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Poland is building (again)

Artur Sutor, Bartek Włodarski, Cresa Polska

2018 has been a year of co-working space providers with several new entrants to Poland who successfully popularized such office use. Regional markets saw faster growth compared to Warsaw, driven largely by IT firms and, again, by the BPO sector, say Artur Sutor, Partner and Head of Office Department, and Bartek Włodarski, Partner and Head of Office Department, Corporate Solutions, Cresa Poland.

Market analysts have been concerned whether Warsaw will have the capacity to absorb all that new office space coming on stream. Now, after many years, the capital city is experiencing a supply gap. How come?

Artur Sutor: Well, first things first, there’s currently more than 700,000 sqm of office space under construction in Warsaw. That’s truly a lot. That’s why limited office supply is temporary and the market will get back to normal in a couple of years. Office buildings such as The Warsaw Hub, Mennica Legacy Tower, Generation Park and the 310-metre high Varso Tower will be coming onto the market one by one from late 2019 onwards. The biggest projects are usually developed within about three years and new space will be delivered every few months. That’s why I believe that the market is very likely to absorb that space and vacancy rates won’t shoot up. The largest concentration of development activity is in the eastern part of Wola. As a result, the capital’s business centre is expanding westwards towards Towarowa Street and Daszyńskiego Roundabout.

Bartek Włodarski: Warsaw is looking forward to the new supply as many tenants are planning to expand. Unable to find ready-to-use office space, they often opt for pre-lets at schemes in the pipeline. Shortages are common in the City Centre, the Wola district and the vicinity of Gdański Railway Station. There’s more office availability in Służewiec, whose “Mordor” part will transform after years of traffic congestion with planned improvements to its transportation system, refurbishments and adaptive reuse projects to convert office buildings into residential or hospitality schemes. Looking ahead, this represents a great opportunity for this location as hotels and housing estates will make this area more attractive, thereby attracting new office tenants.

Despite new space availability being a challenge, co-working providers have been hugely successful this year. They’ve been very active…

BW: Yes, that’s true. Not only has co-working space stock surged by 100% in 2018, but many operators have leased offices in Warsaw’s prime office locations. New market entries into Poland and the rapid growth of co-working providers already present here are no doubt this year’s most notable trends. Development of flexible office space is a natural phase in the growth of our office market and a sign of its maturity. It also results from the intense activity of small and medium-sized enterprises and expansion of start-ups seeking flexible lease terms.

AS: This market segment is growing exponentially. Poland now has more than 200,000 sqm of flexible office space, accounting for approximately 2% of its total office stock. The leading co-working locations are Warsaw, Krakow, Poznań, Wrocław and Łódź. And although most operators favour offices in prime locations, we are seeing increasing market differentiation with a diversity of budgets and needs as regards flexible office space. Not everyone can afford Class A space. That’s why co-working space will also be developed in Class B buildings whose owners will cater for various needs in pursuit of putting space to effective use. The co-working market is set to grow in upcoming years, just like in the West, which Poland needs to catch up with. The UK leads the way with the co-working space sector accounting for more than 20% of all office leasing activity in 2017.

Regional cities are experiencing faster growth than Warsaw. Krakow is the no. 1 regional market and Wrocław’s office stock has surpassed the magic mark of one million square metres this year. Will there be appetite for all that space?

AS: Krakow, Wrocław and Tricity are growing at a robust rate. These are stable markets with a strong potential. In the first three quarters of 2018, regional office supply hit more than 400,000 sqm, double the amount recorded in Warsaw. And yet, occupier demand continues to outstrip supply. Average vacancy rates in regional cities are below 10%, meaning that landlords are enjoying the upper hand there. A healthy market for both tenants and landlords is where the average vacancy rate is around 15%. That’s why I think that cities like Krakow, Wrocław, Gdańsk and Poznań are at no risk of office oversupply. Tenants appreciate these locations and want to grow their business there, and given the current market performance, I believe that projects in the pipeline will also see buoyant letting activity.

Who is the key driver behind the rapid growth of regional office markets?

AS: The IT sector has been one of the key drivers in 2018 - it has been expanding in Poland for quite a time. With universities providing IT programs and the sector offering high salaries, young people are becoming increasingly tempted to study IT. IT firms are growing and rapidly increasing headcount, thereby expanding their offices.

BW: Shared services centres have also been major tenants in the regions. According to ABSL’s data, the SSC sector will have approximately 340,000 staff across Poland by Q1 2020. Krakow, Warsaw and Wrocław are their preferred choice of location. Next are Tricity, the Katowice Agglomeration, Łódź and Poznań. Due to the increasingly tight labour market, other cities like Lublin, Rzeszów and Bydgoszcz are also on global corporate radars for accounting and call centres.

The BPO/SSC sector has been active in Poland for years. What’s more, it continues to grow with global corporates opening offices here. What brings them here?

BW: Shared services centres have very specific requirements and Poland has many advantages: a strong labour pool with high levels of language proficiencies, and a shared culture and time zone with Western Europe. In addition, on account of sensitivity of some processes and data security issues, such centres cannot be set up in remote countries. In the past year, the most straightforward BPO services also gave way to more advanced R&D processes. Corporates setting up R&D centres need both high-skilled graduates and experienced specialists - available in large Polish cities.

Has the limited office supply pushed rents up significantly?

AS: Headline rents have remained relatively flat over the year, but effective rents have gone up by a few percent. For several reasons, but mainly because Poland in many locations and segments is a landlord-led office market, automatically leading to fewer lease incentives offered to tenants. But, as I said earlier, low supply - especially in Warsaw - is a temporary phenomenon and the market is expected to return to normal in the next two or three years. Rising prices of lands and construction services are a much more serious issue. Costs of labour and prices of building materials have risen by approximately 25% in the past 15 months.

What does therefore 2019 have in store for the market?

BW: If macroeconomic fundamentals remain at 2018’s levels, the office market will continue to grow at a rapid but steady rate. Regional cities look to outpace Warsaw for development activity with leading markets being Krakow (240,000 sqm in the pipeline), Wrocław (176,000 sqm) and Tricity (125,000 sqm). And yet it remains to be seen how many announced projects will be put on hold due to rising construction costs and lower profitability levels.

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