investment market and encourages investors to seek for new facilities. According to CBRE, the amount of offers available on the Warsaw market indicates that the 2016 investment volumes will reach the level similar to the one registered in 2015, namely app. EUR 1.3 bln. At the same time the office sector is set to be back among the most attractive investment assets due to a large number of assets put up for sale in Poland. Finding the right ones shouldn’t be an issue.

Regions stronger than ever

A lot is going on in Kraków and Łódź in particular, where 153,000 sqm and 100,000 sqm of new office space is being currently developed respectively. Over 60 pct of the new Łódź supply has already been leased, bringing down the vacancy rate to the lowest level in the city’s history – 7.3 pct. A total of 84,000 sqm of new space was delivered in TriCity in 2015, while over 70 pct of the new Katowice stock is already leased. Meanwhile Poznań registered the vacancy rate of 15.7 pct as the city experiences some temporary problems with absorbing 60,000 sqm of new office floor. Lublin is also doing better and better when it comes to the development of the local office market. Both the vacancy rate and rent rates are going down, while three new projects are currently being carried out there.

“The Polish regional office markets are experiencing a construction boom just like Warsaw is. Last year the demand generated by companies from the business services and outsourcing sector was very strong and the space available in modern buildings was almost entirely absorbed. This attracted a larger number of investors which launched new projects. At the same time, the increasingly better quality of office facilities also encouraged investors to take a closer look at the investment products leased to institutional tenants for a longer period of time. The main cities such as Kraków, Wrocław, TriCity, Katowice, Łódź and Poznań, made their presence known,” says Joanna Mroczek, director of consultancy and marketing department at CBRE in Poland. “However, the further development will continue to depend on the developers’ ability to launch speculative projects and focus on the quality. The standard of the new office projects must not differ from the standard known to investors from Poland’s capital city or global destinations. Interestingly, owners and developers of office buildings in regional cities have oftentimes much better offerings than those in Warsaw. This feature will undoubtedly be appreciated by tenants. Their activity does continue to be strong and there is no reason to believe the demand for office space beyond Warsaw will fall,” she adds.

Selected 2015 investment office transactions in Poland

Alchemia I

Torus sold the first stage of the Gdańsk office project to a joint venture between REINO Dywidenda Plus and the Bluehouse Capital Advisor fund for app. EUR 48 mln.

Alchemia II

Polski Holding Nieruchomości has concluded an agreement on the app. PLN 260 mln (EUR 60.8 mln) purchase of the second stage of Alchemia. The final purchase agreement is to be signed by September 30th, 2016.

Andersia Business Centre

Polski Holding Nieruchomości purchased Andersia Business Centre from Von der Heyden Group’s SPV, which owns the Gdańsk building under the same name, for app. EUR 40 mln.

BPH Office Park

Euro Styl, the developer of the BPH Office Park project in Gdańsk, sold the complex to an Irish-owned company, GNT Gdańsk.

Centrum Biurowe Kazimierz

Globe Trade Centre signed a EUR 42 mln agreement with a fund managed by GLL Real Estate Partners on the sale of Centrum Biurowe Kazimierz in Kraków.

Dubois 41

French development company Nacarat sold the Dubois 41 office building in Wrocław to Warburg-HIH Invest Real Estate. The German company purchased the property on behalf of the Europa Select Immobilien Invest fund for app. EUR 21 mln.

Empark

Immofinanz Group finalized the acquisition of 50 pct of shares in the Empark Mokotów Business Park complex in Warsaw from Heitman for EUR 90 mln.

Enterprise Park

The EPISO 3 fund, which is managed by Tristan Capital Partners, purchased the office complex in Kraków together with an investment plot which enables the company to extend the project. The EUR 65 mln JV deal was signed with Avestus Real Estate.

Europlex

The Akron Group-owned AICEE II fund sold the Europlex office and retail building in Warsaw to Lone Star for EUR 61 mln.

Green Horizon in Łódź

Griffin Real Estate finalized the purchase of Green Horizon. The building was acquired from Skanska Property Poland for EUR 65 mln.

Irydion, Wiśniowy and Millenium

Lone Star Real Estate Fund III acquired a portfolio of ten CEE commercial properties from an Aviva Investors-owned fund. The app. EUR 185 mln transaction includes three Polish buildings: Irydion Office Building in Warsaw, Wiśniowy A in Warsaw and Millenium in Katowice.

Jutrzenki Business Park in Warsaw and Park Biurowy Teofilów in Łódź

The transaction, whose total value reaches nearly PLN 137.8 mln, was part of the acquisition of a series of properties owned by Arka BZ WBK Fundusz Rynku Nieruchomości 2 FIZ fund by Bergold Group.

Centrum Biurowe Kazimierz

GTC sold the Kazimerz Office Center office building in Kraków to a company controlled by GLL Real Estate Partners. A preliminary EUR 42 mln (nearly PLN 174 mln) purchase agreement was signed at the end of 2015.

Kredyt Bank headquarters

The property was acquired by Yareal Polska from Deka Immobilien (Deka-S-Property Fund No. 1) for app. EUR 14.6 mln.

Malta House

A joint venture of an investment fund managed by Bluehouse Capital Advisor and REINO Dywidenda 2 FIZ as well as REINO Dywidenda Plus purchased Skanska’s Malta House office building in Poznań for app. EUR 38 mln.

Nestlé House

The office building was purchased by Hines Poland Sustainable Income Fund (HPSIF) for app. EUR 50 mln. The seller was Kronos Real Estate.

Obrzeżna Building in Warsaw and Baltic Business Center in Gdynia

Optima sold two office buildings in Warsaw and Gdynia to the Octava FIZAN fund. The Obrzeżna Building was sold for app. EUR 20 mln.

Multimedialny Dom Plusa

The building is now the property of the W.P. Carey-owned CPA:17-Global fund. The Polkomtel headquarters was developed by White Stone Development and sold for app. EUR 60 mln.

Peakside office portfolio

WB Properties, a joint venture between Partners Group and Peakside, is to acquire three office buildings in Poland. The Luxembourg-based entity acquired the Peakside companies whose portfolios included the Atrium Centrum and Atrium Plaza office buildings in Warsaw as well as Poznań Financial Center in Poznań.

Poleczki Business Park

UBM took over a half of the shares in Warsaw’s Poleczki Business Park complex from CA Immo. The transaction exceeded EUR 80 mln.

Dominikański

Union Investment finalized the EUR 117 mln purchase of Wrocław’s Dominikański from Skanska Property Poland.

Skanska’s Polish portfolio

Swedish investor Niam purchased four Skanska Property Poland office buildings in Kraków and Katowice for a total of EUR 160 mln.

Raiffeisen Business Center

Invesco Real Estate sold the Raiffeisen Business Center office building located at ul. Piękna 20 in Warsaw to Griffin Real Estate.

Trinity Park I

Pramerica sold the Trinity Park I office building in Warsaw to Revetas Capital for EUR 35 mln in Q3 2015.

Universal

Commerz Real acquired the Universal office building in central Warsaw, along with the perpetual usufruct rights for a plot on which the building was erected, from S+B Gruppe AG. The buyer plans on developing an app. EUR 95 mln project on the site.

West Forum

The West House 1B office building, which was developed by the Archicom group as part of the West Forum Business Centre complex in Wrocław, was purchased by GNT Ventures Wrocław, a part of the Irish group GNT. The value of the transaction was app. EUR 25 mln.

Powiśle Park

Spółka Gazownictwa sold an office building located at the junction of ul. Krucza and ul. Ludna in Warsaw at the end of 2015. The company has signed an app. EUR 33 mln preliminary agreement on the sale of the app. 12,000 sqm property.

Konstalnet headquarters

The Konstalnet headquarters changed its owner in Q3 2015. The project’s developer, Laris Investment, which is a part of the Elektrim group, cashed in EUR 20 mln for the 9,000 sqm building located on ul. Jana Kazimierza in Warsaw.

Maciej Wójcik

CEO, TDJ Estate

The office market in Katowice is stable and growing progressively. We are carefully monitoring the situation on regional markets, especially in Kraków where supply and demand have recently exceeded expectations. The last few years have proved that international entities are very interested in investing in conveniently located top quality real estate products with long-term lease agreements. Due to this fact, TDJ Estate has decided to invest in a plot located in the very centre of Katowice.

The office market in Warsaw is considerably different from those across the regions. Despite the vacancy rate fluctuations, the companies operating in Warsaw appreciate the prestige and benefits that come with the capital city location: the closeness of central administration institutions along with the research, development and financial centres.

In regional cities we observe a higher risk diversification tenant activity reflected the fact that many companies consider opening their second Polish branch there. Already proven destinations such as Kraków and Wrocław are still attractive, however some negative symptoms on local labour market are starting to be noticed. This gives Katowice a tremendous opportunity to take advantage of the situation.

The biggest challenges on the office market are: problems with convincing existing tenants to renew leases and new investors to set up businesses, keeping up with trends (e.g. the Z generation lifestyle, workplace management improvements, green certifications) and cooperating with local municipalities regarding zoning procedures and faster master plan arrangements.

TDJ Estate is a new player on the commercial real estate market which now focuses on launching an office investment in the centre of Katowice. The unique location next to the so-called ‘Cultural Zone’ provides an added value to the office environment and allows easy access to wide range of amenities.

We also plan on starting the construction work on the office complex located at al. Roździeńskiego 1 in Katowice in the second quarter of 2016. First phase will deliver approximately 20,000 sqm of space and will be handed over within two years.

Marcin Liberski

sales and marketing director at Atlas Estates

We have been observing a considerable increase in the office space availability on the Warsaw market as new office facilities are constantly being put into operation.

This does not discourage developers of the new office projects. Along with a number of projects that are now being prepared, there are many more new developments planned to be completed over the next few years. The increased stock volumes result in an expected growth of the vacancy index. However it is expected to mostly concern office buildings located outside the city centres. As a result, rent rates in these facilities might go down. This, on the other hand, will require an increased activity in terms of tenant sourcing. Landlords will certainly have to take better care of renewals, complete the transactions faster and offer some incentives like covering fit-out costs.

Atlas Estates does not plan on developing any new office project in the near future as it concentrates on core activities, namely residential projects. This strategy is reflected in the change we made to the concept of the third tower planned on ul. Grzybowska in Warsaw. Previously earmarked for offices, the project will comprise residential space instead.

Stanislav Frnka

CEO, HB Reavis Poland

The commercial real estate industry in Poland seems to be on a more solid footing than it has been for quite some time. Despite different forecasts and internal turmoil following recent government elections, the Polish economy continues to develop and market players are seeing robust performance across most sectors. After 2015, which was the record-breaking year
for the office leasing market in Warsaw, in the coming months we will certainly experience an increased supply of new office space. Over 450,000 sqm coming on stream in 2016 will once again lead to a rapid hike in the amount of vacant space. As a result we will still be dealing with a tenant-led market forcing developers and landlords to remain extremely flexible and outdo one another. Even now, the growing competition motivates suppliers to provide
not only increasingly innovative services and top-of-the-range solutions, but also a numberof additional incentives, including rent-free periods and fit-out contributions. Therefore, although the positive sentiment in the leasing market is expected to continue, in line with the economic cycle spurred by the expiry of ten-year leases signed in 2006-2008 and five-year leases signed in 2011-2013, the coming months will turn out particularly difficult and demanding for owners
of older class B buildings. On the other hand, prime assets with excellent locations will continue to attract potential tenants and investors, who are stimulated by Poland’s strong economic performance coupled with falling unemployment, low interest rates and high return perspectives. Of course, the future marketability of Polish office properties is strongly dependent on the further development of the political situation and how many of the recently announced changes should actually come into force. Unless nothing unexpected happens, the new wave of investment capital coming from both European and global markets is likely
to keep the volume of investment transactions at high level both in Warsaw and in regional cities.

Jarosław Zagórski

commercial and development director of Ghelamco Poland

In 2016, the total amount of modern office space available in Poland’s capital is to exceed 5 mln sqm. There is no doubt that Warsaw will maintain its leading position on the market, as it will provide more than half of the 1.5 mln sqm of office space that is currently being developed in Poland.

Given that all the new projects are completed on time, the Warsaw market could grow by 460,000 sqm by the end of the year. Still, I wouldn’t worry much about any sharp increase in vacancies, as in most of the projects which are now being constructed a lion’s share of the new offices have already been leased out. Warsaw is and will remain a very attractive market, both for developers and investors, either domestic or international. Warsaw also attracts new entrants to the Polish market.

In recent years we have focused our efforts mainly on the Warsaw market, but now we plan to also strengthen our presence on the regional markets. Last year, the construction work started on Przystanek MBank, our first office project in Łódź. It will deliver 24,000 sqm of office space to the market. Our portfolio also includes other projects in regional cities, as for instance Synergy Business Park in Wrocław, a new project we will launch as soon as we see sufficient demand from tenants.

Moreover, we keep expanding our land bank and look for growth opportunities in other market segments, both in regional cities as and in Warsaw.

Paweł Kłosiński

leasing director, Golub GetHouse

Poland continues to be a leader of the Central and Eastern European commercial real estate market. Despite the constantly strengthening position of regional city markets, Warsaw remains to be the most attractive for those looking for safe and profitable assets.

Due to a significant amount of office space planned to be delivered to the Warsaw market in 2016, investors will probably be more active than in 2015. In fact, by 2018 new office supply in Warsaw is expected to add 670,000 sqm to the market. However, the majority of the new space, app. 440,000 sqm, is forecast to be completed this year, while analysts estimate that 25 pct of this space has already been pre-leased. This will impact the vacancy rate in 2016. However, with the limited number of major construction projects planned for completion in the next couple of years, we remain optimistic about the activity from tenants in the following years.

In this occupiers’ market, tenants tend to consolidate their office space and continue to look for locations alternative to an already crowded Mokotów district. Since demand for centrally-located modern office schemes remains strong, we believe there is still room for some high-quality projects there.

Designed with great flexibility of layout, Mennica Legacy Tower project is our response to those requirements. The project’s construction is scheduled to begin in Q1 2016 and add up 65,000 sqm of prime office space to the Warsaw market.

Our Prime Corporate Center office tower, offering 20,140 sqm of space, has already been successfully 100 pct pre-leased and is to be completed in March 2016.

Michał Styś

managing director, OPG Property Professionals

Today’s supply certainly bodes well for the market. Demand also makes us feel quite optimistic. We see tenants operating in Poland growing their businesses and therefore requiring more space and up-to-date solutions in order to adjust to modern ways of living and working. Ventures shall look for opportune moments to invest, which in turn will encourage developers to take on new projects, although we need to keep in mind the increase in investment risk in the recent months. Nevertheless, I hope that the steady, moderate growth which we currently see in Poland will carry on in the future.

The Warsaw market is by far the biggest in comparison to other regional cities in Poland. The market growth not only improves the way the businesses operate but also boosts quality of new real estate investments. Given the current demand, emerging office spaces should find new tenants without much of a problem. The growth might not be big enough to fill the existing buildings, though. Reducing the price is not always a viable option, as the low-end market sector often expects rent rates way below actual profitability for the property owners. Our company has an extensive background in managing challenging projects – we know how to handle such issues. It gives the investors a chance to look for real market opportunities that offer a higher investment return with rising asset value.

At the moment we focus our efforts on developing projects for our clients, as well as finding new investment opportunities. Our business experience and team of specialists allow us to face new challenges, so we also plan on working with the new office and mixed-use space owners.

We plan on supplying the well-known Off Piotrkowska Center in Łódź with additional 5,500 sqm of a high-end office space. This will serve as a starting point for further development of this project. Apart from that, we are currently in the middle of commercializing an emerging housing complex – Art Modern, also in Łódź. As for the first stage of the development, we will deliver 98 apartments with a total of 4,900 sqm by the end of the year. Eventually, we plan on expanding the complex to up to 374 apartments, a few services units and 12-18 offices. All our remaining commercial projects are now fully-leased as we strive to keep it that way by taking best care of our customers.

Magdalena Kowalewska

country manager, office asset management, Immofinanz Poland

At Immofinanz we stay positive about the outlook for the Polish office market and specifically Warsaw, where we focus our operations and where we are the largest local office stock holder with a total of around 270,000 sqm. Our optimism derives from two overlapping factors, namely the situation on the office market itself and our office portfolio’s performance. Office market in Warsaw has become very competitive and at the same time demanding for office real estate players. In spite of these difficulties, this financial year we have renewed more than 90 pct of expiring lease deals and successfully won many new clients. Also, we are content with the leasing outcome of our Nimbus Office development project which is now nearly fully-leased. What is more, we are also focused on further investing in our buildings so that their quality gets improved.

Additionally we keep observing that large corporations are more eager to cooperate with international real estate partners to search for economies of scale in the region. This trend will become more and more evident also in coming years. Challenges in the sector remain the same: how to lease out space successfully, meaning how to downward the pressure which results from large pipelines of new projects. However our observations from year 2015 show that standing assets keep attracting potential tenants and are still able to win against new developments. This is mainly due to the fact that the former feature greater readiness for making quick amendments, as well as for improving quality and services. We are confident that this situation will continue to last also throughout 2015.

Rafał Mazurczak

office and hotel director, Echo Investment

I can describe the sentiment on the development and investment market as good. We have had a successful Q4 and all the forecasts predict another successful year for us, which are also confirmed by last year’s preliminary reports. Of course, there are still a lot of projects planned to be developed in Warsaw and some developers are still wondering whether it is worth starting new projects at this time, while others rather focused on establishing relationships with entities financing the construction process. We have had accomplished all that. As the completion of Q22 approaches, we keep signing new tenants for the project. They include the companies that consider having two locations in Warsaw: a centrally-located headquarters and the second office with process support operations in Warsaw’s Mokotów district, or even beyond Warsaw, in regional cites. The highly developed Warsaw market offers great office selection. Like other property market players, we now see that the lease process in individual projects takes more time than originally assumed. But 2015 was really a very good year.

Developers and funds provide incentives not only in the form of attractive rent rates but also other interesting solutions which reflect growing expectations of tenants. They are the reason why some extremely interesting office interior designs are currently being developed, some new functions introduced to the buildings, and greater openness and flexibility is being presented in relationships with tenants. When it comes to regional cities, no revolutionary changes will be made. The largest regional cities such as Kraków, Wrocław, Katowice and TriCity continue to be popular among developers and investors.

However, office projects in these cities also experience some greater interest from investment funds, which is an interesting factor. We have very ambitious plans for 2016. This will certainly be a time of hard work for us. We will hand over Q22, which is our largest, tallest and most expensive project. Apart from that we are also planning to announce details of the project we plan to develop on the site formerly taken by the Warsaw Brewery. We will also aim to start the construction work on the project on ul. Beethovena. Beyond Warsaw, we will be active in Wrocław, Kraków and Gdańsk, among others. We will deliver a total of over 130,000 sqm gla to the market this year in Q22, the first stage of Opolska Business Park, Tryton, Nobilis and Symetris.