The ABC's of Poland's Office Market

REPORT issue 05.2020

Cavatina Holding's Global Office Park project in Katowice The ABC's of Poland's Office Market

Building and leasing big in Warsaw • Regional boom • Emerging office markets • Market in numbers • Office trends to watch REPORT Introduction

Poland’s office Warsaw: big projects under construction, large deals signed stock has more as the city remains Central and Eastern than doubled over Europe’s most vibrant the last decade office market

Sustainable success Poland’s office market boom goes on

The Polish office property market has seen tremendous growth in recent years, driven by the country’s good macroeconomic situ- Medium-sized cities: ation and the ongoing expansion of both do- more development and leasing activity expected mestic and foreign companies responsible in the coming years as for massive job creation. At the end of 2019, the markets emerge as Poland’s total existing stock of modern of- interesting alternative fice space reached almost 11.2 million sqm, office locations according to Cushman & Wakefield data. This means that it had more than doubled over the preceding decade, going up from most important figures and trends defining well as the most spectacular projects and the over 4.7 million sqm recorded at the end Poland’s office real estate market as it keeps transactions. The city has already become of 2009. changing and adapting to both domestic the undisputed leader in the CEE region Just five years ago, the stock stood at developments such as the rapid improve- and is now also arguably one of the most slightly more than 7.4 million sqm. Since ment of Polish cities’ transport infrastruc- attractive office destinations in Europe. For then, annual office space demand and ture and global phenomena including the some global investors, the Polish capital supply levels have consistently remained green building and workplace revolutions. has been the first-choice destination on the very high with the former even setting new We are focusing on Warsaw (A), the biggest continent. records of late. As the world fights the new regional cities (B) and some of the smaller However, the boom in the Polish office coronavirus disease and fears of a global but quickly growing urban centers (C), property market is not limited to Warsaw. slowdown persist, concrete forecasts are as well as on issues that will in the near The largest regional cities in the country difficult to make, but assuming that the pan- future matter a lot in all locations across the – Kraków, Wrocław, the Tri-city agglomera- demic proves only a temporary disruption, country. tion, Poznań, Katowice and Łódź – have the sector – for now still based on strong Warsaw remains by far the largest and been strengthening their positions, largely fundamentals – will certainly continue its the most important office market in Poland, due to the growth of the BPO/SSC sector. solid performance. one that has been witnessing the most The strength of those markets has been a In this report, we are taking a look at the development and investment activity, as big asset of the Polish office sector which,

56 MAY 2020 WBJ Large regional cities: plenty of development, Mennica AIMING HIGH leasing and investment Legacy New office towers activity as the markets Tower become truly established office destinations springing up in Warsaw The significant number of very big projects that are currently being built in Warsaw is perhaps the best proof of the very good condition of the city’s office market. Indeed, never before has so much new office space been under construction in high-rise schemes in the Polish capital. This year alone, three such developments – Mennica Legacy Tower (Golub GetHouse/Mennica Polska), Skyliner (Karim- pol) and The Warsaw HUB (Ghelamco Poland) will be Skyliner completed. Ghelamco is now also working on a skyscraper investment called Warsaw UNIT and Skanska is building the skyscraper phase of its Generation Park complex. Both companies have further high-rise projects in their pipelines. Meanwhile, PHN last year started constructing its Skysawa scheme. For its part, HB Reavis will next year finish construction work on its Varso Tower Varso Tower under development which will completion not only tower over the Warsaw skyline, but will also be the tallest office building in the entire EU. unlike the markets in many other countries The Warsaw of the region, offers plenty of development HUB and investment opportunities outside the capital city. Meanwhile, a number of medium-sized Polish cities – including Lublin and Szczecin – have emerged on Poland’s office map 310 as interesting alternatives to their bigger meters regional peers. As some of the biggest Polish the height of HB Reavis’s cities face qualified labor force shortages, Varso Tower, soon to those smaller markets – offering access to become the tallest office well-educated employees and benefiting building in Poland and in from infrastructural investments – could the entire EU soon attract more tenants and developers alike. We are taking a glance at some of the emerging office markets that will be worth watching in the coming years. >>>

WBJ MAY 2020 57 REPORT Warsaw

Capital dominance Warsaw is still home Ato the biggest projects, lease deals

1. Record transaction The biggest office lease deal to have ever been signed in Poland took place in Warsaw last year. Spectacular figures have defined the Financial institution mBank, which office property market in Warsaw in had decided to consolidate its recent years, with the Polish capital now Warsaw operations, pre-let 45,600 seeing a record-high take-up level and sqm in the Mennica Legacy Tower a record-low vacancy rate. Develop- building that Golub GetHouse and ers have hardly been able to deliver a Mennica Polska are developing in sufficient amount of space to meet the the city’s Wola district. Other huge huge demand. A total of 878,000 sqm of transactions included bank PKO office area was leased in the city in 2019 BP's lease of over 24,200 sqm in (a 2 percent increase on the record year the Chmielna 89 building in central 2018), which brought the rate of unoc- Warsaw, which is being developed cupied space to 7.8 percent, the lowest by Cavatina. level in seven years. The demand has largely been driven by consolidation and relocation processes in the banking and insurance sectors where companies leased big last year. As many as 12 lease deals signed in Warsaw in 2019 exceeded 10,000 sqm, and four Warsaw’s of them exceeded 20,000 sqm. It is now very difficult to find an office area office vacancy in the city that would be sized several thousand square meters and could be rate is now available this year. In 2019, just 162,000 lowest since sqm of new space was completed in the capital (down 30 percent y/y). 2012 However, the supply gap witnessed of late is currently coming to an end. A combined 423,000 sqm in 19 projects will be delivered in Warsaw this year. The five biggest of those schemes will account for almost half of that volume (202,000 sqm).

58 MAY 2020 WBJ 4. New office locations emerging While Wola and the CBD will likely remain the largest con- centrations of new office space in Warsaw in the coming years, a number of major projects could soon also be launched in several (less popular until recently) locations in the city. Those will include the northern part of central Warsaw where HB Reavis is now developing 2 . Focus on the center a large scheme called Forest and a few other developments The bulk of the development 3. Służewiec makes a comeback are in the pipeline. The eastern activity (over 80 percent) in Praga district, too – made more Warsaw is now taking place The Służewiec neighborhood in the Mokotów dis- attractive through the construc- in central locations, including trict in Warsaw’s south, which features over 1.1 tion of the second subway line – in the CBD and the City Centre million sqm of office space and was until 2015 could see more investment. For West zone. The latter zone the biggest office zone in Warsaw, keeps turning example, there is room for new alone – encompassing the into a more attractive multi-function area. Criti- high-rise office buildings in the Rondo Daszyńskiego area and cized for its office monoculture, Służewiec saw Port Praski area, located just parts of the Wola district lying less office development activity over the past next to the National Stadium. closest to the CBD – accounted few years and now has the highest vacancy rate for more than 50 percent of all (16.6 percent) in the city. However, the situation is space under construction at the improving as more residential and hotel proj- end of 2019. The completion ects, as well as infrastructural investments, get of a new subway station and completed there. Office demand in the neighbor- the availability of large post-in- hood increased to almost 200,000 sqm in 2019 dustrial sites have opened new and there are signs that the zone will soon attract investment opportunities there more investors as investment products in other in recent years. parts of Warsaw become scarcer.

5.59m sqm the total stock of existing office space in Warsaw, Q4 2019

SOURCE: CUSHMAN & WAKEFIELD

5. Aging buildings’ owners’ strategies With developers working on huge amounts of new office space in Warsaw, the owners of many of the older properties are increasingly under pressure to rethink their strategies. Many tenants have already decided to move to new, more modern projects, vacating space in aging buildings delivered 15-30 years ago. Others will likely follow suit. In the near future, one can expect more investments in the city entailing thorough modernization and repositioning of existing office properties. In some cases, owners may even opt for the demolition of existing buildings and their replacement with bigger and/or more modern projects if they find such an option profitable.

WBJ MAY 2020 59 REPORT Major Cities in Poland

Regional growth BMajor cities outside Warsaw keep attracting huge developer and investor interest

Poland’s largest regional office markets have been witnessing their own booms in recent years, which manifests itself in the intense development, leasing and investment activity there. Renowned international developers, tenants and investors are present in those locations. A record 547,000 sqm of office space was completed in the eight biggest regional markets in the country in 2019, which means that the combined existing stock there (5.61 million sqm) is now – for the first time in history – bigger than the stock in Warsaw (5.59 million sqm). Kraków (25 percent) and Wrocław (21 Katowice Kraków percent) together accounted for almost half of the new supply delivered in regional Demand doubles BPO/SSC leader markets last year. At the end of 2019, a total of approximately 800,000 sqm was In 2019, demand for office Kraków has seen its office under construction in the eight markets, space in Katowice reached stock almost double over with the most of that volume concentrated more than 82,000 sqm, the past four years to reach in Kraków, Katowice and the Tri-city. which means it was twice as nearly 1.42 million sqm, Regional office space demand also remains large as in the previous year. which accounts for more very strong with the 2019 leasing volume The vacancy rate decreased than a quarter of the entire amounting to almost 693,000 sqm. The by 3.2 percentage points regional office space volume. average vacancy rate in the regions stands at 9.6 percent. to 5.6 percent. Only 10,000 Close to 500,000 sqm of ad- In terms of investor interest, too, regional sqm of new space in three ditional space is expected to office markets have been putting up a projects was completed be built in the city by the end strong performance – a record (more than) in the city last year, but of 2022. Annual gross take- €1.4 billion was invested in office proper- increased tenant interest has up levels have been setting ties there last year. already translated into more new highs since 2014 with development activity with a the 2019 figure standing at total of over 210,000 sqm over 266,000 sqm. The IT in 13 schemes now under sector accounted for 38 perc construction. Over the next ent of the 2019 leasing activ- three years, Katowice’s office ity in Kraków, which remains stock is expected to grow Poland’s leading business by an average of 10 percent services sector location. annually.

60 MAY 2020 WBJ Łódź Tri-city Flex growth High absorption Daniel Draga, Flexible office space opera- The Tri-city agglomeration tors showed an increased should at the beginning of a management board interest in the Łódź market 2022 become the fourth member at Cavatina in 2019 with New Work office market in Poland Holding accounting for the largest (after Warsaw, Kraków and lease transaction (almost Wrocław) with over 1 mil- 5,000 sqm) signed in the city lion sqm of existing space. Market resilience last year. Nevertheless, it Currently, the market’s The last few years have shown is still the BPO/SSC sector stock amounts to more that Poland’s commercial property that drives the demand for than 838,000 sqm with over market is immensely attractive new office space in the Łódź 160,000 sqm under con- for foreign investors. International companies from the BPO, SSC and IT market. The office stock in struction. Demand in the Tri- sectors have been opening their of- Łódź in 2019 exceeded the city last year grew by over fices in the largest cities across the 0.5 million sqm mark grow- 19 percent y/y and reached country. Such factors as access to ing by more than 60,000 sqm 100,700 sqm. Net absorp- an excellently educated labor force, and reaching over 528,000 tion (67,300 sqm) exceeded competitive (in comparison to West- sqm. More than 90,000 sqm the new supply level (61,100 ern Europe) labor costs and access is now under construction, sqm), which led the vacancy to international airports have been of which 81,000 sqm will be rate to decrease to 4.9 per- playing a major role in generating delivered this year. cent (the lowest level among the big demand for office space in regional markets). Warsaw and regional cities alike. Our market still has all these assets, but because of the global coronavirus pandemic, one can- Poznań not rule out the possibility of an economic slowdown in the near Record supply Wrocław future. However, when it comes to long-term prospects, the real The level of new office space Convenient location estate market will certainly hold its supply in Poznań last year own. We are focusing on maintain- reached an all-time high – a Wrocław has been benefiting the current pace of the group’s total of 85,700 sqm in ten ing from its proximity to the operations. We are working towards projects was completed German and Czech borders, achieving the construction, leasing there. This brought the exist- as well as its pool of quali- and sales targets that we have set for this year. At the same time, we ing stock in the market to fied employees. The city’s are acting in line with the govern- more than 564,000 sqm (an office stock last year grew ment’s health and safety-related almost 18 percent increase by more than 147,000 sqm recommendations. y/y). Some developers in reaching almost 1.2 mil- In accordance with the law, work the Poznań market are now lion sqm. Major developers at our construction sites is pro- waiting with launching new including Cavatina, Echo ceeding apace with precautionary schemes to see if the 2019 Investment and Skanska are measures being taken. At the same supply gets absorbed. At the now active there. Demand time, commercialization and sales end of last year, the vacancy in the Wrocław market last processes regarding our properties rate in Poznań stood at 10.8 year reached a high level of are underway. percent and was 3.6 percent- over 123,000 sqm. The city age points higher than a year continues to be appreciated earlier. by big-name tenants – in 2019 companies such as Toyota Europe signed lease agreements in Wrocław.

WBJ MAY 2020 61 REPORT Medium-sized Polish cities

Rising stars CA number of smaller, but promising cities are seeing their office stocks grow a certain scale and a certain level of investment liquidity. Misiak said that the threshold Poland’s largest regional cities have now of 300,000 sqm of existing long been office hot spots, but several space is the entry-level for medium-sized urban centers across the major developers. To be able country also have the potential to become to draw major investors, a important office destinations in the near market needs to have a track future. The biggest real estate service record of at least five office firms already include Lublin and Szczecin building sales transactions. in their regional office market reports, and experts argue that such locations as Lublin: eastern leader Białystok, Bydgoszcz, Kielce, Olsztyn, Lublin is the biggest office Opole, Radom, Toruń, Zielona Góra, market in eastern Poland Rzeszów and the main cities of the Silesia and the seventh-largest agglomeration will be worth watching in regional office market in the the coming years. country. At the end of last Such cities have sizable student popula- year, the city had a total of tions and thus could in the future be over 191,000 sqm of modern attractive markets for tenants including office space in 48 buildings. BPO/SSC sector companies. To date, A further 22,000 sqm was it is mostly local developers (often also under construction. Nearly present in the residential sector) that 9,000 sqm of office area was have been active in those markets, said leased in Lublin in 2019. The Szczecin: more activity Krzysztof Misiak from Cushman & city attracts tenants from With its growing BPO/SSC Wakefield. However, there are exceptions the BPO/SSC, IT and BFSI sector (over 40 operating with Vastint, an international real estate (banking, financial services business service centers), the organization, having completed a project and insurance) sectors. The northwestern city of Szczecin in Szczecin and White Star having built a largest 2019 deals included has already become a sizable scheme in Radom. the lease by Santander Bank regional office market. At the Medium-sized cities attract office de- Polska of 4,700 sqm in CZ end of 2019, the city’s stock to- velopments whose size corresponds with Office Park. taled over 180,000 sqm, while the limited demand there – most of such 6,000 sqm was under con- investments offer between 5,000 sqm and struction. The Szczecin market 15,000 sqm of leasable space. Scale needed last year saw an increase Some of the smaller regional in development and leas- office markets could in the ing activity. A total of around future attract large interna- 25,000 sqm of new space in tional developers and inves- four buildings was completed tors that are already present (which marks the highest in Poland’s biggest urban annual supply level in the centers, but they first need market’s history) and demand to see their markets achieve reached over 13,500 sqm.

62 MAY 2020 WBJ MARKET IN NUMBERS

€3.8 billion the total value of investment transactions in Poland’s office sector in 2019 Source: Colliers International

The figure accounts for 50% of the combined 2019 commercial real estate transaction volume and marks a 39% increase y/y. Apart from established funds from Western Europe, major transactions were also signed by new investors from Asia and CEE

€386 million the value of last year’s acquisition of the Warsaw Spire tower by Immofinanz

This was the biggest single-asset investment transaction signed in the Polish market in 2019. Other major deals in the office sector included the purchase by CPI Property Group of the Warsaw Financial Center for €275 million

52,000 sqm the amount of flexible office space completed in Poland in 2019 Source: CBRE

At the end of last year, the share of flexible areas in the total modern office space volume in Poland stood at approximately 2.6%. According to CBRE experts, this figure could go up to around 5% in the coming years if the sector’s current growth continues

€24 sqm/month 8.7% headline office rents in prime Warsaw locations the average vacancy rate in Poland’s office market, Q4 2019 Source: Cushman & Wakefield Source: Cushman & Wakefield

€375-€1,400 sqm of GLA 4.25%-5.50% the price of land for office projects in central Warsaw yields for the best office assets in Warsaw Source: Colliers International Source: Knight Frank

WBJ MAY 2020 63 REPORT Future Trends

Keeping pace Poland’s office market is now shaped by the latest global trends

1 . Making places The beginnings of the office property Mixed-use buildings sometimes potential to become new neigh- market in Poland only date back to the end up creating – in locations borhoods in themselves. Prime 1990s. That’s when the country started where the availability of a suf- examples of ongoing place-mak- building its free-market economy after ficiently large plot allows for such ing schemes of this kind include four decades under communist rule. an investment – huge multi-func- Echo Investment’s Browary The initial phase of its development was tion projects. They often entail the Warszawskie and Capital Park’s mostly defined by copying ideas that had renovation of neglected post- Fabryka Norblina, both of which long been known in other, more estab- industrial properties that have the are located in Warsaw. lished, marketplaces. There was a lot to catch up with, and in some cases, this also meant the implementation of solutions 2 . Building green which soon began to be seen as inefficient Major green certificates such as BREEAM and and outdated. LEED have already become the standard in the Those times are now definitely gone. Polish market. Any new office project needs to The Polish market has matured and the feature green certification to be able to attract quality-related expectations of urban tenants and investors. However, more needs planners, as well as of buildings’ owners to be done as sustainability issues come to the and dwellers, have grown tremendously fore amid what many now call a global climate in recent years. To remain competitive in emergency. There are concerns as to how cli- today’s market, developers currently need mate change will affect property values. In the to keep pace with the latest global trends near future, one can expect a drive towards as far as urban planning, office building developing net-zero buildings. design and workplace solution trends are concerned. Indeed, in some areas, Poland has even been among those who are leading change these days. This is arguably true for such modern concepts as sustainability and flexibility. 3. Location rules Here we list some of the most important “Location, location, location” – trends that are already shaping Poland’s we all know the old quip about office property market and will certainly the three most important factors grow in significance in the coming years. determining a property’s attrac- tiveness, but it has probably never been more true in Poland’s office market. As employers compete to win and retain the best talent, a well-located office is an asset that cannot be over- estimated and is worth investing in. This is exemplified by the success of the new office hub in Warsaw’s Wola which, thanks to its good transport infrastructure, has been able to attract tenants from cheaper, but harder to get to locations.

64 MAY 2020 WBJ 4. Mixing uses Office monocultures no longer work – tenants want to be in properties offering access to amenities, developers and investors understand that synergy effects can be achieved by com- bining various building functions, and city officials and inhabit- ants alike appreciate those creating places that are not dead zones after office hours. An attractive office building should also accommodate retail and service space, and be located close to residential buildings.

6. Going high-tech Poland’s office buildings are more and more advanced with energy-efficient technologies and sophisticated parking and lift solutions having already become commonplace. How- ever, there is still a gap between the needs of the younger, technology-savvy generations of employees and the offerings of landlords, many of whom have not yet embraced the proptech revolution. In the coming years, owners will be stepping up their investment in property technology as tenants increasingly expect to have access to the latest applications in their workplace.

5 . Flex revolution Dramatic changes in the way that people work and tenants’ expectations of more flexible space arrangements and leasing terms have been driving the demand for co-working and serviced office areas. Warsaw has in recent years been one of the fastest-growing flex markets in Europe. At the end of 2019, Poland’s total existing stock of flexible space exceeded 220,000 sqm, of which over 147,000 sqm was located in the country’s capital. The trend is also visible in regional cities with Kraków’s stock having almost doubled last year.

WBJ MAY 2020 65 REPORT Expert Opinions

Daniel Bienias, Managing Director, CBRE in Poland Strengthened trend For many companies the coronavirus pandemic is an exam in remote working. As the latest Gartner’s forecasts show, even every third remote employee will no longer work in the office full time. It should be emphasized that coronavirus only accelerated what was eventually going to happen on the labor market. Our latest research, conducted jointly with Grafton Recruitments before the coronavirus pandemic, shows that the vast majority of Polish employees count on the possibility of working remotely for at least one day a week. What is more, up to 51% of employees admit that the possibility of remote working affects their efficiency. So, coronavirus just reinforced a trend that would have become the norm anyway. However, this does not mean that offices will no longer be needed. Employees will be given the freedom to choose the workplace, but they will continue to meet with other employees and clients in the office, and this social aspect is the most significant. I think that the outbreak of the virus, which has locked us in our homes, has clearly showed everyone how much we need contact with other people. Interpersonal relations in the workplace are very important, and the office is the key to making them possible.

Nicolas Klukowski, consultant, financial advisory department, at Mazars in Poland Leasing issues The year 2019 involved a lot of activity and Poland saw attractive results in the office sector. The current year 2020 would also have been likely to maintain this trend, offering bigger office supply to meet the rising demand. However, the situation has changed and it is now difficult to measure precisely the impact of the coronavirus crisis. At the moment, compared to previous forecasts, higher rental levels and a slowdown in investment activity can be expected. At the same time, owners (i.e. landlords) are facing big issues with the payment of rents during the coronavirus pandemic. Most of lease processes are under negotiations and the outcome is uncertain due to the absence of special regulations. Regarding development, investors declare that the current situation has not stopped office construction. During the first week of April, more than 100 projects were under construction in Poland with a total area of over 1.7 million sqm. The coronavirus crisis has changed the way people live as they are bound to stay at home. All types of assets such as shopping centers, hotels and offices have remained empty since the outbreak. The office property sector is being -di rectly affected and its future is about to change as the remote work model has become a widespread practice. This new way of working is now undergoing a test phase and companies are now choosing if they want to adopt this practice from now onwards.

66 MAY 2020 WBJ Kamil Krępa, head of leasing at TDJ Estate Virginie de Baere, managing director at New opportunities MVGM in Poland Definitely, the coronavirus pandemic came as a shock and no one expected this black swan to disrupt business and the economy on the scale we are observing at the moment. From Accelerating transfor- TDJ’s point of view, the office sector has been impacted to a mation limited extent due to the Business Continuity Plans deployed The current situation in the prop- by office tenants, aware of the global reach of their services erty market is very dynamic and it and their obligations regarding back-up scenarios. Tough is difficult to forest any long-term times have come for retailers with food and beverages sec- effects of the pandemic. However, tor companies not able to conduct their business in a regular every crisis also has its positive way. In the .KTW office building we have – taking a partner- consequences. In this case, it will be ship approach – concluded an extraordinary agreement with the digital transformation embraced the canteen operator, which provides for the suspension of by tenants and office building own- the tenant’s lease obligations. ers alike, which has accelerated The construction process of .KTW II is ongoing and we do rapidly in recent weeks. It is related not expect any delays with regard to supplies and workforce. to the biggest home office test in the As a responsible investor we have implemented all the history of the labor market, which recommended procedures and health and safety measures entails the need for the implemen- to prevent potential contagion. On the other hand, the leas- tation of technologies allowing for ing process is underway and companies, which generally maintaining communication among plan long-term, are continuing their analyses as far as the employees and ensuring business establishment of new business units and the relocation and continuity. Business processes and expansion of existing ones is concerned. communication with clients need to The economic downturn of 2007-2008 brought companies be managed effectively. opportunities to find new models of operation and at TDJ Such changes are also taking we believe that the current crisis will also allow firms to place in the property management redefine their business and create new roles responding to business where access to platforms the needs of the post-corona world. Therefore, flexibility will based on big data and giving compa- gain further allies due to the core philosophy of giving people nies an insight into a whole range choice as to how and where they work from. As for the big- of real-time data is the key. This is picture perspective, we should expect a decrease in transac- why organizations which have to tion volumes due to the withdrawal of capital to more mature date been shying away from modern markets, which will impact the yields of office assets. technologies will need to increase their investment in innovation. This is no longer a question of so-called added value, but of surviving in the very competitive market in which one can expect turbulences and unexpected events in the future.

WBJ MAY 2020 67