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Developers and tenants are returning to big cities

The shopping centers’ market is slowly recovering after the recession. The developers are dusting off their old projects. Construction works, which were stopped in the previous years because of the lack of financing or interest from tenants' side, are beginning now.

The shopping centers’ market was influenced by the crisis in two ways: by the tenants who felt fluctuation of the euro exchange rate and by the developers who had to face credit policy toughened by the banks. As a result the tenants started to suspend their aggressive development in 2009 and the developers were forced to stop construction works or plans of their risky projects.

The crisis grazed us gently

Dorota Lachowska, the Head of Market Research and Marketing in Polish Properties, emphasizes that in spite of the fact that a few commercial brands like Galeria Centrum or Avans Północ went bankrupt, the retail estate in Poland did not suffer acutely. Thanks to stable economy, the Poles did not refrain from shopping, but unlike in the old EU countries, retail sales increased.

Only its structure changed, the customers more often shopped in outlet or discount stores. “We did not observe consumption market slump. Thanks to this fact, the Polish market is still attractive for western brands, which chose precisely period of the crisis to enter our market. Such brands as for example MUJI or Peacocks have appeared in the Polish shopping centers since 2009", says Lachowska.

There is no doubt however, that commercial market has changed in the last two years. Ambitious expansion plans of both the tenants and developers have been limited. Only two years ago we could observe increased interest in smaller towns where shopping centers similar to those in the main Polish cities were to be opened. Currently, evaluation of the local markets is more real, the number, size and type of the planned projects have decreased. They are more adjusted to specificity of medium-sized Polish towns where spending power is lower and where traditional commerce is still dominant. Dorota Lachowska forecasts that in the towns with population between 100 and 200 thousand, about 70 thousand square meters will be put into operation in 2011, which is 65 per cent less compared to 2009.

Magda Frątczak, the Director of Commercial Space Department in CB Richard Ellis, assesses that the crisis have mainly influenced new projects making them appear or sleep, but it has had no influence on existing, reliable projects. “It also influenced so called second-class projects and shopping centers which were opened during the crisis. Since the tenants were touched by the crisis, which limited their plans to expand on the Polish market, ratio of unrented space reached the level of 8 per cent (in case of good projects it is usually only 2 per cent)", explains Frątczak. According to her, the crisis revealed two facts – it showed weakness of some centers and cleared situation among the tenants, leaving on the market only the biggest, financially stable players.

We don’t expect boom

CB Richard Ellis predicts that we can’t count on boom from before 2008 when “everything was created everywhere” without taking into account research and recommendations; e.g. third shopping center in a town inhabited by 60 thousand people.

The market is only waking after the crisis. More and more transactions can be noticed. Poland is regaining trust of the foreign investors. “According to different data, Poland, probably as the only country in Europe, did not surrender to the crisis on the real estate market. There were no sales or significant price cuts as investors' expectations based on events taking place in other European countries like Germany or Great Britain were far from the expectations of the sellers", says Iwona Laszkiewicz, the Director Asset & Property Management in King Sturge. According to her this and the following year is a good time to get the balance and energy to powerfully enter 2012.

Policy of financial sector toward shopping centers' market has changed this year. "The banks are willing to give credits, but it concerns big cities only. Their activity on minor markets is still low. Currently more than 67 per cent of all objects which are under construction are being created in the towns with over 100 thousand inhabitants," says Jakub Zombirta from the Department of Market Research in Lang LaSalle. He adds that forecasts for next year are optimistic. They predict that 632 thousand square meters will be put into operation in the shopping centers.

So, the developers and tenants choose big cities where investment risk is definitely lower because of demographic potential and strong purchasing power of the inhabitants. “However, they have to compete with already existing projects due to strong competition and limited number of adequate plots. This dilemma whether to compete with objects whose situation on the market is stable or to take a risk and enter the local market can be soon settled, again to the advantage of the local markets” states Dorota Lachowska. She emphasizes that before the decision is made to start a new investment, there will be wide market research conducted and town’s commercial potential will be analyzed thoroughly to avoid market glut. It is worth noticing that construction of two shopping centers in a town with 100 thousand inhabitants may lead to a glut in retail space.

In case of short-term prospect, let’s say two years long, there will be no dramatic change in supply of new retail space, so the new chains which are planning to enter our market will have a limited choice. “Such situation is very difficult for the new chains which are planning to start their expansion from Warsaw, Wrocław or Poznań, as their possibilities are limited. In Warsaw for example, there is informal never ending line of tenants to the best shopping centers”, stresses Magda Frątczak. She forecasts that rent can increase in the best projects. Current situation will also influence evolution of retail space market and also quality changes in already existing centers. CB Richard Ellis forecasts development of commercial streets, creation of different types of department stores as well as phenomenon of occupying large space along main streets in the city centers by well known chains. They will replace other institutions, for example banks.

It is still far to the condition from before the crisis

It seems that the market will not reach the condition from before the crisis in the next years. According to Frątczak, entering Euro zone and dynamic economic growth will be decisive factors in that case.

Jakub Zombirta estimates that in terms of space put into operation within new projects, we can expect next year return to the statistics from the time before the crisis. “However, there has been a reduction of too optimistic plans concerning realization of new commercial objects. Situation on the market defined plans of many developers. We can expect that some of the plans from before 2008 will not be realized within five years", he adds.

The analysts emphasize that in 2008 – before the crisis, we had to do with unrealistic estimation of the market potential. As a result, a few clothing companies went bankrupt and some developers stopped their investments in construction phase. “Now we are dealing with more realistic attitude towards market potential, the tenants are not using aggressive expansion any more and the developers are more careful when making decisions concerning new locations”, states Dorota Lachowska.

The old is supplanted by the new

According to Iwona Laszkiewicz, the customers expect from the shopping centers something more than just commercial offer. “They are expecting attractions which are not connected with trade. Polish people are smarter nowadays. They do well-thought shopping, they expect good transport connections, convenient parking lot, nicely organized space and the possibility to fix other minor cases at the same time", she says.

Laszkiewicz adds that the Poles appreciate so called “all in one" solutions, which satisfy their needs comprehensively. “New concepts of the shopping centers containing modern solutions in terms of both logistic and esthetic aspects, will be necessary to fulfill customers’ needs”, emphasizes Laszkiewicz. “In my opinion, not large but optimal in terms of the offer, concepts will enjoy the greatest popularity. Even today the concepts whose offer is adjusted to the needs of the local market work very well”, stresses Laszkiewicz.

However, these are not spectacular projects that we can expect in the nearest future. What we are expecting is a decreasing role of older objects built in the 90’s. “They will be supplanted by more modern and better adjusted to the needs of local inhabitants, objects, which will fulfill growing customers' demands. It means that multi-functional shopping centers or retail parks with attractive tenants and interesting architecture will be created, although this is not a completely new concept", emphasizes Dorota Lachowska. She does not anticipate a significant change in the attitude to the concept of the shopping centers in the nearest future. The changes come slowly as a result of market evolution. In her opinion, trends that can be discussed are new concepts such as shopping centers located in housing estates, specialist centers selling for example interior furnishing, or farther development of retail parks and outlets. Just like Magda Frątczak from CB Richard Ellis, the representative of Polish Properties emphasizes that commercial streets will be of great importance. They will become an alternative to shopping centers in terms of luxury brands.

Although well located shopping centers with good tenants do not have to beckon through additional attractions, the best of currently realized projects have cinemas and interesting food courts. "People pay more and more attention to cafe chains. Shopping center owners also concentrate on the offers addressed to the youngest. Playgrounds for children became really popular and professional care lets the parents spend more time shopping”, observes Frątczak. At the same time she emphasizes that unique choice of tenants is alone value and attraction for each shopping center.

According to the research conducted by Jones Lang LaSalle, the crisis has shown that objects which fulfill the following criteria are doing the best: adjustment to the market, well-thought strategy and coherent tenant mix, which enables consequent creation of competitive position. “Good commercial objects include in their offer elements which let them stand out against the competition. These can be brands that are unique on the market, wide children and family offer, or unique ways of spending free time with the family”, says Jakub Zombirta.
We can expect that together with growing market glut and intense fight for customers’ wallets, new trends which have not been present here so far, but have been tried out on more mature markets, will appear.

End of tenant’s market?

Last year we could talk about tenant’s market. Tenants constituted a party placed on a better position in negotiations, they analyzed thoroughly potential new locations. “There was a pressure to decrease rents, they demanded considerable support from the developers with finishing works in their stores”, says Jakub Zombirta. At the same time tenants whose rental contracts were concluded during the prosperous period, were trying to renegotiate their rent.

Iwona Laszkiewicz observes that today the tenants cooperate with each other, assess the projects and administrator’s work together, and what is the most important according to her, read rental contracts. "The tenants concentrate not only on the costs of centers' operating activities but also on the marketing policy. They noticed the benefits of common action", states the Director Asset & Property Management in King Sturge.

Magda Frątczak assesses that a tenant can dictate conditions only in smaller centers and smaller projects. Here he can negotiate a number of conveniences e.g. sharing the costs of decoration and furnishing of the store, or sign a shorter rental contract.

The crisis has for sure influenced the tendency to raise the discussion and attempts to reach a compromise between the owners and the tenants.

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