The office market in Polish regional cities continues its strong momentum. Tenants and developers are attracted not only to core agglomerations, but to emerging markets as well. In 2016, a supply gap is expected in Krakow, Tricity and Łódź. The next year’s transaction volume on the Polish regional markets is projected to surpass that recorded in 2015.
Regional markets driven by business services
In the first three quarters of 2015 the total volume of lease transactions on the regional office markets reached around 350,000 sq m. Tenants from the sector of business services, including outsourcing, shared services centres and IT, accounted for approximately 80% of that take-up. Occupier interest focused on office developments close to city centres due to improved city transport and increased employee requirements regarding office location and its immediate neighbourhood.
There is also a growing interest of BPO tenants in the emerging markets of Szczecin and Lublin. Other regional markets such as Rzeszów, Bydgoszcz and Opole are also becoming important office destinations compared to other similar-sized cities. These are favourable locations benefiting from various incentive tax credits offered by local authorities, particularly to companies seeking to open new business centres and to create up to 200-300 jobs. We expect this trend to continue in the coming years.
A supply gap is expected in Krakow, Tricity and Łódź in 2016, which may lead to an increase in pre-lets for office projects planned for 2017.
Despite major vacancy rate fluctuations headline rents have been relatively stable on a long-term basis with little variations among individual cities. However, market diversification is expected to intensify in the coming years. On the largest regional markets such as Wrocław and Krakow headline office rents in city centres, including prime locations, will gradually begin to differ from those in non-central locations.
The vacancy rate in Poznań stands at 18%, which is largely due to the delivery of the Business Garden complex offering 41,900 sq m. In 2016, more than 25,000 sq m of office space is expected to come onto the Poznań market, mainly through the completion of the Maraton project, being developed by Skanska, and the city’s vacancy rate will fall to 15%.
Limited supply is expected to drive vacancy rates down gradually in Krakow (3.72% of vacant space), Łódź (6.13%) and Tricity (11.31%), while Katowice’s rate is expected to remain stable at 12.25%. In Wrocław, on the other hand, the delivery of new office schemes is likely to push the vacancy rate up from 8.69% to 10%.
Vacancy rates at the healthy level of around 10% point to a balance between supply and demand. However, smaller markets can be easily affected by changes to supply and demand levels. Low vacancies may discourage new tenants from entering a given market and, paradoxically, may also prove unfavourable to developers. On the other hand, high vacancy rates in Wrocław, Poznań and Katowice stimulate market demand, boosting transaction levels in 2016.
Transactions on the rise
Yields on regional office markets range from 6.75% to 8% for prime assets. The most liquid markets such as Krakow and Wrocław offer prime yields of less than 7%, while in other cities such as Łódź and Katowice yields usually stand at more than 7.5%.
Demand reported by investment funds on the Polish regional markets continues to outstrip supply of prime office assets. Cushman & Wakefield expects yields to compress in regional cities in 2016 and the transaction volume to be in excess of that noted in 2015.
According to Cushman & Wakefield’s data, most office space (130,000 sq m) will be delivered by the end of 2016 in Krakow, followed by Wrocław with around 95,000 sq m, Katowice (around 45,000 sq m) and Łódź (around 45,000 sq m). Approximately 20,000 sq m of new office space is expected to come on stream in Poznań and Tricity each. In addition, around 25-30% of office space planned for 2016 has already been let.
The most spectacular office schemes under construction include Skanska’s phase three of Silesia Business Park in Katowice and Maraton office building in Poznań, while Euro Styl is developing an office complex Tensor Gdynia in Tricity. The largest scheme underway in Łódź is phase two of University Business Park, developed by GTC. Other office buildings in the pipeline include Business Garden Wrocław in Wrocław and Axis in Krakow.
Author: Krzysztof Misiak, Partner, Head of Regional Cities, Cushman & Wakefield