Vacancy rate creeps up as supply builds

Office availability has risen, with a crop of new building setting the scene for a downward correction in rental levels across the city Last year the Warsaw office market saw a slight overhang of space – a novelty in the city. For many years owners and developers have been used to virtually every scrap of prime new accommodation being prelet at ever-increasing rents. But most agents active in the city are noting a significant downward rental correction as supply creeps up to exceed demand. According to Roger Saper, managing partner at Jones Lang LaSalle in the city: “Last year we were steaming through $40 per m2 a month but I think levels will settle at around $32-$35.” DTZ Debenham Zadelfhoff’s managing director Eelko Korteweg backs this up: “The office market is maturing but a lot of companies are pretending that rents will continue to go up.” Warsaw’s property market is divided by the Vistula river running south-east to north-west through the city centre. Eastwards lies the area known as Praga, chiefly a mix of residential and communist era commercial property, mostly industrial. With the exception of one or two developments, notably ECC’s Promenada, this area has been largely ignored by western developers in favour of the more attractive and commercially-oriented west side of the river. The west bank has seen more modern development as it includes the Srodmiescie district – the city centre – and is the gateway to the important southern and western areas of Poland and the rest of Europe. The centre also tends to be very mixed in use while outlying areas are dominated by housing or a residential/industrial mix. As the real estate market in Warsaw is at a relatively early stage of development, a true commercial centre is hard to identify. DTZ describes the best office locations as those bounded by Krolewska, Jana Pawla II, Nowy Swiat, drakowskie Przedmiescie and Wicza streets. In addition there are other pockets such as the area next to the Opera House and around Saski Park. Outside the centre, the Mokotów district and the western stretch of Jerozolimskie are popular among occupiers. Initial phases of schemes like Wisniowy Business Park, The Globe Trade Center and Curtis Plaza in Mokotów, and Jerozolimskie Business Park, Ochota Business Park along with owner-occupied buildings such as those occupied by BASF and Hoechst along aleje Jerozolimskie have already been completed. There are other proposals for this area too – the Bayer headquarters and Thorkild Kristensen’s Company House. Demand is likely to continue in this area thanks to the district’s easy accessibility. Foreign blue-chip companies continue to lead demand for office space. They are entering for the first time, expanding, or relocating to larger premises. New legislation allowing private pension funds to set up from next year will also boost demand as will the privatisation of several state-run monopolies such as rail and postal services. With the exception of the Polish banks, domestic companies still prefer to take cheaper existing or refurbished space. This is changing and the largest Polish bank, PKO, has chosen to locate its 28,00m2 national headquarters within the new Pulawska Financial Center. Businesss parks are still in their infancy but as the road network around Warsaw is improved occupiers will become more used to the option of locating out of town. According to Saper, the property market is similar to the UK but freeholds are harder to come by. Land is chiefly owned by the state, which grants a permanent usufruct, meaning the right to use of the land. “The handicaps are comparable with eastern Germany: unless you are very careful people come out of the woodwork who have had land confiscated. You need to be 200% sure and there are a number of cases in the courts at the moment on disputed ownership,” says Saper. Development is funded by debt, with the banks requiring around a 30% prelet level of a project. Warsaw’s stock of modern office space built since 1990 reached the 500,000m2 mark by the middle of last year. Strong demand for offices has ensured a vacancy rate of about 1% over the last few years. But, according to Chelverton Properties’ director Chris Vaughn: “The high rate of development will push this up by the end of this year to 4%. By the end of 2000 it will be 6%.” The Polish way of calculating rents does not encourage efficient development. A major component of the rent is an “add-on” factor, made up of common areas shared by the occupiers of multi-let buildings. This add-on factor is usually split on a pro rata basis between occupiers. Commenting on the add-on factor, DTZ’s Korteweg says: “We just won the instruction to find 6,000m2 for Hewlett Packard and we are doing a complete inventory of buildings. Many tenants look at the rent per m2 a month rather than the total occupation costs. Headline rents don’t mean a thing, especially when you are taking so much space.” Vaughn says Chelverton’s Wisniovy Business Park has the lowest add-on factor in the Warsaw market of 4%. The first phase of this scheme comprises four buildings totalling 22,000m2 and tenants include IBM, Sony and ABN AMRO. Chelverton is currently building a second phase consisting of 22,000m2. As the vacancy rate rises, Vaughn says that tenants will have a much greater choice and be in a better position to negotiate rents downwards. “Demand has outstripped supply for several years and occupiers on 3-5 year leases that are up this year will probably walk to better space.” Agnieszka Kubas, partner at Couderq & Kubas Consulting, agrees that there will be a flight to quality and thinks that rents will fall: ” Too many projects have been designed on the assumption of being let at over $35 per m2 a month. Most will be let at below this so the market will also become more segmented and there will be more sub-markets as a consequence,” she says. Underlining the popularity of top quality space is Golub Europe’s recently completed 71,000m2 Warsaw Financial Centre. Marketing manager Robert Mathias says: “This is a trophy building. We wanted it to be the best quality building in the entire region and I think Golub got that. We have had tremendous success; it was 72% let at opening at $40 per m2 a month.” Bank Austria Creditanstalt took 11,000m2, Arthur Andersen moved to 7,000m2 while other tenants include Cameron McKenna, General Electric and the European Bank for Reconstruction and Development. Golub is now ready to start work on the 20,000m2 International Business Centre on the south side of the CBD towards the airport. “This will be much more functional and is aimed at the service sector. We will be quoting rents of around $30 per m2 a month,” says Mathias. Foreign developers are still coming to Warsaw. This month NCC bought a site known as West Gate. Located on aleje Jerozolimskie, the scheme involves 25,000m2 of offices, 1,300m2 of shopping and a 300m2 restaurant. Completion is set for 2001. But there are signs that the office sector could become over-developed. DTZ expects around 340,000m2 to come available this year while 2000 will see the completion of around a further 400,000m2. According to Brian Patterson, managing director of US investor-developer Lincoln AIG, a joint venture funded by the US’s AIG insurance company: “The time has come to stop doing speculative development. Daewoo’s 50,000m2 Warsaw Trade Tower does not have preleasing and it could cause significant problems. The market may absorb this but if [speculative development] continues there could be a dangerous situation.” Major developers in Warsaw Developer Country of origin Project AIG/Lincoln USA Saski Point Diamond Business Park Apollo-Rida USA/Polish Renaissance Plaza, Renaissance Tower Chelverton Properties/Lend Lease UK/Australia Wisniowy Business Park ECC, European Construction Consortium The Netherlands Promenada, ABB headquarters Globe Trade Centre Israel Mokotów Business Park Golub Europe/Epstein USA/Poland Warsaw Financial Center,Warsaw Corporate Center Ilbau Austria LIM Center, IPC, ILMET,IBI City House Liebrecht & Wood Belgium Green House, Jerozolimskie Business Park Mahler Project Germany Ochota Office Park, Wspólna Pol Nordic Group Norway Nordic Park Reform Turkey Reform Plaza, Reform Center Skanska Sweden Atrium Swede Center The Netherlands University Business Center I,Swede Center TK Development Denmark Philips Company House, Targówek, Reduta Van der Heyden Groupe Germany Nowogrodzka 69 Source: DTZ Debenham Zadelhoff, Ernst & Young Lease terms and conditions Lease length 5-7 years Rent Quoted in US dollars or Deutschmarks and paid in Polish zloty Rent rises Annually in line with US or German CPI Other charges Service charge plus an “add-on” factor of 10-30% to reflect common areas Deposit 3-6 months rent or bank guarantee Source: Jones Lang LaSalle Buildings under construction in March 1999 Project Gross lettable area (m2) Taken and pre-commitments (m2) Completion Inner city Aurum 8000 1999 BRC 55000 1999/2000 Europlex 10000 1999 Focus Filtrowa 28000 2000 Library 2700 1999 Nordic Park 8200 1999 Plac Teatralny 4500 4500 1999 Reform Plaza 34600 1999 Roma Center 12000 1999 Saski Point A 8000 6500 1999 Saski Point B 10000 10000 1999 Skorupki 64000 4000 1999 Stock Exchange 27000 27000 1999 TPSA I 20000 20000 2000 TPSA II 16000 16000 2000 Warsaw Towers 20600 8000 1999 Warsaw Financial Center 49000 30000 1999 Total 317600 126000 Out of centre Babka Tower 9000 2000 Bayer 5000 5000 1999 Europejskie Centrum Inwestycyjne 24000 2000 Heros 6000 1999 Jerozolimskie Business Park D 8000 1999 LAND 8500 1999 MBP – Orion 13100 1999 MBO – Sirius 13100 13100 1999 Ochota Office Park 30000 30000 1999 Optimus Business Center 11400 11400 1999 Optimus Tower 8400 1999 Philips Company House 6500 6500 1999 Platan 14000 10000 1999 Plocka Center I 1500 1998 Plocka Center II 2600 1999 Ursynów Business Park 7500 1999 Wioeniowy Building D 5800 1999 Warsaw Trade Tower 37000 4000 2000 Subtotal 211400 80000 Total inner city 1998 317600 126000 Total out of city centre 1998 211400 80000 Total 529000 206000 Source: DTZ Debenham Zadelhoff