Warsaw | 22May2017

PREMIERE OF THE NEW CBRE REPORT “POLAND OUTLOOK 2017”

21 maja 2017

Poland, with its population of 38 million, is the largest country in the Central and Eastern Europe region in terms of the number of inhabitants. According to the report drawn up by CBRE experts, our country is one of the most stable and dynamic economies within the CEE region. The “Poland Outlook 2017” report discusses the current situation and features forecasts prepared by CBRE experts as to the key sectors of the commercial real estate market: Warsaw and regional office markets, the retail and industrial and logistics sectors as well as the investment market.

The positive outlook for the Polish real estate market results from the country’s stable economic condition, robust consumption supported by a tightening labour market and low oil prices. However, a slump in EU funding and lower predictability as regards the political situation under the current government are unfortunately weighing on investor confidence and prolonging the decision making process, which in turn translated into a decrease in GDP growth from 3.9% in 2015 down to 2.9% in 2016. Nevertheless, CPI has returned to positive territory and will probably increase over the coming months to achieve an average of 1.8% for the year. The labour market continues to tighten with unemployment down to a record low rate of 7.7%, while real earnings have risen by approximately 3% in the past year.

Poland remains a sound investment destination and has virtually not been affected at all by the political changes taking place in the European Union and the USA (Brexit and immigration issues). The situation in the country is mostly boosted by its internal economy which attracts large numbers of foreign investors. The positive condition of Poland’s economy has been recognized by Moody’s ratings agency which has upgraded its previous rating stating that there are solid prospects for GDP growth and, as far as attracting investment is concerned, we still hold all the cards.

Warsaw office market

Warsaw is experiencing continued growth, both in terms of its population and infrastructure. There is a lot it has to offer to new investors and those already present on the market. At the moment the office market in Warsaw is extremely attractive, where the high level of competitiveness between developers results in an alignment of forces favourable for tenants.

The total stock of modern office space in Warsaw exceeds 5 million sqm and developers’ appetites remain strong: there are currently 840 000 sqm of office space under construction. More than 84 000 sqm in 9 buildings have been delivered to the market since the beginning of 2017, while further 283 000 sqm are to be completed by the end of the year. We estimate that Warsaw’s stock of modern office space will grow by approximately 7.3% by the end of 2017.

The increasingly varied range of leasing options as well as the strengthening position of tenants in respect of the negotiation process translated into a fall in rents over the past several years. Headline rents have not fallen since Q2 2016 and current prime office rents stand at EUR 23.00/sqm/month. Regardless of the high vacancy level, we do not predict further decreases in rents.

The demand for modern office space in Warsaw seems stable, which means consistently strong. Both local and global political-economic situation have not and are not anticipated to impact on the modern office space market in the capital. The high level of developer activity coincides with stable demand driven by, amongst others, an increasing number of companies making the decision to relocate their businesses from other countries to Poland. The sheer volume of leases concluded in Warsaw is a proof that tenant activity remains strong. Despite the temporary stabilization of the vacancy rate below 15%, we expect that the upward trend will return and will continue through to mid-2018, however it should not exceed the level of 15.5%.

Łukasz Kałędkiewicz, Senior Director, Advisory & Transaction Services, CBRE

Łukasz Kałędkiewicz - LinkedIn

Regional office markets

The total stock of modern office space in regional cities amounts currently to nearly 4 million sqm, where A class office buildings account for 45% of the total volume. In addition to Warsaw, Kraków (942 000 sqm), Wrocław (867 000 sqm) and the Tri-city (646 000 sqm) remain the leaders of the Polish market. The other markets, such as Łódź, Poznań and Katowice, are enjoying increasing interest from both tenants and developers, with more cities with significant potential, such as Lublin and Szczecin, now also in the queue. 2016 was one of the most successful years in the history of Poland’s regional markets, with Q1 results backing the positive prospects for the future.

Nearly 70 600 sqm in 12 schemes were delivered to the market in Q1 2017, with further 827 000 sqm in 66 schemes under construction to be completed within the next two years. The largest schemes being constructed at the moment are Alchemia III and Olivia Star in the Tri-city (a total of 39 000 sqm), Tischnera Office in Kraków (32 000 sqm), Ogrodowa Office in Łódź (28 000 sqm) and Sagittarius Business House in Wrocław (28 000). The high level of developer activity is a response to the growing needs of tenants: nearly 175 000 sqm were leased in Q1 2017, which means a 60% increase as compared to the corresponding period in 2016.

Strong developer activity has only slightly affected the average vacancy rate which dropped to 10.4%, with the values for the individual markets ranging from 6.8% in Kraków to 15.9% in Szczecin. The differences in the level of vacancy come from the varied pace of growth of each specific market. Rents in the largest regional cities remained stable and stood at EUR 10.50-15.00/sqm/month depending on the location. Kraków, Wrocław and the Tri-city record the highest asking rents.

Developer activity in the regions is generated by the strong demand for modern office space on those markets. The stock of modern office space will continue to grow over the next two years, with the highest level of activity projected for Kraków (more than 300 000 sqm under construction). Due to the increasingly higher vacancy rate, developers may have to expect heightened requirements from tenants and be prepared to expand their incentive packages. In many cities supply will surpass demand, nonetheless the unwavering interest on the part of tenants, particularly those from the BPO/SCC/IT sector, allows us to predict that the newly built space will be gradually absorbed by the market. Notwithstanding, it has to be stressed that the schemes that are already under construction, preferably located within city boundaries and offering tenants the optimal working environment along with the abovementioned incentive packages, will be leased first, irrespective of which particular regional market is concerned here.

Kamil Tyszkiewicz, Director, Advisory and Transaction Services, Office, CBRE

Kamil Tyszkiewicz - LinkedIn

Idustrial and logistics market

At the end of Q1 2017 the total stock of modern industrial and logistics space in Poland stood at nearly 11.6 million sqm. The market is experiencing a real construction boom with Upper Silesia as the second region (following in the footsteps of the Warsaw II zone) to have exceeded the 2 million sqm threshold in terms of supply of A class warehouse space. Next in line to break the record are Poznań, Central Poland and Wrocław. Together, the five largest Polish industrial and logistics regions aggregate more than 80% of Poland’s total supply.

2016 was historically the best year on the warehouse market as regards both demand and supply: the total supply of A class warehouse space delivered to the market in the entire 2016 reached a record level of 1.12 million sqm. So far 2017 is not showing signs of slowing down either. The excellent condition of the market stands backed by Q1 results with nearly 570 000 sqm of completed and further 1.3 million sqm under construction. The positive market situation is conducive to growth of well-established locations in Poland’s key regions as well as construction of warehouse schemes in entirely new markets such as Zielona Góra, Opole, Kielce, Kalisz and numerous others.

Despite strong developer activity, vacancy rates remain low. Newly built space is quickly absorbed by dynamically expanding businesses looking for new locations. Lowest vacancy rates are recorded in Central Poland (2%) and Upper Silesia (4%). Headline rents in Poland’s key industrial and logistics hubs are stable and stand at EUR 2.40-3.90/sqm/month with a significant discrepancy between headline and effective rents noticeable.

On-line retailing is affecting the logistics market to an increasing degree now. The dynamic growth of the e-commerce sector translates into strong demand for warehouse space in both large-format regional distribution centres, frequently occupied by leading international e-commerce players, and urban logistics centres responsible for the final stage of distribution within the supply chain (the so-called 'last mile').

Aleksander Kuźniewski, Associate Director, Industrial&Logistics, CBRE

Aleksander Kuźniewski - LinkedIn

Retail market

Poland’s current stock of modern retail space amounts to more than 11 million sqm. The beginning of the year did not bring any new schemes to the market. The only completion that took place was the extension of Auchan Hetmańska in Białystok (5 800 sqm of new retail space). Despite the fact that Q1 2017 was relatively calm, it is expected that more than 0.5 million sqm of new retail stock will still be delivered this year, which will see the opening of schemes such as Wroclavia in Wrocław, Galeria Północna in Warsaw, Ikea in Lublin and Serenada in Kraków.

Even though Marks & Spencer and Topshop have decided to withdraw from the market, many famed brands such as Hamleys, Victoria’s Secret and brands from the Iconix Brand group are looking towards Poland and planning their expansion here. Moreover, retailers already present on the Polish market are expanding their operations by introducing new concepts and formats, which has a positive impact on the diversity of the retail offer.

The average vacancy rate in the 8 largest Polish agglomerations stood at the end of 2016 at 3.3% and was marginally higher than at the end of H1 2016. Rents and the length of the negotiation process for prime shopping centres have not changed significantly over the past few years. The most prestigious schemes such as Arkadia, Galeria Mokotów, Złote Tarasy in Warsaw, Galeria Krakowska in Kraków, Silesia City Centre in Katowice and Stary Browar in Poznań remain at the top of many tenants’ wish list and they are the schemes where prime rents are achieved. The negotiation process for new schemes in poorer locations has become much longer. Tenants expect an increase in capital incentives, i.e. contributions towards the cost of fit-out, rent-free periods and turnover rents in place of fixed monthly rents.

Polish consumers are no longer afraid of on-line shopping and retailers in traditional stationary stores are becoming increasingly aware of the need to integrate the on-line market with conventional retail. The increasing share of on-line sales in the total volume of retail sales is creating the challenge to find innovative ways to attract customers to stationary shops. The need to fuse traditional retail with the m-commerce and e-commerce sectors has become one of the most pressing issues for all the players active on the market. In order to develop competitive advantage, property managers and landlords use innovative technologies that are quickly and effectively incorporated in their shopping centres. Examples of innovative solutions include mobile applications that help find the way to the required store within a shopping centre and present personalized offers based on the customer’s previous shopping decisions.

As a result of the increasing competition in the form of modern schemes offering innovative solutions, many older schemes are now facing the need to introduce some necessary changes and improvements. As many as 50% of Poland's existing shopping centres have been on the market for 10 years or longer. Developers should now be planning to not only implement new schemes, but also to modernize and modify the existing schemes. Renovations and alterations in respect of the existing space as well as verification of the retail offer and introduction of new technologies represent a trend that is set to continue over the coming years.

Magdalena Frątczak, Senior Director, Retail Department at CBRE

Magdalena Frątczak - LinkedIn

Investment market

The beginning of the year was as customary a relatively calm time for the investment market, where the total investment volume in Poland in Q1 amounted to EUR 485 million, which represents a 5% drop as compared to the corresponding period in 2016. Nevertheless, Poland remains at the centre of attention as the strong transaction pipeline and the increasing number of investors investigating the Polish real estate market indicate that the total investment volume in 2017 should reach a level similar to that recorded in 2015-2016.

For a few years now investor activity has no longer been focused on only the largest schemes in Warsaw and has partially shifted towards smaller schemes in Poland’s other cities. We expect that this trend will continue over 2017’s remaining three quarters and investors with varied investment profiles will seek attractive market opportunities both in Warsaw and the regional cities.

Yields have not changed significantly since the end of 2016. We are still observing downward pressure on prime yields, although the speed of yield compression is slowing.

The investment market in Poland in Q1 2017 was dominated by the hotel sector, which due to a purchase transaction in respect of three 5-star hotels held a 45% share in the market. The transaction means that the Sheraton Hotel in Kraków and two hotels in Warsaw: Radisson Blu Centrum and Westin have now found a new owner. Furthermore, investors are displaying unwavering interest in the retail and office sectors which hold a respective 33% and 20% share in the total volume of investment transactions. 2017 is generally looking extremely positive due to the fact that there are numerous transactions underway on the market at the moment.

Przemysław Felicki, Director, Capital Markets, CBRE

Przemysław Felicki - LinkedIn