In 2008 most of the analytics and experts agreed, that we face a crisis, or at least a serious breakdown on the real estate market. Most of the analyses, reports and studies were describing mainly the situation on residential real estate market, because possible changes in that sector affect the biggest group of people. It is important to reflect on the current situation on office market. How much has the world crisis and worsening of economic situation in Poland affected the development of the market? KRN.pl website has turned to the specialists from the field of commercial real estates, in order to receive more information concerning trends on office real estate market. We were mainly interested whether it's possible to tell if the office market's demands are met with or not. Another area of interest were the chances and dangers for the development of office investments in Poland and how are what are the tendencies for rent rates.
Wioleta Wojtczak, Research and consultancy in King Sturge
Warsaw and Cracow are currently the biggest construction sites in Poland. For years, these were the markets where yearly the biggest amount of office space has been finished. Not much has changed.
These are the two biggest cities in Poland, two of the most important academic centres in the country. Both cities have access to the airports, which attend more and more passengers every year. All that influences the attractiveness of these cities, both for the developers and tenants.
Office real estate market in Poland is not full. Of course, out of the seven biggest cities, the office market in Warsaw is the most developed, however it's worth mentioning that its development started earlier.
Each of the cities can absorb yet additional office space, but with the current state of the world economy, their development will be much less dynamic. Completion of some projects can be delayed, other may not be finished because of the dwindling demand or the problems concerning financial situation of the banks.
In the first quarter of 2009 rents were noticeably lowered. The reductions were applied mainly in the buildings which are currently being constructed. Meanwhile, in the already existing buildings the cuts were more rare. It is connected with a small availability of office space in the structures currently in use. The administrators want to lease space during the office building's construction, so they set lower rents or give the tenants more encouragement (so called 'rent holidays' or financial contribution to the arranging of space). The following months can bring yet another lowering of rents, due to the anticipated smaller demand for office spaces. Because of the economic situation in the world, many companies have stopped or limited their development plans. Such decisions caused signing of less lease contracts in the first quarter of 2009 than in the last months of 2008. The improvement of the situation is expected at the turn of 2009 and 2010, when, according to the predictions, the economy should start to pick up.
The main danger for the office market is of course the economic crisis which affected the whole world. Witholding the decisions concerning expansion of some companies has limited the demand for office spaces. In the first quarter of 2009 vacant flats indexes in all of the cities were higher than at the and of 2008 even though they have remained relatively low. Availability of the space will increase due to a small demand.
Paradoxically, it can happen that bigger availability of office space can be an opportunity for the office real estate market. Many cities are perfect locations for large BPO centers. These centres usually rent about 1000 msq, but one of their expectations is a short period of time waiting for their space. In the last several months most of the cities were unable to provide available space straightaway. As a result, many of the contracts were signed before the construction was finished. Other factors taken into consideration were: the level of salaries and the availability of workers. Therefore, we can expect a new wave of interest of the BPO centres in Poland.
Dominik Witkiewicz, Senior Market Analyst in DTZ
The leader in absolute values is Warsaw, where the supply rises for another 20-40 buildings each year. In 2009, the supply will still be high as the trends from the last two years will continue.
Considering the dynamics of rise of the existing space, the biggest growth in 2009 can occur in Łódź (over 60%) and in Cracow (37 %). In Łódź, several projects, started 2-3 years ago, have coincided. In Cracow, for the last four years there has been a shortage of office space. With the passing of new local land utilisation plans, there are more and more possibilities for the construction of office buildings. A large supply of new space was noted last year in Wrocław and Tricity. There, the developers have already limited the number of the projects due in 2009 and 2010. In all of the cities, in the next three years the supply will be reduced because of the limited options of financing.
Asked a question if the theory that in some Polish cities the office real estate market is currently full is plausible, Dominik Witkiewicz answers that it is. The state of market being full is brought about by several factors, such as: rising rates of the uninhibited flats, numerous sublease offers and a significant decrease in demand from the new foreign subjects.
The state of the full market is usually temporary in the case of office real estate market. Many of the tenants prefer to move into a new building every few years, so there is always a demand for new buildings.
As far as the issue of the rents is concerned, it can be noticed that last year in Warsaw their levels were very steep. In the last few months we had a chance to observe a correction of their levels. New projects, depending on the localisation and the standard, are usually offered for 24-28 Euro/msq in the city centre, and 15-17 Euro/msq outside the centre. Of course, cheaper offers in can also be found older buildings. In the majority of other cities, the rents are similar or slightly lower than in Warsaw ecept for its city center. The lowering trend of the asking rents, affected by the worsening of economic situation, will probably be continued in the next several months. We can expect an intensified competition between the owners of the office buildings and the tenants offering a sublease.
The conversion of residential projects into office ones is, with a few exceptions, of no greater importance for the market. The users of the residential and office buildings expect different parametres, so the buildings are designed in different ways. If the framework of the building has already been made, some of the differences can be undone, however, most of the construction changes are not possible.
Such buildings, even after the conversion, usually cannot meet competition of the modern office buildings. It is caused by the height of the storeys, limited elasticity in terms of dividing and arranging space, lesser effectiveness of the space, small number of elevators and different access to sunlight. Additionally, typical residential space developers can lack experience, with which the leading office space developers boast.
As a result, residential projects changed into office ones can be a competition mainly for B-class and lower class buildings. Some of the cities like Poznań, where not much new space was made in the last few years and the tenants cannot be too choosy, serve as an exception.
Currently, the main chance is a rise in Polish economy, assuming that the return to the state from the previous year is possible. An economic rise increases the demand for services, such as: banking, financial and business service, which in turn translates into a demand for the offices. The main danger is the lack of growth.
Joanna Mroczek, Head of Consultancy & Research Department in CB Richard Ellis
Worsening of the economic situation has a negative impact on the situation on the real estate market. The demand for office spaces on the Warsaw market, noted in the first quarter of 2009 has decreased significantly and reached a level of 45,500 msq. It means a drop of almost 60% in comparison to the respective period of time in 2008. Also the size of the average lease contract has been reduced to 473 msq, while in 2008 the average was 1167 msq. In the first quarter of 2009 86 700 msq of the up-to-date office space has put into operation, which raised its total amount in Warsaw to 3,07 million msq.
The development of the office real estate market in Warsaw will be largely dependent on the demand, which this year can be smaller. Construction of most of the projects planned depends on pre-lease contracts. On the other hand, the trend of space sublease is becoming more and more popular. We are estimating that currently about 40,000 msq of space is offered for sublease by its current tenants.
The rate of space which has not been leased has risen 160 basis points in the last quarter and has reached the level of 4,5%. That rise was especially visible in the zone outside city centre, where the uninhibited flats rate amounted to 4,0 %. At the end of the first quarter of 2008 it was on the level of 1,7%.
Asking levels of the rents in the best locations in the city centre have dropped to 25-28 Euro/msq/a month. Outside the centre they have stabilised on the level of 15-16,60 Euro/msq/a month. Effective rents are about 20 % lower.
The development of investment market is still being restrained by the global financial crisis. In Warsaw the rates of capitalisation are reaching the level of 6,75 % and it is predicted, that in the future they will be about 7%.