Warsaw’s uncertain future

Warsaw Spire Image : Ghelamco

Warsaw’s office stock is set to grow by 600,000 sqm by the end of 2016, half of which will be erected in the very center of the city. Add to that the increasingly pronounced trend of tenants favoring the more flexible and spacious offices outside the capital’s center. Is the 3-4 percent GDP growth forecast for the coming years enough to cushion the effects of increasing oversupply?

by Beata Socha

In Q1 2014, some 85,000 sqm of office space was delivered in Warsaw, 16 percent more than in the corresponding period of last year, according to Knight Frank. Throughout 2014, 320,000 sqm should be added to the market, a 7 percent increase compared to 2013, according to projections by JLL. Altogether Warsaw has 611,000 sqm of office stock in the pipeline, which is no trifle given that Warsaw now has 4.2 million sqm of office space.

The most recent major completions include Skanska’s Atrium 1 with 16,200 sqm, Echo Investment’s Park Rozwoju with 16,000 sqm of space, HB Reavis’s Gdański Business Center (15,000 sqm) and The Park Warsaw B2 (10,000 sqm) delivered by AIG/Lincoln.

Crowded CBD

Developer activity was at its strongest at the beginning of the year in the capital’s city center, where as much as 31,000 sqm was added to the market in Q1 2014. Developer activity shows no signs of slowing down, either. Between 2014 and 2016, 350,000 sqm of office space will be delivered in the CBD area, increasing the total office stock in Warsaw’s center by 25 percent, according to CBRE. Most of the new office space will be built in the western part of Warsaw’s CBD.

During 2014 and 2015, a number of refurbished office schemes in the CBD are scheduled for completion, including Ethos, Spektrum and Moniuszki Tower, which will altogether add 49,000 sqm of space.

There are also a number of brand new projects in the works, most of them in or close to the city center. HB Reavis is close to completion on its 30,000 sqm building A of the Gdański Business Center complex in southern Żoliborz. Work is progressing on Ghelamco’s Warsaw Spire, which is set to be completed in 2015, adding a whopping 100,000 sqm to the capital’s market. A few weeks ago Austrian developer S+B Gruppe launched construction on a 6,000-sqm office scheme on ul. Królewska, scheduled to be delivered in mid-2015.

Another major batch of shiny new office space is expected also in 2016. Echo’s biggest scheme, the Q22 project, is scheduled to be delivered in early 2016. After the successful sale of Atrium 1, Skanska has also recently launched another office scheme in the center, Atrium 2, which will provide 20,000 sqm of office space in Q2 2016.

Tough times ahead

Q22The sheer volume under construction has been cause for concern for quite some time now. Will the market be able to absorb all this space? What will happen to the rent levels as the supply continues to soar? For now there is no reason to panic. As much as 60 percent of the volume completed in the first three months of the year has already been commercialized, according to Knight Frank. JLL estimates that 26 percent of the space scheduled for Q2-Q4 2014 has also already been pre-leased. Something’s gotta give eventually, though.

“The increased new supply is forecast to create upward pressure on the vacancy level and downward pressure on the level of rents with an increasing number of offered incentives lowering the effective rates even by 25 percent below the level of headline rents. This trend should continue at least until the end of 2015,” said Konrad Heidinger, market consultant at CBRE’s Research Department.

Currently, prime office rents in Warsaw stand at €25-€26 per sqm per month in the CBD area, while in non-central locations they are at €14-€15 per sqm per month, according to CBRE data. In the entire city center (CBD plus fringe locations) monthly rents come in at €22-€24 per sqm, according to JLL.

“Occupiers are fully aware of the increased competition among developers. In many cases, they can achieve significantly better financial conditions and improve the technical standard of their offices at the same time by relocating to a newly completed building. Furthermore, companies are tending to move out from the central locations and are looking for flexible, customized offices in business parks located in the fringe of the city center or in further, non-central locations,” said Colin Waddell, managing director of CBRE for Poland.

Moving out of the center

Tomasz Czuba, head of Office Agency at JLL, also noted that non-central locations, particularly Mokotów, are gaining in popularity. “In Q1 2014 alone, approximately 136,400 sqm was leased, with Mokotów taking a clear lead with a 37 percent share of gross take-up volume,” he said. The second most popular location is the city center fringe, with a share of 18 percent of all lease transactions, according to data by Warsaw Research Forum.

New supply for lease in WarsawHigher take-up in these locations is changing the balance in vacancy rates. In the CBD area, vacancy now stands at 13.2 percent and is higher than in the city center fringe (9.5 percent) and in non-central locations (12.7 percent). If more tenants move out of the center, who will rent all this space about to roll off?

Developers and investors will no doubt have more work courting potential tenants. “We’re not afraid. We have
to adjust to it. We try to attract tenants with quality and location. The next two or three years years will be tough. With the amount of space that will be delivered this year we can expect rents
to go down,” said Stanislav Frnka, CEO of HB Reavis.

Pre-leasing activity in Q1 was “flat when compared to previous quarters, with only an 8 percent share in gross take-up. This may be due to the higher availability of existing vacant office space on the market,” said JLL’s Czuba. Experts’ projections are far from alarmist, though. “We expect some large pre-lets to be closed in the upcoming quarters. In our opinion, demand in Warsaw will remain sound, thanks to solid economic fundamentals and very positive GDP projections for 2014-2015,” he added.

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