The office market is undergoing changes. What do we have to get accustomed to? We are talking with Piotr Szymonski, director of the Representative Department for renters at Walter Herz
Our interview will concern office spaces, also investments, your recruitment process. Please tell me, who has joined your company, what advisory departments did you decide to expand? What predetermined these actions?
The year 2020 was a historical one for our company based upon completed projects and attained results. More and more clients feels the need to utilize our services, that is why we decided to expand our team by eight people. Two people strengthend our investment team, with perticular focus on finding sites for our investments. Joining the warehouse team is Piotr Krawczyk, who taken over the managerial position. Our main business objective, which is representing tenants, has grown by 5 people. This is all because we want to continue improving our customer service. What sets us apart from the competition is our commitment to project realization. Our goal is to take care of our clients from the moment they turn to us with questions, right up to when they find themselves happily settled in their new office.
Like we said, the office market in the last year had undergone changes. Can you specify which of these will be permanent?
This is a very good question. As of right now we can only speculate. I feel the market will change, but not drasticall. I think people will sooner or later get back to working in offices. Maybe not 100%, more likely around 70-80% of the work day will be spent at the office. The advantage will be, the ability to work from home.
Speaking of the offices themselves, we are talking about their interior design. According to you, how should the office interior look to meet todays standards?
Offices are currently being redisgned to meet todays standards. First projects that take covid measures into consideration can be observed in ongoing projects in many of our cities. One example of the new standard is partitioning off zones. I think it is a key element that architects and tenants are paying attention to. First of all they want to ensure their staff’s safety and continue doing business in the wake of many challenges that we are faced with. First element is creating spaces for clients, in a manner in which they do not mix in with employees. Most basic element is for the reception area to be separated from the conference area and the rest of the office. On top of that, restroom and kitchen areas are sectioned off as well for office use. Equally as important is assigning a perticular area to each employee. They are to be divided into teams and their office spaces are designed in a fashion that each team has their own dedicated area. Therefore if a infected or quarantined person is present, only half the team gets quarantined, and the business keeps functioning.
Let’s move on from the interior arrangement onto something less pleasant, rent and finances. Rent rates in office buildings have not substantially decreased, although to grab potential tenants interest, many landlords adopted different strategies. What methods have you noticed that are being used to persuade tenants? Which of these are most effective according to you?
It is definitely worth looking at through the prism of the buildings quality. An entirely different situation is in good, quality A projects. Whole different situation in lower quality C class projects, B class projects are somewhere in the middle. In good, well located projects, landlords didn’t feel pressured to lower rent and realized how valuble the tenant is and wanted to keep him interested and invite them to their building, they offered that tenant more than usual rent-free months. In the case of older buildings with lower class, landlords were more leaniant with rent rates. In all cases, amount of rent-free months kept increasing, through which effective rent rates changed. However the key element, I think, was the pandemic, landlords were more flexible during this time. Even last year, two years ago, rent contracts shorter than 5 years were not viewed kindly by landlords. At this time the pandemic forced landlords to be more flexible and open, they understand that more often than not tenants simply do not know what the future holds.
So in that case, in order to make the building available, it has to first be built. According to your publication, the numer of construction projects has fallen drastically, especially in the Warsaw market. The main reason was of course the pandemic. The market is slowly getting back on track, does this mean an increase in demand for construction, and if so, in which locations?
That is true, today there is less construction sites. How did the pandemic influence this? Greatly for sure, however it is worth remembering that the business cycle or investment cycle is spread over a few years, so the position we are in, was only slightly affected by the pandemic. It is worth noticing that any given construction site, will have future influence on the supply gap on the newly developed site. Another issue is, last year there were not many permissions for construction granted in respect to years past. The upside is there are more applications submitted for permission to build. It is reassuring, but the key question is, will investors decide to go ahead and start construction? This will all be determined by what we will see in the fourth quarter of this year and beginning of next year.
That’s right, the market is unstable. Taking into consideration our present situation, what actions can office landlords take? In order to secure their office space needs?
I think, the key is to analyze your own business. What business do we have today, what will it look like in 3 years and how will it look in 5 years. Depending on what answer arrive at to the question, if I truly believe that my business will grow and will continue to over a 5 year period. It should be analyzed how many people should be hired and consequently calculate how much more space will be needed. Also for firms that predict their business to grow, certainly the best option will be relocation, or renegotiation, where we remain at the present location, and we adjust to the tenants needs or search for a more suitable location. In the case of tenants who do not have a clear picture of what their business will look like in 2-3 years, a good solution is shared office space, serviced office space, where we can wait and see how the situation will evolve. However a whole other situation is where the tenant already knows they have more space than needed. In that situation, it is best to start looking for a substitute tenant, who will take over the cession, meaning they will sign on as the third party or sub-lease. Of course, in 99% of these cases, the tenant has to agree, but it is an available solution, which helps optimize costs. On very rare occasion, some tenants decide to go without a tangible office, thankfully, very few decide on this.
Just as some tenants analyzed their needs, withheld their decision, what effect will this have on the market?
Generally looking for a new office takes 18-24 months, of course, the higher volume of transactions, the bigger the desired lot, then the process has to be proportionately longer as well. However taking into consideration that the alloted time frame of 24 months, we noticed first of all that many tenants waited with their decision and at this point they have less than 12 months left. I personally had the opportunity to talk with many clients: they simply do not know, what they will need. They whole team is in „home office” mode and the classic office is dead silent. This situation is slowly changing. Looking at the amount of inquiries that we recieve from tenants, a noticable rise in office space can be seen. The scenario of „I don’t know” can not last forever. Most companies are ready to make a decision. This is where the need to hire more staff becomes evident, to guarantee quality service to these processes, that we receive.
Let’s look at the investment market for a moment. According to you, how did it present itself during the pandemic, and what will it be in 5 years?
Until now the pandemic has affected the retail market the most. Governments actions, but also changes in consumers habits caused investments such as shopping malls to be less attractive to investors. There is still an interest in office buildings that are more than 10 years old. However, from the perspective of buyers they have become less sought after, therefore they want to pay less for the same building than before the pandemic. On the flip side there are warehouses, which are highly desired by investors here and from abroad. They did not suffer during the pandemic, actually they chanelled a lot of the interest from consumers. It is really thanks to them that purchasing online was taking place. Grocery stores, amongst smaller investors, are becoming more attractive and are becoming an interesting form of investing, and appartments for rent from institutional owners. In turn, this is the second most desired asset with which we are actively working as an advisor on the market.
Let’s keep focus on the subject of investments. According to you analysis what are global investors betting on? Who will developers build for mainly?
Most investors and developers look at the market from the perspective of ability to find a tenant who will pay the most. Poland is very attractive from the perspective of western countries since it offers interesting rates of return, which are out of reach in their home markets, and this influx of capital will not be subject to change. What will most likely change is the way of looking at investing, where portfolios will become more so diversified. In other words: companies that until now have been focused solely on the office sector, will begin turning focus on investing in projects in other asset class categories, such as warehouses and retail parks. Projects that are so called mixed-use have sparked a lot of interest, which have multiple functions, whether its office-retail or appartment-office. This allows for pretty good portfolio diversification if looking at it from risk management perspective. We see a constant increase in scale of how one function has positive influence on the other, in other words, owning an appartment above a retail business on the ground floor, allows these businesses to increase profits, at the same time the landlords reep benefits of renting the space out.
To conclude, let’s continue focusing on investments, perhaps some advice from your expertise. We talked about investors, we can’t forget about capital which is necessary for construction. With the tightened bank regulations, many sites may find it hard to get financing. In what case should one secure capital, where to turn to get it, if the bank declines and what solutions to this problem do you suggest?
I believe, banks are not the only option to attain financing. There is a lot of money on the market, influx of capital is substantial, even despite relatively difficult times, a good project will withstand the turbulence. In other words, if someone took a look realistically at the cost structure of income and a great location for the project, locating a source of financing is not hard. There are plenty of entities that offer joint venture financing, they search for sites where they can allocate a part of their capital. And we see a growing interests in funds, which want to act as a passive entity to a joint venture, but also active, to which we predict, that lack of capital will lead to transformation in structure of supply on the investment market.
Last Updated on July 25, 2022 by Anastazja Lach