Office projects outside Warsaw risky, retail projects still best bet

Commercial real estate professionals operating outside Warsaw are confident that a market rebound is just around the corner, putting their faith in lease prices that they say have finally bottomed out. Nevertheless, developers and construction companies around the country are continuing to feel the pinch of a market that has all but dried up this year. At Knight Frank Nieruchomości's Wrocław office, spokeswoman Agnieszka Skóra said that this year the firm has had only two or three large projects under construction at any one time. In 2001, Wrocław was Poland's busiest commercial real estate market. "The number of construction projects has definitely come down here," she said. "Many new investments that were started in 2001 and the beginning of 2002 have come to a halt." In Kraków, an office developer who asked not to be named said that in order to survive, developers have had to adapt their services to the demands of tenants, who are now favoring class B and C office space rather than class A locations. "The times when large, expensive office spaces were sought after are long gone," the developer said, adding that tenants are taking advantage of the current situation and shifting their headquarters to more modest facilities. "This is particularly noticeable with insurance companies, which are now moving their offices to smaller locations," the source said. "Right now the tenants dictate the conditions and the market basically belongs to them." The source noted, however, that the market had stabilized: "The crisis has stopped, and prices are more or less stable."

Dariusz Trojanowski, the director of the analysis department at Nederpol Development & Investment, said that the office market in the Tri-City area (Gdańsk, Gdynia and Sopot) was a good bet to pick up soon. "Right now it's very quiet, but we're expecting a rise in demand," he said. Trojanowski added that the proposed construction of a NATO base in Gdynia and further increased industrialization of the area would bode well for the entire region. "This would cause an influx of law firms and audit firms, causing a new construction boom," he said. Retail developments, on the other hand, are doing well, industry professionals said. They said that the enthusiastic reception of Nederpol's mixed-use project in Sopot and several other projects, such as ING Real Estate's "Targ Sienny i Rakowy," were evidence that there is still plenty of unmet retail demand. Real estate insiders said that for retail projects, especially those outside Warsaw, location is the key. Trojanowski said he is optimistic about retail developments in the Tri-City area. "If the location (of the retail center) and the project itself are good, one can lease for $50 per square meter, instead of the Tri-City average of $25-$30 per square meter," he said. Others were more skeptical.

"Investors will only get involved in projects with a guaranteed yield," said Michał Pielat, the spokesman of retail developer CEFIC Polska. "Most developers still prefer to focus on Warsaw where there are more inhabitants with higher earnings and where the majority of company headquarters are located. Companies will invest only where there is something to fall back on financially." As for the expansion plans of Warsaw-based companies, most of them are reluctant to set up satellite offices outside the capital. Andrzej Mikołajczyk of Germany-based office space developer Mahler, is aware of the risks of moving beyond Warsaw. "A small market is easy to saturate, sometimes even with one large office building," he said. "Investing elsewhere at the moment is risky, since it is relatively easy to build too much."