All across central and eastern Europe last year, office demand continued to drive a recovery that began late in 2009. But the statistics show considerable variation among countries.
Excluding Moscow, the region recorded a 31% growth in take-up in 2010, according to CB Richard Ellis. The strongest growth was recorded in Warsaw, followed by, to a significantly lesser extent, Bucharest. Belgrade, Budapest and Prague all underperformed, posting falling year-on-year take-up.
Annual new supply has been declining since 2008. CBRE estimates that this year’s office pipeline is down by almost 25% year-on-year.
The number of completions and the number of projects in the development pipeline this year and next is low because of financing difficulties, coupled with limited prelet construction starts and relatively high vacancy rates in some places.
Warsaw registered the highest quarterly take-up in the market’s history, with 198,000 m2 recorded in the first quarter of this year. The total represents 36% of last year’s take-up, according to Jones Lang LaSalle.
Lease renewals power demand
Lease renewals still represent a considerable part of demand, at 24%. Prelet agreements, however, made up the greatest share during the first quarter, with 31%. The largest new lease deal in Warsaw was signed in the south-west (Jerozolimskie) submarket, by Telekomunikacja Polska in Miasteczko TP, for a 43,700 m2 asset.
The upper-south (Mokotów), central and south-west areas are still the most popular submarkets for Warsaw tenants and take-up in these three districts constituted almost 93% of the total volume for the city.
Poland’s regional cities’ office markets are also doing well. Prime headline rents have stabilised and corporate demand for space is recovering. Rising corporate demand in all major regional Polish office markets led to more than 230,000 m2 being leased last year and has prompted a number of office development starts.
Around 324,000 m2 of offices are being built across the country, most of which are in Wroclaw (more than 90,000 m2) and Lódz (around 66,000 m2). In these markets, the office space under construction is equal to around 25% and 30% of existing office supply respectively.
But in Katowice, only 10,700 m2 is at the construction stage. During this year, around half of the office projects under construction in the city will be completed. JLL estimates that 135,000 m2 of the speculative modern office space will enter the regional market supply during the rest of this year, in addition to the 14,600 m2 completed during the first quarter.
This means effectively that new supply is slowing: a 34 and 31% decline on 2009 and 2010 respectively. Tomasz Tzroslo, JLL’s head of CEE capital markets, says: “Taking into consideration office availability, the pipeline for 2011 and improving economic indicators, recovery will continue and filter into re-starts of projects that were put on hold during the slowdown, and we may start witnessing some initial upward pressure on rents.”
A shortage of bank funding is holding back new development. Banks usually require at least 30% of a project to be prelet before they start negotiations, and funding is committed when prelets reach 50% and more. Banks also require 30-50% equity, depending on the country.
Some CEE locations are more mature than others, which makes speculative development in less mature markets more risky regardless of prelet considerations. This should help drive the vacancy rates down and restore the balance between supply and demand with effective rental rates increases likely this year, says CBRE.
The situation in Moscow
In the second half of last year, office take-up in Moscow was the highest in Europe, according to Tim Millard, Cushman & Wakefield’s Moscow director-general.
“Corporates are seeing that the market is turning in favour of the landlord, so tenants are keen to find space now. In the first quarter, more than 500,000 m2 was taken up. This compares with the peak year of the recession in 2008 when 1.9m m2 was taken in the whole 12 months,” says Millard.
Charles Bourdais, managing director of Moscow and CIS at Jones Lang LaSalle, agrees that demand is coming back strongly in the leasing markets. “We are seeing lower vacancy in the CBD, which is leading to rising rents,” he says. “There is little in the office pipeline.”
But tentative recovery does not mean a return to pre-crisis levels, and there are some negative trends around. Earlier this year, two big Russian developers – Coalco Development and AFI Development – planned to restructure their portfolios.
Coalco is selling out of commercial property in favour of residential and is selling its 47%-stake in the 74,000m2 White Square office complex to a consortium of VTB Capital, which is the real estate arm of VTB Bank, and US-based global investor TPG. The remaining share in the scheme is owned by joint developer of the project, AIG/Lincoln. Sources say White Square is worth around $370m (€260m).
AFI plans to sell its regional assets and turn from a development business into an investment entity.
Bourdais says: “The new mayor has prioritised infrastructure improvements in the city centre. This is constraining development because infrastructure has to be in place before consents are granted.”
He predicts that there will be more consolidation among developers and that profitable deals for independent firms like Horus Capital, which last year sold an $800m Moscow portfolio, are diminishing. “The chance for smaller one-off developers like Horus to exploit a favourable market will be lower as firms will need critical mass to prosper,” says Bourdais.
Local sources say this sale, to Otkritie Financial Corporation, reflected a yield below 11% for the class B space. JLL puts current yields for class A offices at 9%.
