The new frontier
This will lead to falling rents and a decline in the amount of new office construction that will take place.
"There is a little bit of a slowdown at the moment." said Erik Drukker, an agent with DTZ Debenham Zadelhoff.
As a result, developers and agents are looking for new opportunities and this means looking outside Warsaw.
"We think there is opportunity in small cities," said Peter Long, country manager for U.K.-based Chelverton Properties. "We see opportunity outside the capital."
Unlike Warsaw, though, the opportunity in Poland's secondary cities is unlikely to be in office development over the next few years. Rather, the demand will be for retail, industrial and hotel space.
Chelverton, for example, first invested in the Wisniowy Business Park near Okecie airport in Warsaw. Now it wants to focus on retail centers in other cities where land costs are lower and the markets are not yet thought to be saturated. Chelverton plans this year to start construction of two large commercial centers in Katowice and Szczecin, investing about $220 million in the projects.
Other developers have similar plans.
"Warsaw is overheated not only with commercial centers, but with all building activities," said Klaus Madsen, president of TK Development, a Danish company building Steen & Strom commercial centers here.
"The next place where we will focus is Silesia," he said, adding that after developing two commercial centers in Warsaw TKD will now focus on Katowice.
Madsen said that the cost of developing retail centers in outlying cities is about 30% less than in Warsaw because of lower land prices and salaries. The flip side is that revenue and profit are also lower.
"Our profit per investment in the provinces is 30% lower than in Warsaw," Madsen said.
Still, there are more possibilities to do business outside Warsaw.
"There are opportunities in Warsaw, but trying to assemble land deals in Warsaw is difficult," Long said.
And it is expensive, said Jacek Wesolowski, general director of Polinvest, the developer of the Klif shopping mall that opened last week in Warsaw. In the case of Klif, this mall cost 50% more to develop than a similar project in Gdynia, he added.
Revenue projections are similar for both malls, however. "We wanted a Warsaw location because of the prestige," Wesolowski said.
But that's not enough of a reason for others to stay in the capital. "(Retail) growth has moved away from Warsaw as a new supply has come forward to meet strong demand in the capital," real estate agency Healey & Baker said in a recent report focusing on retail worldwide.
Developers of all stripes are joining in this trend toward retail projects outside the capital. Echo Investment, which has so far focused on high-end residential projects mostly in Warsaw, also sees potential in retail. Echo plans to develop 16 commercial centers throughout Poland over the next two years, said Michal Kubicki, development director for the company, which is traded on the Warsaw Stock Exchange (WSE).
"Now there is no immediate plan to develop something in Warsaw," he added.
The capital, most said, has become too crowded for much new development to make sense. Warsaw has about 400,000 square meters of commercial center retail space, according to Knight Frank Nieruchomosci. In addition, there is 220,000 square meters under construction and another 155,000 square meters in the planning stage.
Some secondary cities are likely to quickly reach similar levels, but may be able to hold even more space than Warsaw. Commercial center space either under construction or in the planning stage in Katowice is about 500,000 square meters, said Marek Wachowski, a Katowice-based consultant with the Henry Butcher real estate agency. But the Katowice area, with a population of about 4 million, is the most densely populated area in Poland and is twice as populous as Warsaw. This could mean room for even more development there.
And even smaller cities are seeing retail development at a sometimes dizzying pace. In Wroclaw, 180,000 square meters of retail space are expected to come on line by the end of the year.
But the retail expansion will only be one part of a development boom outside Warsaw, those in the property industry said. Once these projects are completed, there will be great demand for warehouse and distribution projects.
"Logistic centers will follow retail," said Wachowski, who believes the Katowice area will see a boom in this sector within the next two years. (See related story, page S7)
No offices
While retail developments will easily spread outside the capital, the office market is likely to develop at a far slower pace because of low demand, property players said.
"Opportunities there are more limited, probably to a few buildings," said Brian Burgess, country manager with Henry Butcher.
At the same time, new office developments in Warsaw are likely to become more risky because the tidal wave of new space could result in sharply falling prices.
"We have too many Daewoos, too many Reform Plazas," said Sven von der Heyden, the developer behind the Nowogrodzka 68 and Skorupki buildings.
There will be some opportunities in other cities, but these won't be as attractive as the Warsaw projects have been, developers said.
Von der Heyden last year decided to invest nearly $40 million in the Poznanskie Centrum Finansowe in Poznan, but said this won't be as profitable as a Warsaw development. In Poznan, construction, land acquisition and project management costs are all lower than in Warsaw, but so too are rents, he said.
The overall cost of construction of modern office space in Warsaw is from $1,600-$2,000 per square meter, while in Poznan it is $1,500. But Warsaw rents average $36 per square meter. In Poznan, the average is about $29 per square meter.
"My profitability is still lower than in Warsaw," von der Heyden said, adding that projects outside the capital net 1-2% less than in Warsaw.
"What made me go to Poznan?" Von der Heyden asked. "It's that nothing else is there yet."
This means there will be less competition for tenants, he added. In addition, because of Poznan's proximity to Germany, rail link to Berlin, trade fairs and business culture, there should be opportunities.
But demand for class-A office space in other cities is questionable, others in the industry said.
Katowice has some pent-up demand, but this could quickly be satisfied, said Henry Butcher's Wachowski. The city, which is dominated by renovated downtown buildings, is undersupplied and landlords are asking DM 50 per square meter a month with transactional prices of about DM 40 per square meter, he added.
However, 80,000 square meters of class-A office space in four buildings are under construction including the giant 50,000 square meter Bank Slaski building, Wachowski said. "I think it will satisfy the demand," he added.
In Wroclaw, rents in renovated space run DM 25 per square meter a month. The only modern development done by a local developer charges $25 per square meter, but the 5,000 square meter space has yet to be filled, said Jerzy Hendrich, director of Henry Butcher.
"The demand for new space is not high enough to create a reaction from developers," he said.
Many vacancies
While the demand for class-A office space outside of Warsaw is not high enough to justify new developments, there is demand for hotel investment, although revenue won't be on the same level as in Warsaw.
"We think there is good potential in secondary cities," said Richard Lyon, general director of the Marriott Hotel here. The Marriott could start some projects outside of Warsaw later this year, although it does not expect them to rival its Warsaw hotel in terms of either occupancy or room rates.
The Warsaw Marriott charges room rates of about $200 per night and has an average annual occupancy rate of about 70%. In a secondary city, the Marriott would expect to charge rates of about $120-$130 a night with an annual occupancy rate of 62-65%, Lyon said.
"It is still very healthy," he added.
One of the main factors attracting hotel developers to regional cities is land prices that are far lower than in Warsaw. But questions remain whether there will be enough business traffic in some cities to justify such large investments at these points.
Global Hotels, which is developing Holiday Inn hotels throughout Poland, said it has given up its Czestochowa project because it realized it could charge only $55-$60 per night while in its exiting hotel in Gdansk it charges $80 per night. In Warsaw, Orbis-owned Holiday Inn charges about $150 per night, said Andrew Findeisen, president of Global Hotel's supervisory board.
"There is a little bit of a slowdown at the moment." said Erik Drukker, an agent with DTZ Debenham Zadelhoff.
As a result, developers and agents are looking for new opportunities and this means looking outside Warsaw.
"We think there is opportunity in small cities," said Peter Long, country manager for U.K.-based Chelverton Properties. "We see opportunity outside the capital."
Unlike Warsaw, though, the opportunity in Poland's secondary cities is unlikely to be in office development over the next few years. Rather, the demand will be for retail, industrial and hotel space.
Chelverton, for example, first invested in the Wisniowy Business Park near Okecie airport in Warsaw. Now it wants to focus on retail centers in other cities where land costs are lower and the markets are not yet thought to be saturated. Chelverton plans this year to start construction of two large commercial centers in Katowice and Szczecin, investing about $220 million in the projects.
Other developers have similar plans.
"Warsaw is overheated not only with commercial centers, but with all building activities," said Klaus Madsen, president of TK Development, a Danish company building Steen & Strom commercial centers here.
"The next place where we will focus is Silesia," he said, adding that after developing two commercial centers in Warsaw TKD will now focus on Katowice.
Madsen said that the cost of developing retail centers in outlying cities is about 30% less than in Warsaw because of lower land prices and salaries. The flip side is that revenue and profit are also lower.
"Our profit per investment in the provinces is 30% lower than in Warsaw," Madsen said.
Still, there are more possibilities to do business outside Warsaw.
"There are opportunities in Warsaw, but trying to assemble land deals in Warsaw is difficult," Long said.
And it is expensive, said Jacek Wesolowski, general director of Polinvest, the developer of the Klif shopping mall that opened last week in Warsaw. In the case of Klif, this mall cost 50% more to develop than a similar project in Gdynia, he added.
Revenue projections are similar for both malls, however. "We wanted a Warsaw location because of the prestige," Wesolowski said.
But that's not enough of a reason for others to stay in the capital. "(Retail) growth has moved away from Warsaw as a new supply has come forward to meet strong demand in the capital," real estate agency Healey & Baker said in a recent report focusing on retail worldwide.
Developers of all stripes are joining in this trend toward retail projects outside the capital. Echo Investment, which has so far focused on high-end residential projects mostly in Warsaw, also sees potential in retail. Echo plans to develop 16 commercial centers throughout Poland over the next two years, said Michal Kubicki, development director for the company, which is traded on the Warsaw Stock Exchange (WSE).
"Now there is no immediate plan to develop something in Warsaw," he added.
The capital, most said, has become too crowded for much new development to make sense. Warsaw has about 400,000 square meters of commercial center retail space, according to Knight Frank Nieruchomosci. In addition, there is 220,000 square meters under construction and another 155,000 square meters in the planning stage.
Some secondary cities are likely to quickly reach similar levels, but may be able to hold even more space than Warsaw. Commercial center space either under construction or in the planning stage in Katowice is about 500,000 square meters, said Marek Wachowski, a Katowice-based consultant with the Henry Butcher real estate agency. But the Katowice area, with a population of about 4 million, is the most densely populated area in Poland and is twice as populous as Warsaw. This could mean room for even more development there.
And even smaller cities are seeing retail development at a sometimes dizzying pace. In Wroclaw, 180,000 square meters of retail space are expected to come on line by the end of the year.
But the retail expansion will only be one part of a development boom outside Warsaw, those in the property industry said. Once these projects are completed, there will be great demand for warehouse and distribution projects.
"Logistic centers will follow retail," said Wachowski, who believes the Katowice area will see a boom in this sector within the next two years. (See related story, page S7)
No offices
While retail developments will easily spread outside the capital, the office market is likely to develop at a far slower pace because of low demand, property players said.
"Opportunities there are more limited, probably to a few buildings," said Brian Burgess, country manager with Henry Butcher.
At the same time, new office developments in Warsaw are likely to become more risky because the tidal wave of new space could result in sharply falling prices.
"We have too many Daewoos, too many Reform Plazas," said Sven von der Heyden, the developer behind the Nowogrodzka 68 and Skorupki buildings.
There will be some opportunities in other cities, but these won't be as attractive as the Warsaw projects have been, developers said.
Von der Heyden last year decided to invest nearly $40 million in the Poznanskie Centrum Finansowe in Poznan, but said this won't be as profitable as a Warsaw development. In Poznan, construction, land acquisition and project management costs are all lower than in Warsaw, but so too are rents, he said.
The overall cost of construction of modern office space in Warsaw is from $1,600-$2,000 per square meter, while in Poznan it is $1,500. But Warsaw rents average $36 per square meter. In Poznan, the average is about $29 per square meter.
"My profitability is still lower than in Warsaw," von der Heyden said, adding that projects outside the capital net 1-2% less than in Warsaw.
"What made me go to Poznan?" Von der Heyden asked. "It's that nothing else is there yet."
This means there will be less competition for tenants, he added. In addition, because of Poznan's proximity to Germany, rail link to Berlin, trade fairs and business culture, there should be opportunities.
But demand for class-A office space in other cities is questionable, others in the industry said.
Katowice has some pent-up demand, but this could quickly be satisfied, said Henry Butcher's Wachowski. The city, which is dominated by renovated downtown buildings, is undersupplied and landlords are asking DM 50 per square meter a month with transactional prices of about DM 40 per square meter, he added.
However, 80,000 square meters of class-A office space in four buildings are under construction including the giant 50,000 square meter Bank Slaski building, Wachowski said. "I think it will satisfy the demand," he added.
In Wroclaw, rents in renovated space run DM 25 per square meter a month. The only modern development done by a local developer charges $25 per square meter, but the 5,000 square meter space has yet to be filled, said Jerzy Hendrich, director of Henry Butcher.
"The demand for new space is not high enough to create a reaction from developers," he said.
Many vacancies
While the demand for class-A office space outside of Warsaw is not high enough to justify new developments, there is demand for hotel investment, although revenue won't be on the same level as in Warsaw.
"We think there is good potential in secondary cities," said Richard Lyon, general director of the Marriott Hotel here. The Marriott could start some projects outside of Warsaw later this year, although it does not expect them to rival its Warsaw hotel in terms of either occupancy or room rates.
The Warsaw Marriott charges room rates of about $200 per night and has an average annual occupancy rate of about 70%. In a secondary city, the Marriott would expect to charge rates of about $120-$130 a night with an annual occupancy rate of 62-65%, Lyon said.
"It is still very healthy," he added.
One of the main factors attracting hotel developers to regional cities is land prices that are far lower than in Warsaw. But questions remain whether there will be enough business traffic in some cities to justify such large investments at these points.
Global Hotels, which is developing Holiday Inn hotels throughout Poland, said it has given up its Czestochowa project because it realized it could charge only $55-$60 per night while in its exiting hotel in Gdansk it charges $80 per night. In Warsaw, Orbis-owned Holiday Inn charges about $150 per night, said Andrew Findeisen, president of Global Hotel's supervisory board.
