In addition to the capital, Poland has six large regional cities with populations between 400,000 and 1,000,000 people. These include Kraków, Łódź, Wrocław, Poznań and the respective agglomerations of Tri-City (Gdańsk/Gdynia/Sopot) on the coast and Katowice in the southern part of the country.
Similar to large cities in Germany, these six Polish cities have a specific heritage and role in the Polish economy e.g. shipping and trading with Scandinavia in Tri-City, textile and film industries in Łódź, heavy industry and mining around Katowice, trade and exhibitions in Poznań, as well as business process services in Kraków and Wrocław.
Following Poland’s EU accession in 2004, the country saw constant road/rail infrastructure improvements across the country as well as a gradual, positive change in the way local authorities support foreign investors, improving the ease of doing business. Subsequently, Polish regional cities have emerged as Central Europe’s best-in-class locations for setting up new business.
Poland’s large regional cities enjoy a purchasing power parity 15-35% above the national average, sub-7% unemployment levels and excellent access to young talent from numerous, highly reputed universities.
The take-off of Business Process Outsourcing (BPO) and Shared Service Centres (SSC)
Whereas Kraków has enjoyed many years of being a sought-after destination for BPO/SSC industries, the cities of Wrocław, Tri-City and Łódź have started to catch up during the past two to three years.
Polish regional cities offer easy access to young, multi-lingual talent, availability of new, modern office buildings – sometimes build-to-suit – accessibility either via international airports or high-speed trains, as well as tax incentives for corporations that generate new work places. The fact that one can arrive to Poland by plane from any Western or Northern European capital within 2½ hours supports Poland’s image as Europe’s ‘near-shoring darling’. The BPO sector is steadily moving up in the value chain, offering more advanced services that can easily be offered from Poland due to access to high-educated resources.
Major international corporations that have chosen Polish regional cities as their BPO or SSC hubs include among other Capgemini, Infosys, Lufthansa Systems, State Street, ThyssenKrupp, Amazon, Bayer, Thomson Reuters, Arla Foods, Deloitte, PwC, Jeppesen, Accenture, Wipro, EY, McKinsey, Credit Suisse, 3M, IBM, Alexander Mann Solutions, Delphi, Cisco, Heineken, HSBC, Rolls-Royce, RWE UBS and Motorola.
Polish regional cities rarely compete against one another for BPO/SSC occupiers, although newcomers do pay careful attention to the availability and potential drain of human resources in specific markets. The cities seem to have specialised in specific industry segments that has created a win-win situation for the major cities and the country as a whole. That said, smaller university cities such as Opole, Rzeszow and Bialystok are becoming increasingly “aggressive” in the offering incentives for new, large employers.
In 2014 and 2015 Kraków was ranked by Tholons as the world’s ninth best outsourcing location, and No. 1 in Europe. An outstanding achievement and recognition.
What does that mean for the office market in Polish regional cities?
During the past two to three years both office stock and employment in the business services sector have substantially increased. According to a research by the Association of Business Service Leaders (ABSL) in Poland, the number of employees in service centres with foreign capital have increased by more than 33% between 2013 and 2015. In order to cope with the growing demand for modern office space, driven by new entrants to the market, in particular in regional cities, as well as expansion of existing service sector occupiers, Poland’s large regional cities have seen the take-up of office space more than doubling between 2010 and 2015. Today the combined office stock of these regional cities accounts for approx. 3,000,000m², or 66% of Warsaw’s total office stock.
During the first three quarters of this year, the net absorption of office space has outstripped new supply in Kraków, Wrocław and Łódź. The average vacancy rate of the six large regional cities has been stable around 9% since 2012; evidence of a good balance between supply and demand.
The organic growth combined with stable rent levels and falling vacancy levels have attracted international core capital to focus on offices in Polish regional cities, with particular interest in the three largest markets, Kraków, Wrocław and Tri-City. In 2015 Cushman & Wakefield research estimates that over 50% of total office investment volume in Poland will derive from transactions in the six large regional cities – a record and high, never seen before in any market in Central and Eastern Europe.
Cushman & Wakefield expects BPO/SSC growth in Polish cities to continue, driven by the availability of highly skilled young labour and increasing availability of high-quality office stock, in particular in Tri-City and Łódź, that historically have had low office stock and low attractiveness for corporate occupiers and investors. Whereas Kraków and Wrocław are now well-established BPO and SSC locations within Europe, and will continue to be, the new growth is likely to be seen in Tri-City and Łódź and potentially in Katowice.
Source: Cushman & Wakefield research.
In terms of the investment aspect, Cushman & Wakefield envisages a continuing yield compression, moving from a prime initial yield level of 7.25% in 2014, expected 7.00% in 2015, towards to 6.50-6.75% in 2016 for assets with long-term leases and outstanding tenant covenants.
The time is now for investing in offices in Polish regional cities
With a mid-term outlook anticipating stable rent levels, average stable vacancy and significant growth in leasing take-up, net absorption driven by a combination of new demand as well as expansion of established occupiers, Cushman & Wakefield expects the international inflow of core and core+ capital sources to grow in Polish regional cities.
Selected transactions in 2015 point in a direction of a narrowing yield gap between Warsaw and regional cities during the next two to three years, offering compelling opportunities for both short-term and long-term investors, looking for sustainable growth and income. Cushman & Wakefield expects, everything else being equal, the prime yields in major regional cities to compress 50-75 basis points during the next 24 months and that 2016 will be “an open window” for capitalising on the opportunity to capture prime office assets in Polish regional cities yet at discounted price levels.