Market slows down as oversupply bites
By : Anna Staniszewska
Large lease deals, particularly in suburban areas, were the trend in the office-property market last year. Agents said the market was generally more upbeat, although less space was leased than in 1999. According to the Research Forum, an informal group of major property agencies, 275,000 square meters of office space were leased in 1999, while in 2000 deals were signed for 200,000. In 1999 the amount of new office property was calculated at 350,000 square meters, while in 2000 new stock amounted to 380,000. "The market has recovered (from the 1998 Russian crisis) and is becoming more stable," said Jeroen van der Toolen, director of DTZ Zadelhoff Tie Leung, an Anglo-Dutch real estate consultancy.
Some 150,000 square meters of A-class office space in Warsaw came on the market last year. This brought the total amount of office space in the city to 580,000 square meters, according to U.K. real estate agency Knight Frank Nieruchomosci. Many of the A-class buildings are in the Central Business District (CBD), defined as the area between Aleja Solidarnosci, ulica Towarowa, Aleja Armii Ludowej and ulica Krakowskie Przedmiescie.
Brian Burgess, managing director of U.K.-based CB Richard Ellis, said many of these office blocks (such as the Warsaw Trade Tower and Reform Plaza) have yet to be fully leased and this has influenced the leasing market and rental levels.
However, the sector will slow down this year with an estimated 50,000 square meters of A-class office space opening up. Completion of B-class space in 2001 will also bring some 300,000 square meters onto the market.
Deals
A series of huge deals shook the market in 2000. The most spectacular one was Deutsche Bank's move to Focus Filtrowa on ulica Domaniewska, signed last November. The German bank will take 8,300 square meters in the 11-story 33,000 square meter development in March. Other tenants include contractor Mostostal Export and insurance firm Compensa. Both of these companies have links with Teamworx, which represents the owner, German insurer Hamburg-Mannheimer. DTZ Zadelhoff Tie Leung and Jones Lang LaSalle were joint agents for the building.
Another big deal was phase II of the University Business Center (UBC II) in March 2000, brokered by DTZ. Energis Poland took 8,100 square meters, including 7,800 square meters of office space and 300 square meters of storage. UBC II has 30,000 square meters of space, with 19,000 of this reserved for offices. Rents in the building on ulica Szturmowa cost DM 45.5 per square meter. Satellite TV broadcaster Wizja also rented 6,500 square meters in December last year, with CB Richard Ellis brokering the contract.
New technology companies were also expanding last year and a large contract was signed between ComputerLand, a Polish systems integrator and software producer, and the Kopernik office complex on Aleje Jerozolimskie and ulica Popularna. ComputerLand leased 6,000 square meters (out of an available 24,000 square meters) at O24 per square meter monthly. U.K.-based Healey & Baker negotiated the terms. The new tenant is likely to take up an additional 2,500 square meters during the next phase.
Wisniowy Business Park's building E has increased its occupancy rate to 82% since mid-2000. Softbank signed a deal for 1,100 square meters in February, and in March British American Tobacco signed a deal for more than 2,500 square meters. In August, DTZ concluded a deal for 3,000 square meters on behalf of Energis. Rents for the building are $25 per square meter, a relatively high price for locations outside the city center.
Ironically, there weren't many large office deals in central Warsaw in 2000. In August, Finland's Nokia took 2,400 square meters at the Sienna Center, which has 20,000 square meters of space to let. In the same month, Canada's Nortel signed up for 1,600 square meters at the Roma Center. Healey & Baker brokered both deals.
Acquisitions
During 2000, several property acquisitions were signed as institutional investors kept an eye on Warsaw's office market. "They (property investors) have been sniffing around," said Healey & Baker's Ricky Aboo. In September American firms Heitman International together with GE Capital Real Estate bought Wisniowy Business Park's buildings C, D and E. During the same month, Austrian property fund Europolis Invest paid $70 million for Warsaw Towers on ulica Emilii Plater.
A smaller $11 million deal took place in December when Polish telecom operator Pro Futuro purchased a 7,000 square-meter section of Optimus Business Center's 25,000 square-meter B-class office building on ulica Wynalazek. Optimus hopes to sell the development for about $50 million. Property agents hope there will be more large-scale buyouts soon. "We are hoping for bigger investments," Aboo said. He also expects purchases to happen in the next couple of years. With property yields at 11-12%, Poland is still about 3% higher than in Western Europe.
Looking back
According to Burgess, 2000 was quieter than the previous year, adding that tenants waited for the market to settle to achieve the best rents. The vacancy rate in Warsaw's CBD was 18.5%, according to the Research Forum. With supply outstripping demand, rents inevitably came down. By the end of 2000 many tenants started to move. It was a good time to seal deals, Burgess said.
Since Lokale's survey last June, Warsaw Towers lowered its rents from $35 per square meter to $31 per square meter. Similar falls were recorded in most prime location office buildings. The lowest was Reform Plaza at $20 a square meter, or $17 unofficially. Also, this didn't include incentives such as fit-outs and rent-free periods. Aboo said demand is growing, but not necessarily in central locations.
Falling rents in prime locations may cause demand to increase as prices go down. "The market is approaching stability," Aboo said. According to Jerzy Wysocki, head of Knight Frank Nieruchomosci, rents have already stopped falling. He said the average asking rents in A-class office buildings range from $24 to $31 per square meter. Depending on negotiations, the price can drop a further 10-15%.
Outlook
The supply of new office space will be lower this year at about 50,000 square meters. This includes the Centrum Krolewska and Atrium Center developments. Property watchers said vacancies will begin to fall during the year. Despite fewer A-class office buildings being completed next year, the industry is not too concerned. Van der Toolen said there will be about 10-15 deals going through, both in A-class and B-class buildings. He said these companies would take chunks of more than 5,000 square meters each, which would lower the vacancy ratio. Aboo said the high vacancy rate in central locations would soon be taken up.
B-class
Last year, B-class office space much of it in Mokotow, Wola and Ochota had more client interest than in 1999. "The advantage of suburban developments is that they are less expensive and have more parking space," Wysocki said. According to the Research Forum, October's vacancy rate of B-class offices was only 10.9% in the suburbs compared to 18.5% in the city center. As the chart shows, the majority of deals were concluded in those areas. While occupancy steadily increased, rents in suburban offices slightly dropped, although not in all developments. The slump ($1-$2) was not harsh, and in many buildings rents remained stable, such as Wisniowy Business Park ($25) or Batory Foundation ($24). Wysocki said rents in those developments vary from $17 to $22 per square meter, but in some can rise to $24. But further developments such as Brama Zachodnia, Taurus, Eurocentrum, Blue Point and Zepter may push the rents down. "Buildings will soon have to fight for tenants," Aboo said.
Agents
Healey & Baker and DTZ Zadelhoff Tie Leung were the leaders in office space rentals in 2000, each claiming to lease 51,000 square meters. Jones Lang LaSalle was next with 31,000 square meters, followed by CB Richard Ellis, renting about 25,000 square meters.
