New market norms addressing new needs

‘Eurobuild CEE’: What are the present-day needs of office tenants in terms of quality and location? What are the most common requirements landlords need to face? Are there any particular new trends that are now becoming more important than others?

Łukasz Kałędkiewicz, head of office department at CBRE: The greatest and most fundamental change that affects the needs and requirements of tenants is the redefinition of office space. At the moment the office constitutes an extremely effective means for motivating staff and attracting new talent to an organization. And this particular change impacts the perception and expectations towards location and quality. Tenants seek for offices that are attractively located and offer varied amenities and opportunities to spend the work and off-work time on.

The factors that are of growing significance here include the availability of full-service facilities close to the building tenants lease space in. These should be food and retail units as well as public transportation infrastructure. Therefore, we are now witnessing migration of tenants from the outskirts of cities into more central zones, and an increased eagerness to incur slightly higher costs if a given location meets the criteria.

Class A office buildings have been a market norm for many years now. The increased activity of developers who deliver record amounts of modern, and thus increasingly better, schemes to the market guarantees the higher quality of the space offered. The quality of space is one of the key aspects for tenants, who now review such building specifications as the efficiency and energy security in the first place. Flexible layouts are also important to them. They don’t want to be limited by the building’s architectural design and systemic constraints any more. They expect to be offered workplace solutions that could bring them the appropriate level of comfort at work.

What other incentives can tenants expect to get from landlords? Fit-out contributions, lower rents?

Financial incentives for new tenants are now becoming a market norm. They take form of rent-free periods (often as discounts), fit-out contributions and straightforward financial contributions. The change here is the more flexible approach the building owners have towards such incentives. Tenants are given the choice as to what backing they would like to receive, e.g. whether they prefer longer rent-free periods or obtain higher direct financial contributions from the landlord. This more open and cooperative attitude of landlords sends an exceptionally positive signal to tenants and enables them to pick those solutions that actually do support their organization. Fit-out contributions have been in place for a considerable number of years now, and it is very common for landlords to manage the entire process. Consequently, tenants can effortlessly minimize their fit-out costs.

Tenants are now increasingly looking for greater flexibility of the space occupied. They want to freely decide on expanding or abandoning some parts of the floor they take up during the lease term. This represents a real challenge for developers who are now required to draw up a more suitable commercialization strategy in order to avoid incurring potential losses in the long run. Additionally, landlords have been maximizing their efforts and activities aimed at increasing their buildings’ attractiveness and expanding the range of services that could be offered to tenants.

Within the past year, achievable monthly rents for prime office space in Warsaw fell from EUR 24.5 per sqm down to EUR 23.5 per sqm. We are not expecting the number to fall below 23 EUR as rents should stabilize in the second half of this year. The situation is more firm in the regional cities, with some of the markets, including Kraków and Wrocław, performing really well indeed. The vacancy rates are not that high there, and thus there is no pressure to decrease rents.

Is there a difference in the quality of space offered in Warsaw and across regional markets? If yes, what is it?

The newly-built office floor is of very comparable quality across Poland. As I mentioned before, the market is dominated by Class A buildings, where the offered standard and quality are very similar irrespective of the scheme’s location. The most outstanding and unique developments on the office market come in the form of high-rise towers erected in the inner centre of the capital city. These are a type of buildings where the standard will be the highest by definition and rents will be reflective of it.

In which direction will the office market evolve in terms of quality? What are today’s “right behind the corner” solutions?

The office market will always follow tenants and their needs. Tenants are the ones who set up market trends, in a natural way intertwined with the prevailing social trends. Certainly, the use of mobile solutions in the office space management will become more and more noticeable in the years to come. We already use systems that monitor the space utilization efficiency, interpret data and identify the most optimal and suitable solutions. We are also expecting to see an even greater integration of office space with public transport links. At the moment Poland does not have an office scheme that would offer direct access to the metro or suburban trains. However, several developers plan on bringing a scheme like that to life, and I am sure that we will see such development being completed in the coming years. Office space itself will align with further changes to the working environment and policies. At the moment the ‘smart office’ concept is on. It uses varied internal settings and design configurations to provide maximum comfort at work. However, in the coming years this will change. Offices will be designed in a way that will enable people to lead active professional and social lives. They will be friendly spaces with a full range of food and relaxation facilities within designated zones.

Does better quality translate into higher prices? Or maybe the two are not interrelated? Maybe you have to know where to look for savings and how to negotiate successfully?

Rent rate levels are being affected by a number of different factors. Costs incurred by an office tenant are the combination of a number of elements, location does certainly play a significant role. And it can be examined from both micro and macro perspectives. One should be aware that the differences in valuation of schemes within even one borough could be substantial and they affect prevailing rents. The final level of the rent to be paid will be additionally affected by the so-called “soft factors,” such as building positioning, services offered and the broadly understood everyday usability. Building exposure and orientation in relation to the main street is vital. The final level of rent will also be impacted by all add-value and unique solutions designed and available in the building.