Office market analysis

Poland's office real estate market has been booming for the last two to three years and has not been affected by the current global economic slowdown, in sharp contrast to the country's residential market. In 2006 and 2007, some 850,000 sqm of office space was delivered in Warsaw, all of which has now been leased. Furthermore, Warsaw has a very low vacancy rate, at only about two to three percent. That is very unusual for the office real estate market - a healthy vacancy level is 10 percent.

In Warsaw there is a lack of attractive office space in good locations. The city center especially requires new investments. Many companies would like to settle down in this area because of its dynamic character and prestige. However, the lack of office space, as well as high demand, has resulted in a 30-percent increase in rental prices.

The property market in Warsaw indicates that the demand for office space will not exceed supply in the next two years, however. Lower demand is expected in the next two years as changes in the world economy influence Poland. I also predict rents decreasing a bit in the Mokotów district of Warsaw. Currently, rents there are at the level of about €15-18 (zł. 51-61) per sqm. This lower level will probably remain where it is, but the higher end will fall to €16.5 (zł. 56.5) per sqm. Nevertheless, demand is still healthy.

Outside the capital

The situation is changing in other Polish cities. A slowdown in demand for class-A office space is observable in other Polish business hubs currently, as there are fewer large BPO investments. Local authorities are still able to attract foreign investors, but the growth will not be as high as it has been over the past couple of years.

Developments which are emerging outside the capital have the same high standards, since tenants' expectations are as high as those in Warsaw. Google, a major tenant in the BemaPlaza facility in Wrocław, settled in the city because it was looking for proper office space. Developers who delivered good products on the local market had no problem leasing them out. Usually by the time an investment was started, the developer had already obtained a key tenant for the building.

Some of the residential developers are planning to enter the commercial market with redesigned apartment buildings. Such a strategy can be risky both for developers and tenants, because this type of office space can be of very low quality and may not fulfill corporate clients' expectations.

The BPO market

The BPO market has completely changed and there is much less demand from that sector. This will influence changes in the demand for office space in Poland's "BPO cities," of which Warsaw is not one.

Of course, the worldwide economic slowdown is affecting demand as well, and so the Polish market will see decreased growth of companies. The credit crunch is affecting the industry both positively and negatively. Tenants pay closer attention to costs, as they need to choose efficient projects. But there will also be new opportunities on the market to buy plots of land, since some developers have started to sell sites at prices below those they paid to obtain them. New developments will be more carefully planned, because tenants are more knowledgeable about the market and have stricter requirements.

It is important to note that office investments in Poland are usually better and much more modern than office space available in Western Europe. Poland's office market is younger, and still has a strong demand for new buildings, while Western countries' lower demand for office space is causing a lack of new developments. This is leading to a situation where regional offices of international companies located in Poland often have a much better standard than their headquarters abroad. It's worth mentioning that most of the biggest developers are building more in Poland than in their home countries.

Zoning plans needed

Very complicated regulations are negatively influencing the progress of the Polish office market, as are the lack of zoning master plans for cities. Warsaw, for example, only has about 20 percent of its area under zoning plans.

A developer which wants to construct an office building usually needs to go through complicated procedures to obtain a ruling for development conditions, and then again for building permits. These significantly increase the time and cost of investments.

Apart from that, the market is still hungry, and Poland's macroeconomic performance is generally good. Even the credit crunch will not hit the market badly. Of course, banks are probably now more careful with financing developers - but only those developers with little or no experience. Developers with a good track record and long history in Poland should not be worried.

Jeroen van der Toolen is managing director of Ghelamco Poland & CEE