Tenants Know What They Need
Commercial tenants are much better off today than five or ten years ago. Most have been through three or four lease cycles and understand what it takes to relocate or renegotiate, says Piotr Kaszyński, Managing Partner at Cresa Poland.
Three years ago the belief was that the Warsaw office market would not absorb such a huge supply and tenants would be in a position to dictate conditions. What has changed since then?
All supply forecasts came true: at the end of the first half of 2018 Warsaw’s office stock amounted to 5.4 million sqm while more than 700,000 sqm was under construction. We were all however taken aback by the huge occupier demand. Warsaw is attracting shared services centres which are also expanding at a quick pace on regional markets, and large global corporates. Financial institutions that have recently chosen Warsaw include Standard Chartered and American Express. They see Poland as a stable and attractive market.
Does it mean that Warsaw is no longer a tenant-led market?
The current market situation in Warsaw is complex. Due to limited availability of office space for immediate occupation in the city centre, landlords having vacant space often enjoy the upper hand in negotiations and some increase their financial demands. A turnaround is unlikely until 2019 when another wave of new supply is expected. Tenants do, however, have a stronger bargaining power in non-central locations.
The vacancy rate in Warsaw’s city centre stands at approximately 10%. What rate do you consider healthy?
The healthy vacancy rate is when it stays within the 10–12% range. But it hasn’t always been there, it stood at more than 18% in the Central Business District in the years 2003–2004. Things changed radically after Poland’s accession to the EU. The market grew at a quick pace until the 2008 financial crisis, which caused only a temporary slowdown here. Warsaw saw a rebound in office supply post-2010 and turned into a tenant-led market in 2015–2016.
How have tenants changed over that time?
Most tenants have been through three or four lease cycles and are aware of what it takes to relocate or renegotiate. They realise that time is of the essence, not only with regard to exploring the market and the pre-selection of locations, but mainly to create the most competitive bidding environment throughout the tender and negotiation process. This preparation ensures the best possible package of cost, conditions and protection. Occupier expectations regarding office space standard have also changed. Employee wellbeing is now an important factor in office selection with firms now taking steps to ensure a comfortable work environment.
We’ve said a lot about Warsaw. How do tenants fare on in regional cities?
Regional cities are expanding at a rapid pace. Poland’s eight largest office markets - excluding Warsaw - have more than 750 office buildings. The overall regional vacancy rate is substantially lower than that in Warsaw with the resultant limited number of large office spaces available for immediate occupation. Pre-lets are also on the rise, leading to an increased interest in these markets from international developers. This, in turn, translates into an improved market offer, helping tenants to negotiate lease conditions more effectively.
Are warehouse tenants beset with similar problems when looking for space for immediate occupation?
Let me remind you when it’s the best time to start looking for new space. This holds true for both office and warehouse tenants. Businesses looking for large footprints or requiring bespoke facilities should start the market research and acquisition process early, preferably two or even three years before needing to be fully operational. Small and medium-sized enterprises should think about moving at least 12-24 months before the end of the current lease depending on the nature and preferred location of the required property.
But back to warehouse tenants, the time of mass speculative developments has long gone. Prior to the financial crisis, developers took a substantially higher risk with projects that were not secured under pre-lets. Tenants enjoyed easier accessibility. Things changed after 2008; developers have become a lot more cautious and engage in client-contracted projects. Speculative space is usually developed in addition to warehouses secured with pre-lets. In many locations where demand outstrips supply the average vacancy rate is below 5%.
Does it mean that clients have to wait for warehouses to be developed? Aren’t they put off by this?
Developers are able to speed up the development process, they have land banks and relevant administrative permits in place. With such an approach, the developer is practically able to commence construction right away and deliver a warehouse within 8–12 months. Robust occupier interest in warehouse space in Poland is driven, among other things, by rents which are the lowest in Europe. Rents are, however, likely to edge up in the near future due to rising construction costs and land prices, but will remain relatively low.
Do warehouse tenants have different requirements than a few years ago?
Technical requirements have changed, particularly those reported by e-commerce retailers such as Amazon and Zalando. E-retailers are increasingly targeting warehouse space close to central locations of large cities in order to recruit sufficient staff with requisite skills. Developers cater for their needs and are willing to commence projects in secondary locations such as Kielce, Zielona Góra or smaller cities in western or eastern Poland.
Shopping centre tenants have no reason to complain about retail space supply, do they?
Except for a few prime retail schemes in large cities, the Polish retail market remains tenant favourable. This is largely due to a high number of shopping centres in Poland. The average shopping centre space density per 1,000 inhabitants stands at 275 sqm, placing Poland in the middle of the EU ranking. It’s a truly high position given our market’s young age and development stage.
But retail landlords enjoyed a strong bargaining power ten years ago…
The market was young, retail supply was low and tenants were taking their first steps in the world of negotiations. Tenants’ situation changed in 2008 when there was no rush among tenants to sign leases. Landlords made quite big concessions which frequently became a standard. Today, retailers are in a much better situation as they have gained experience in negotiations and work with advisors. Tenants with the strongest bargaining power include retailers who may be key to success of a retail scheme and are likely to be followed by others. These are mainly food operators and leading fashion groups.
What can retailers count on today?
A lot has changed, which is also an effect of our market coming of age. For instance, under leases signed five or ten years ago, service charges were absolutely non-negotiable. Today, parties to an agreement discuss them to agree a maximum increase in shared costs. In addition, some tenants are successful at including provisions granting them an option to renew leases on conditions to be no worse than their current lease terms. This may greatly benefit them in the future, particularly if they operate a store in a prime scheme. With a deep market knowledge and awareness of their strengths, retailers are able to obtain dozens of incentives and concessions such as temporary rent reductions, partial or full fit-out allowances or additional promotional and marketing services. The only limitation is the creativity of the parties and their advisors.