Stable growth of Poland’s commercial real estate

Poland is the undisputed leader in the CEE region and, thanks to relatively low labor costs, the still high availability of land and competitive rental rates, so it is a good alternative to Western Europe’s markets.
Stable growth of Poland’s commercial real estate

New office building in Warsaw, Poland (Maria Bnińska, Public domain)

The office market in Warsaw is still ready to absorb new projects, which is why developers’ activity is high, although the risk of a rising vacancy level is a concern mostly for older buildings as tenants prefer to choose new projects.

Over 722,200 square meters (sqm) of office space is currently under construction across Warsaw, according to the latest report by the global real estate advisor Savills.“Despite some concerns that a large number of office projects under construction city wide will result in a bust, the data shows that so far there is still a balance between supply and demand,” the report reads. “Owners of older buildings will be forced to refurbish existing office space or even decide to demolish them and use the plot for other purposes,” said Tomasz Buras, Managing Director, Savills Poland.

In the first half of the year 131,400 sqm was completed. The largest office project completed during that time was the second phase of Business Garden complex, which comprises four buildings totaling 54,800 sqm. During the second half of the year another 185,000 sqm of office space is expected to be delivered across the city. Thus last year’s record high new supply of 407,000 sqm in such projects as Warsaw Spire and Q22 among others, won’t be beaten, the report states.

Starting next year, and throughout the three following years, the largest office complexes currently under construction will be completed: Mennica Legacy Tower (63,800 sqm; delivery date 2018), The Warsaw Hub (75,000 sqm; delivery date 2019) and Varso (106,200 sqm; delivery date 2020).

According to Savills, letting activity in the first half of the year in Warsaw was at a record high level. Take-up stood at 391,400 sqm, which was above the total volume during the first six months of 2016 (360,600 sqm) and more than the historical-high level recorded in 2015 when 390,200 sqm of office space was leased in H1.

Some 30 per cent of letting activity was recorded in the City Centre, which contains four subzones, including City Center West located in the Daszyńskiego roundabout region, where 76,700 sqm of office space was leased. Take-up in Mokotów in H1 stood at 87,300 sqm, of which 60,400 was leased in Służewiec.

Financial institutions dominated the largest letting transactions in Warsaw in the first half of the year. Three of the five largest lease deals were signed by companies from the banking sector. The largest transaction was Millenium Bank’s renewal of the lease agreement for the office space in Millenium Park (18,900 sqm).

Prime rents in projects located in the CBD and City Centre range from EUR21 per sqm/month up to EUR25 per sqm/month. Prime rents in non-central districts range between EUR13 and EUR14.5 per sqm/month. The vacancy rate decreased by 150 bps to 13.9 percent when compared with H1’16.

“Warsaw still remains the largest office market in Poland and also the most attractive city for developers and tenants,” said Dorota Ejsmont, Head of Office Agency, Landlord Representation, Savills. “The high level of new supply doesn’t mean there are too many projects under construction in Warsaw. But without a doubt the competition on the market is increasing, which is why developers build more and more interesting projects and try to attract tenants by developing more and more interesting projects with amenities.”

Poland’s warehouse real estate sector in strong shape

The first half of 2017 noted historically high demand for Polish warehousing, on the back of several large lease agreements, according to AXI IMMO report

Over 1.82 million sqm was leased, of which 70 per cent was made up of new lease agreements and extensions. There is also 1.71 million sqm of warehouse space under construction and 720,000 sqm completed in the first six months of this year. “Development of the sector is being helped by changes in sales patterns as well as the good economic situation in Western Europe,” according to the AXI IMMO report, summarizing the first half of 2017 on the warehouse market.

Supply

From January to the end of June, 720,000 sqm were completed. This is 10 per cent more compared with the first half of last year. Most new projects were created in the Warsaw area (115,000 sqm), Bydgoszcz (113,000 sqm) and in the Poznań region (111,000 sqm).

At the end of June, the total stock of modern warehouse space in Poland was 12 million sqm. The following developers had the largest share in new supply at the end of June this year: Panattoni (47 per cent), then Prologis (12 per cent) and Hillwood/7R (11 per cent).

The level of new supply is high, but BTS and pre-let are predominant. 1.71 million sqm of industrial space is under construction. Compared to the same period in the previous year, this is an increase of 100 per cent . The largest number of new projects under construction are in the Warsaw region (360,000 sqm), Upper Silesia (330,000 sqm) and in Szczecin (293,000 sqm).

“The share of speculative investments in the volume of projects under construction is falling, and at the end of June their level was 24 per cent, down 18 per cent compared to the same period in the previous year. This is a result of large BTS projects, but also more cautious developers, who in most cases start a new investment after signing at least one pre-let contract. Speculative investors prefer the main markets, with most space not secured by lease agreements being built in the Warsaw, Upper Silesia and Wroclaw regions,” added Anna Głowacz, Head of Industrial – Leasing Agency at AXI IMMO.

Demand

Agreements were signed for 32 per cent more space than over the same period last year. Some 70 per cent of the volume of transactions were new leases and expansions. This high level of demand demonstrates the good condition and further rapid growth of the sector and Poland’s economy. The best result was recorded in the Central Poland region, where 444,000 sqm was leased within just 16 rental agreements.

“Three of the contracts represented 52 per cent of total demand in region, for the implementation of BTS projects for companies: Castorama (100,000 sqm), BSH (79,000 sqm) and OBI (50,700 sqm). Upper Silesia (401,000 sqm) and Warsaw (392,000 sqm) were also on the podium,” said Anna Głowacz.

In the first half of 2017, the main markets dominated, in which 1.6 million sqm was leased, while only 11 per cent of gross demand was recorded in smaller markets. Compared to the first half of 2016, the greatest demand-side dynamics were observed in Central Poland, where a large increase of 158 per cent was recorded. A significant jump was also observed in Upper Silesia, where demand rose by 89 per cent. In the demand structure, retail chains took the lead with a share of 35 per cent, followed by logistic operators (30 per cent).

Vacancy rates

The high demand for warehouse and industrial space set against a stable number of completed projects means that vacancy rates are low, standing at 5.9 per cent at the end of the Q2’17, 0.2 p.p. lower than in the previous quarter.

The largest amount of space available for immediate rent is located in Szczecin (8.7 per cent) and Wroclaw (8.5 per cent). The lowest availability at the end of June was reported in Łódź (0.7 per cent).

Rental rates are at a stable, low level, with an upward trend observable in Łódź and selected locations in Upper Silesia. For medium-sized warehouse rental transactions between 2,500 and 5,000 sqm, developers are not willing to make concessions on base rents, though there is room for negotiation on effective rates.

The most attractive effective rents were obtainable in the Warsaw area (EUR1.9-2.4/sqm) and in Poznań (EUR1.9-2.4/sqm) high rates, above EUR3/sqm, were found in Łódź and the Bielsko-Biała sub-region.

Forecast

At the end of 2017, last year’s three million sqm of leased modern warehouse space can be expected to be beaten. The further development of e-commerce and the good macroeconomic performance of the economy, as well as in Germany and EU countries, will be factors in the good results.

 

New office building in Warsaw, Poland (Maria Bnińska, Public domain)

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