Lodz struggles to restore its pre-war fortunes
Lodz, the second biggest city in Poland, has never had the economic muscle of its mighty neighbor, Warsaw, which is only 120 kilometers away. As the capital has risen from the ashes of its communist past, Lodz has yet to get to its feet after years of relative prosperity under a command economy.
During the past 10 years, Lodz's economy has slumped dramatically as its main industry, textiles, has fallen afoul of new market forces. Investment has been in short supply, adding further to the city's industrial woes. Consequently, unemployment in greater Lodz, a city of about 1 million people, rocketed to double-digit figures during the early 1990s.
"Lodz's economic potential is lower than you would think with a city that size," said Katarzyna Baczynska, research manager with Knight Frank Nieruchomosci. But although the city is too weak to become a powerful regional economic capital, its future is not all bad, property sources said. Lodz would likely attract investors that could benefit from its strategic location in central Poland, lower costs and skilled labor supply, said Brian Patterson, president of AIG/Lincoln, a U.S.-based developer that built the Diamond Business Park warehousing project in Lodz.
"Everything there moves slower, but we believe in this city," said Jan Debski, general director of ECE Projektmanagement, a German developer that plans to invest in a large shopping center in downtown Lodz.
Most of the city center was developed for textile production during the past 150 years and Lodz is still dominated by solid industrial structures long overdue for renovation. The city also has a large downtown that combines industrial, retail and residential real estate.
Almost 100,000 people live in the center of Lodz. The rest of the population lives in our districts outside of the center: Baluty, Gorna, Polesie and Widzew. These are residential areas dominated by apartments built in the 1960s and 1970s.
The main area for shopping and entertainment is concentrated along ulica Piotrkowska, dubbed "the longest high street in Poland." The street has been recently renovated and competes well with any other downtown area in the country. The department stores along Piotrkowska include Central, Central II, Saspol, Galeria Centrum and Orange Plaza.
Lodz's hinterland is based on mixed agriculture and industry. Some 30% of the province's people work in agriculture, more than the national average of 27%. Although another 30% of its workers are employed in industry (just above the national average of 28%), the province lacks large-scale industrial development with the exception of the Belchatow brown coal mine and power plant, one of the largest power generators in Europe.
The lack of opportunities in Lodz and its surrounding areas prompts many young professionals to leave for Warsaw. Urszula Karczemska, responsible for investor relations at Lodz city hall, said entry level jobs in Lodz for Lodz University graduates pay zl. 1,200 a month at best, while in Warsaw starting pay for university graduates is zl. 2,500-zl. 3,000 a month. The difference allows young professionals from Lodz to save more in Warsaw even after deducting the high cost of rents in the capital, she said.
This has resulted in a strong Lodz community in Warsaw, Karczemska said, so much so that "people say that Lodz is running Warsaw." In politics alone the list of politicians from Lodz is impressive. Well-known figures include Leszek Miller, the head of the Democratic Left Alliance (SLD); Marek Belka, the economic advise to President Aleksander Kwasniewski; and Aleksander Kropiwnicki and Stefan Niesiolowski, the leading politicians from Solidarity Election Action (AWS).
Political lobbying from the Lodz community has certainly helped the city win special economic zone status from the central government. The special award has been given to only six areas, each badly affected by high unemployment. These special economic zones offer investors substantial tax incentives for 20 years.
But Lodz has attracted little investment and virtually no high-profile companies, unlike other zones where tax incentives have helped attract heavyweights such as General Motors (Katowice zone), Toyota (Walbrzych zone) or Volkswagen (Legnica zone).
But property sources said this would soon change, as Lodz's central location and the availability of skilled and cheap labor will almost certainly attract more investors, especially those seeking a cheaper alternative than Warsaw.
"The Warsaw labor market is very tight," said Patterson of AIG/Lincoln.
Industrial/Warehousing
Baczynska of Knight Frank said the most likely sectors to develop first in Lodz are the industrial and distribution sectors. Roman Fortuna, an associate with King Sturge, the U.K.-based property firm, agreed: "Lodz is seen as an attractive place (for investors) in industry and distribution."
Warehousing has already attracted some investment. AIG/Lincoln has built and leased 20,000 square meters in the Diamond Business Park Lodz, the most modern warehousing project outside Warsaw, Fortuna said. Soon, the developer plans to expand the project into 50,000 square meters, with total investment of $30 million, according to Lodz city hall.
For AIG/Lincoln, Lodz was its second market after Warsaw. "Lodz was the logical choice," Patterson said. The company chose Lodz as its central location for distributing goods around the country. For AIG, the city will be even better when the government-planned motorways are built on its periphery. "It's a good location now, but when they build the highway it will become a great location," Patterson said. Fortuna agreed: "The planned crossing of motorways is a big chance for Lodz."
Despite the timetable to develop the motorways (construction has yet to start), many other companies picked Lodz to build their own distribution centers.
French retail company Casino built its national distribution center in Strykow, just north of Lodz. Swedish furniture maker and retailer Ikea is building a zl. 150 million ($33 million) distribution facility in Jarosty, south of Lodz. The project will have warehousing space of 62,000 square meters and is planned for completion in early 2001. In addition, Toyota chose Lodz's suburb of Rzgow for its national car components distribution center.
While most current investment is in distribution, some companies combine that with manufacturing. Italian appliance producer Merloni has set up manufacturing units in Lodz and plans to build a new distribution center. Investment in the project is estimated at $60 million and is to be completed in 2002, according to Lodz city hall.
Office market
While Lodz's distribution and warehousing market is one of the strongest in Poland, the city's office market is still in its infancy. There are currently few financial and service companies based in Lodz. Warsaw-based companies often manage their operations in the city from a central office in the capital.
"Lodz is not the first choice for companies looking to set up regional offices," said Anna Celichowska, property manager at Pekao Development, which is marketing its own 10,500 square-meter office block on ulica Pilsudskiego in central Lodz.
The current office stock is estimated to be about 150,000 square meters, according to DTZ the realtor. But only up to 30,000 square meters is modern office space, Knight Frank said. This is much less than office stock in other big cities such as Krakow, Wroclaw and Poznan. "Lodz is lagging behind, mostly because of its proximity to Warsaw," said Baczynska of Knight Frank.
To date, the city has no typical commercial offices developed. Pekao's building, was developed by PBG, a Lodz-based bank that originally intended the offices for its own use. But when PBG was acquired by Pekao bank, the company centralized its banking activities in Warsaw, leaving the office building in Lodz empty.
The building has 16 floors and only three floors leased to tenants, including Commercial Union. Later this year, Pekao intends to hire a Western real estate agency to market the building, with rents at $16 per square-meter a month plus $5 per square meter for service charges, Celichowska said. But she said marketing the building would not be easy. "We won't lease it in three months," she said. "The demand is not that high."
Pekao hopes to attract Warsaw-based financial institutions setting up branch offices in Lodz. Celichowska said possible tenants in the building could be companies like Arthur Andersen and KPMG, which have yet to set up in Lodz.
But the Pekao building will have to compete with renovated offices along ulica Piotrkowska as well as new office buildings developed by Echo Investment on ulica Pilsudskiego across from the Pekao building.
Rents in renovated buildings in downtown Lodz are currently not much more than $10 per square meter a month. The Secesja 89 renovated building on Piotrkowska, which already has tenants such as Deutsche Bank, Zurich Insurance and local insurance firm Hestia, still has about 1,000 square meters available to let, with asking rents starting at $12 per square meter.
The office market has also started to attract hotel operators, which are targeting a business clientele. Earlier this year, French operator Accor opened a 212-room Ibis hotel on Pilsudskiego, and developer Prima plans to develop a 122-room Best Western hotel on Piotrkowska.
Retail market
While the office market has never been large in Lodz and is not likely to grow soon, retail developments have been developing quickly. "The potential comes from the number of residents (living in Lodz)," said Michal Kubicki of Echo, which has developed a multiplex cinema to be operated by Silver Screen and is also building a retail and office project at the junction of Pilsudskiego and Piotrkowska.
Lodz's retail sector is also well developed. Under communist rule the city was considered a good place to buy clothes. The local textile industry supplied stores with a wider choice of goods than elsewhere.
Today, Lodz has more than 250,000 square meters of modern retail space. "The retail market is saturated in Lodz," said Baczynska of Knight Frank. "There are plenty of shopping centers."
Kubicki said Lodz's retail sector has a lower purchasing power than in other cities. "The purchase basket is smaller than in other cities, where people have more money," he said.
The competition for retail projects is likely to increase even more as many developers plan to build more shopping centers in downtown Lodz.
French developer Apsys plans to build a $200 million retail center to be located on ulica Ogrodowa at a site now occupied by Poltex, a textile company, according to Lodz city hall. ECE Projektmanagement plans to develop a 40,000 square-meter shopping center on Pilsudskiego in central Lodz. Plaza, a Polish-Israeli venture, plans to develop an entertainment center at the junction of ulica Zeromskiego and ulica Mickiewicza in central Lodz, according to the city hall. Also, Ikea plans to develop 30 hectares of land at ulica Pabianicka on the western outskirts of Lodz.
Residential market
Lodz's residential market is the least developed of the property markets in the city, mainly because of the brain drain of young professionals to Warsaw.
"This market is the weakest out of the 10 biggest cities in Poland," said Kubicki of Echo.
Last year only 1,094 apartments or 13.7 apartments per 10,000 residents were built in Lodz. In comparison, Warsaw saw 54.2 new apartments built per 10,000 residents, Krakow 47.7 and Poznan, 38.7. Among big cities, only Katowice had fewer apartments completed per 10,000 residents last year at just 11.1, according to figures from Lodz's statistical office.
National developers have been shying away from Lodz because of low residential prices and low returns. Kubicki said Echo is focusing on other markets including Poznan, where it can sell apartments at about zl. 5,000 per square meter. "At this price anything in Lodz would be unsellable," he said.
Prices in Lodz are typically zl. 2,000-zl. 2,500 per square meter, and newly built, three-bedroom, 80 square-meter apartments cost zl. 179,200. Since there are few new projects and prices are low, developers who build apartments in Lodz sell them quickly. Local developer Unibud, which has completed an apartment block for 42 apartments in the Janow district, sold all but four apartments by late August, ahead of planned completion for November, the company said. The price per square meter was zl. 2,240.
Another local developer, BP Real Nieruchomosci, plans to charge zl. 2,400 per square meter for apartments in a nine-story building in central Lodz, with 87 apartments to be completed by the end of this year, the developer said.
