High level of demand for Warsaw office real estate, report shows

As interest grows in Eastern Europe commercial property markets the latest sector report from Jones Lang LaSalle shows that the Warsaw office market continues to see high levels of occupier demand.

Over 123,000 square meters was leased in the second quarter of 2011. When combined with the demand registered in the first three months of the year this adds up to over 321,000 square meters, the report shows. In comparison the total take-up in the corresponding period last year was 220,000 square meters.

Lease renewals and renegotiations are still a large part of occupier activity as pre-lease agreements are picking up, with a share of 25% this year. The largest new deals in the second quarter included a company from the petrol industry signing for 9,100 square meters in Senator, and the developer Ghelamco taking 2,000 square meters in their new development, Mokotów Nova.

The second quarter also saw two large lease renewals from E&Y with 11,000 square meters in Rondo 1 and PKT Centertel with 8,800 square meters in Renaissance Plaza. City Centre, Upper South (Mokotów) and South West locations still remain the most popular sub-markets in Warsaw in terms of occupier activity, the report reveals.

It also says that supply levels remain moderate, with only four projects completed in the first half of 2011, totalling 28,350 square meters. These were Pałac Młodziejowskiego, Mokotowska Square, Racławicka Point and Platinium Business Park IV.

For the remainder of the year approximately 111,650 square meters remains in the pipeline, with the majority of this being in non central locations and approximately 37,000 square meters in the city centre.

‘It is worth highlighting that many new developments have been initiated on a speculative basis to fill in the expected supply gap in 2011 and 2012 caused by the limited number of construction start-ups in 2008 and 2009,’ says the report.

Following the stabilization of the vacancy rate in 2010, sound demand and limited supply has continued to push this rate down. At the end of the second quarter approximately 6.2% of modern office stock in Warsaw remained vacant. That is made up of 6.7% in the CBD, 9% in the City Centre and 5.2% in the Non Central locations. The vacancy rate is expected to decrease further due to the relatively low number of new completions.
 
Prime headline rents in Warsaw are growing, while the demand side has improved and the vacancy rate dropped. Prime office space in Warsaw City Centre can now be secured from €22 to €25 per square meter per month. However, there are some A+ developments quoting rents even higher than this. The best Non Central locations are being leased at €15 to €15.50 per square meter per month. The first sub markets to witness rental growth were the City Centre, Upper South and South West.

Around 160,000 square meters was leased in regional markets in the first half of 2011, with Kraków and Poznań clearly taking a lead in respect of occupier activity. Major lease transactions included Shell with a renegotiation of 16,100 square meters in Kraków Business Park, Kraków, Allegro with a pre-let of 14,600 square meters in Pixel, Poznań and Sabre with a renegotiation of 8,900 square meters in Buma Square, Kraków.

‘With the office market maturing, we should see more renewal leases being signed over the next few months and years. In addition, a new support program for SSC/BPO and R&D centres was approved by the government in early July, and this looks set to boost new investments in this sector thus strengthening demand for office space,’ adds the report.

The second quarter also saw over 35,300 square meters of new office space brought to the market, with the vast majority of this coming from three buildings in Kraków, that was Bonarka 4 Business buildings A and B and Green Office building B. Currently around 340,000 square meters of office space remains under active construction across Poland, excluding Warsaw, the majority of which can be found in Wrocław, Kraków and the Tri-City, where office space under construction is equal to around 31%, 13% and 16% of the existing office space supply on these markets respectively.

Jones Lang LaSalle estimates that 95,000 square meters of speculative modern office space will realistically enter the regional markets over the second half of 2011, in addition to 49,950 square meters completed in the first half of 2011. Major pipeline office provision for the second half of the year includes Olivia Business Centre in Gdańsk, the first building in the Olivia Gate complex, offering approximately 15,900 square meters, Park Biznesu Teofilów I with around 8,600 square meters in Łódź and Malta Office F with around 6,500 square meters in Poznań.

Only Kraków saw vacancy rates remain stable over in the second quarter, averaging 10.9% compared with 10.5% in the first three months of the year. Slight downward pressures were registered in Łódź, the Tri-City, Poznań and Katowice from 20%, 11.6%, 13.6% and 17.3% to 18.6%, 10.2%, 11.4% and 15.3% respectively. Only Wrocław saw an increase in vacancy level, with the rate now standing at 3.2%, up from 2.1% in the first quarter. This minor growth is attributed to the delivery of two office projects, which remained 50% vacant.