I wasn’t built yesterday

Due to the rapid development of the office market in Poland, class B office buildings can sometimes seem even older than they really are being unable to keep pace with technological change, the rising awareness of the environment and increasingly demanding tenants. Such buildings must be modernised, renovated, refurbished – or just demolished.

Even half of resources

Karol Grejbus, the tenant representation director at Knight Frank, is the first to agree that the office market is continuing to break records with its supply of new space, and that buildings are popping up like mushrooms. “The interest shown by potential tenants is what’s important here and wherever demand and supply meet, you’ll also see competition emerge. This is particularly difficult for older buildings that are forced to keep up with their more modern neighbours if they are to stay fully leased,” he says. Paweł Warda, the director of project management for the CEE region at JLL, is also equally aware of this problem and explains that: “At the same time as the Polish market has been maturing, its assets have been ageing, and many developers now face a dilemma – what strategy should they adopt for those office buildings that are passed their prime?”

According to JLL’s data, at the end of Q3 2019, every fourth office building in Warsaw (around 1,345,900 sqm) was built before the close of the previous century. “The age range with the largest number of office buildings in the capital is for those constructed in the last ten years and these buildings have a total area of almost 2.5 mln sqm. Those built within the last five years comprise 24 pct of Warsaw’s total. In the largest cities outside the capital, the buildings are even younger. In Kraków, office buildings constructed before 2010 have a combined area of almost 366,000 sqm and make up 26 pct of the stock and in Wrocław that figure is 363,000 sqm or 33 pct of the stock,” calculates the director from JLL.

According to Mikołaj Sznajder, the office space director at CBRE, a debate has raged for some time about what a class B office is and how to classify and define the data across all of Poland’s markets. He points out that this is a key issue for those looking to invest in this asset class. “We currently estimate that more than 40 pct of office buildings in Warsaw are of a class B standard and outside the capital the figure could be as much as half of all the office space,” he claims. Mateusz Cieślik, an associate at Colliers International, estimates that office buildings of a class B standard or lower constitute between 15–30 pct of the stock depending on the city while Jerzy Węglarz from Biuro Na Miarę thinks that such office space could be as much as all the modern class A office space that the agencies track. But who can be surprised that the figures differ when no one can agree on how to classify such office buildings in Poland?



Mateusz Cieślik of Colliers believes that lower standard buildings constitute 15–30 pct of the market

What is a class B building?

And that is not all! Daniel Czarnecki, the director of landlord representation at Savills mentions that the criteria used by developers and market analysts have also changed as the market has developed and the technology has progressed. “Today, class A space rarely applies to buildings that do not have BMS, raised floors and suspended ceilings. You could pick out a dozen or so, or maybe even 20 or 30 features of a building that enhance the co mfort of the tenants and make it more attractive in their eyes,” he explains. “People assume that class A buildings have nearly all of them while class B buildings only a few. But such class B space is still much better than the offices of many companies that might for instance be based in former apartment blocks reclassified as office space or other buildings that have virtually no such features that modern businesses desire,” he explains. However, as Jerzy Węglarz of Biuro Na Miarę points out buildings that are not class A usually provide very attractive rental rates, which makes up for the poor standard of their common areas and their lack of facilities. “Such buildings are often found outside the city centre so they may have more parking spaces in their immediate vicinity and are much cheaper. Companies can also sign very flexible contracts covering an indefinite period,” he adds. The downsides of such buildings are as Izabela Miazgowska, the property management director at Knight Frank, points out that the air conditioning, ventilation, heating and access control systems will fail more frequently as will the lifts, and electronic barriers and doors.

However, the competitive advantage of shorter more flexible leasing terms that such offices give is now under threat from the rise of serviced offices and the coworking sector, which according to Mateusz Cieślik from Colliers now largely meet the demand for flexible lease terms.



“Wherever supply and demand meet you’ll see competition emerge,” claims Karol Grejbus of Knight Frank

Time for a facelift

When asked about the appropriate time for a facelift, Paweł Warda from JLL replied: “An important test for an office building comes when the first few lease agreements expire. At that time, the building will still be relatively young, so if it is deserted at this stage, it sends a clear signal to the owner about how well their building is doing on the market.” He then went on to explain that office buildings age at different rates. “A great deal depends on the standards to which the building was built and how far-sighted the investor was in taking into account how the building would age at the design stage. You definitely have to assume that in 20-25 years, most of a building’s installations will need replacing, while the first renewal of the common areas, such as the lift lobby and the reception area should take place after 10–15 years of using the building,” he explains.

Owners and managers of lower-tier office buildings are increasingly looking to tap their potential and reposition them to meet current market requirements. “By actively managing such assets, which usually have very good locations, you can tempt tenants to join and create an attractive investment product,” says Daniel Czarnecki from Savills. “For example there is the office building at ul. Wilcza 46 in Warsaw, which proved so desirable that it became one of the first of two assets in Poland purchased by the Galcap Europe fund at the end of 2018,” he adds.

This is not the only ageing office block to gain a second lease of life and investing in the upgrade of a building can pay for itself such as with the Adgar Park West complex in Warsaw, which won the Eurobuild Award for Best Office of the Year in 2017 seeing off the competition from far more youthful developments. The modernisation of the Twarda Tower skyscraper in Warsaw (which has now been renamed Spektrum Tower) was also another notable success. After its anchor tenant Orange had moved out, the building underwent a thorough renovation before being recommercialised and sold in 2018 to a new owner.

“Projects that are somewhere between a complete demolition and a large or small scale renovation when you build a tower onto a historic building, have not been seen in Poland so far,” says Daniel Czarnecki. “In the long term, since attractive land for development is being used up, we cannot rule out buildings such as the Beurs-World Trade Center in Rotterdam and JP Tower in Tokyo being developed in Poland,” he concludes.



Paweł Warda of JLL points out that the reality of a maturing market is an ageing office stock

When to demolish

Changing the use of a building is also an option for an office building that has passed its heyday, since as, Mateusz Cieślik from Colliers points out it is usually difficult to bring such a property up to modern standards, so demolition or conversion of a building are sometimes the only practical options. Knocking down a building is a last resort and doesn’t happen often in Poland. “Such actions may be considered when an existing building clearly fails to match the standard of other buildings in its vicinity or for some reason does not make much use of its site’s potential,” explains Paweł Warda of JLL.

As Karol Grejbus of Knight Frank points out, the supply of development land is not endless. And as someone from the audience pointed out at a conference organised by Knight Frank, managing a lower grade building is like a marriage because a husband needs to listen to his wife and try to put her remarks into practice instead of immediately filing for divorce. So maybe we should be listening to the tenants and consultants before throwing in the towel and knocking down an office or turning it into a hotel. After all many elderly buildings are still held in high regard by their tenants. ν