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POLAND ON CUSP OF RETAIL DEVELOPMENT BOOM

By Susan Thorne

Warsaw’s first regional urban mall. More are coming.

When it comes to Eastern Europe, retail developers appear to have saved the best for last. Of the former Warsaw Pact countries, Poland offers the most attractive market potential for urban retail development, yet it has lagged behind some of its neighbors.

But that is about to change, and the numbers explain why. Poland has a population of nearly 40 million, compared with only 10 million each in the Czech Republic and Hungary. And with 16 large cities of more than 200,000 inhabitants each offering concentrated markets for shopping centers and few well-developed retail chains of its own, the country presents a tempting market opportunity for foreign retailers.

Certainly, the country has come a long way in developing a stable free-market economy since the first private stores — family-run kiosks on downtown streets and supermarket pads — were launched in the early 1990s. Over the past decade, hypermarket companies including Auchan, Carrefour, Casino, E. Leclerc, Jeronimo and Tesco have been the most conspicuous entrants; about 80 hypermarkets have been developed in the past four years alone, according to an estimate from Warsaw-based property consultants working for Healey & Baker, the international commercial real estate services firm owned by U.S.-based Cushman & Wakefield.

But while Continental-style shopping centers anchored by hypermarkets and warehouse retailers such as Sweden’s IKEA and German home-improvement chain OBI have proliferated in suburbs and in the countryside near major highways, the central cores of Warsaw and Poland’s other major cities have seen little modern retail development to date. Poland has evolved more slowly in this respect than Hungary, which boasts a handful of regional-size malls in Budapest, and even tiny Slovakia (formerly part of Czechoslovakia) has the 38,000-square-meter (408,956-square-foot) Western-style Polus Center (SCT, December 2001) in downtown Bratislava, its capital.

Poland’s pattern is similar to that of the Czech Republic, where there are some smaller downtown malls in urban areas (the 58-shop, upscale Vinohradsky Pavilion in Prague is an example), while larger shopping centers tend to be hypermarket-based and located on the outskirts. Warsaw, Poland’s capital city of 1.6 million, has no regional-sized center in the central downtown.

“Nothing has happened in the city in the last decade,” said Jan van Hensbergen, general manager of ING Real Estate’s Polish development arm. “There is close to zero in terms of good modern retail space downtown.”

Not for long, though.

Van Hensbergen cites complicated land ownership issues as one of the big challenges for retail development. The government still owns a sizable proportion of downtown property, which ties up many prime downtown sites, and claims by pre-1945 owners have slowed the ability of developers to secure title to many city center sites.

Modern shopping centers are desperately needed to supply a Polish shopper hungry for new Western retail offerings, according to Monika Rajska, research analyst with Colliers International, Warsaw.

“When I travel to other countries, I realize that we don’t have a lot of new tenants here — we don’t have Gap, for example,” Rajska said. “People are interested in new retailers, but there is a lack of good shop space for them, and it is expensive.”

In Warsaw, the likeliest entry point for foreign retailers, the rents on either of the two main downtown streets could run as high as $80 per square meter ($7 per square foot) per month, Rajska estimated, compared with $45 for equivalent space in a modern mall. Besides being cheaper, going into a shopping center is much easier for retailers new to Poland, she noted.

One step in the right direction was the opening in September 2000 of Galeria Mokotów, the first regional-size enclosed urban mall in the Warsaw area, with 48,000 square meters of retail space in its first phase. Developed in south central Warsaw by Globe Trade Center, an Israeli player, the Galeria offers an unprecedented number of foreign retailers, some of whom used it to open their first stores in Poland. The lineup includes apparel retailers Mango, MaxMara, River Island and ZARA; footwear purveyors Adidas and Bata; and Vision Express, among others. Hexeline, an exclusive Polish women’s apparel retailer, is also represented. The mall is housed in a silver-surfaced oval building designed by HOK International which features an interior entrance rotunda with fountain court.

Galeria Mokotów’s success demonstrates the demand for novel retail offerings; shoppers have crowded the stores and common areas, with a record 64,000 visitors on Oct. 8, 2001. A second phase of development will add 70 more retail and service outlets, and a couple of two-level stores, one sized at 1,200 square meters and the other at 3,500 square meters; the latter will be occupied by German clothing retailer Peek & Cloppenburg.

Central Warsaw’s first sizable shopping center promises to up the ante much further. Zlote Tarasy (the name means “golden terraces”) is a landmark multilevel, mixed-use project being developed near Warsaw’s main train station by ING Real Estate in partnership with Dutch investor Rodamco. It will combine 60,000 square meters of shops and restaurants, a 4,000-seat cinema multiplex, office space and a hotel. The dramatic ensemble of high-rise towers (205,000 square meters) will enclose a terraced, roofed-in courtyard at its center for concerts and events. The project site is at present being prepared for construction and an opening for the fall of 2004 is planned.

ING’s van Hensbergen says his company perceived a strong need for new retail in central Warsaw.

“Hypermarkets on the outskirts may be an efficient way to bring goods to the consumer market fast,” he said. “But we came to the conclusion that it was rather strange that people in downtown Warsaw needed to go to the suburbs to shop.”

With its prime location, Zlote Tarasy will focus on the middle-price customer through both local and international retailers. Some space is already preleased, and ING has provided temporary store space nearby for Marks & Spencer and French grocer Promodes, both of whom will move into Zlote Tarasy once it is ready.

Other shopping center projects are creating additional modern retail space in Warsaw and in Poland’s other leading cities. In Warsaw the Promenada, developed by the European Construction Consortium, a locally based subsidiary of Switzerland’s Elas Business Services, is doubling in size to 47,000 square meters. A mall called Nowe Miasto is planned by Tishman Speyer Properties for Krakow, and Fortis, a Polish developer, is undertaking a mixed-used business and cultural center with 19,000 square meters of retail in a renovated former brewery property in Poznan. German developer ECE opened a 30,000-square-meter center in Wroclaw last fall and plans another with 40,000 square meters in Lodz, with a launch late this year or early in 2003.

These projects aside, there is still lots of room to grow when it comes to Poland’s total retail space. Healey & Baker data show that there is only 0.6 meter of retail space (old and new combined) per capita in Poland, compared with two square meters per capita for Western Europe generally.

But is consumer spending sufficient to support additional retail capacity? Poland’s economy has been in decline in the past year, and some indicators raise doubts about spending strength. According to Polish Market Review, an independent research organization based in Warsaw, unemployment nationwide rose from 15.1 percent in 2000 to 17.4 percent in 2001, and inflation stood at 3.6 percent at the end of 2001. Year-over-year retail sales climbed by only a small margin (0.4 percent) in the first eleven months of 2001. Poland is suffering in part from the recession in Europe, especially in Germany, its largest trading partner, and this year is not likely to bring much change, the organization predicted.

Sources in Warsaw say they are not greatly troubled by these findings, however. Van Hensbergen points out that Poland’s economy may have problems, but it has improved greatly even in the past few years.

“When I arrived in the country in 1994, inflation stood at 25 percent,” he said. “Even in 2000 it stood at 10 percent.”

Moreover, national economic statistics don’t reflect the wide differences between urban and rural populations in Poland, van Hensbergen added. “When you look at the city of Warsaw, it has far higher employment and higher salary levels than the average for the country.”

The Polish enthusiasm for shopping is another factor that defies other economic statistics. Polish women are fashion-conscious and dress more elegantly than women in some other European countries, Colliers International’s Rajska pointed out, and this generates higher spending on apparel even when times are tough.

“I don’t know how they find the money, but they do,” she remarked.

Piotr Kaszymski, a consultant with Healey & Baker, stresses a long-term perspective on the economy, noting that the current difficulties look far less threatening when compared with Poland’s bad old days under Russian influence.

“Nowadays when you tell a Pole there’s a recession, that won’t scare him,” Kaszymski said. “We had fifty years of Communism — now that was a recession!”

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