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FAREWELL COMRADE, GREETINGS CONSUMER

Outside investors help Poland erase bleak Soviet retail model with latest shopping center concepts

By Curt Hazlett

Every six weeks or so, Vincent Polimeni leaves his Long Island, N.Y., office and heads to New York City’s Kennedy Airport, where he settles into a business-class seat for a flight to what he considers a land of opportunity: Poland.

When the nine-hour journey is over, he checks in with his 25 Poland-based employees in Gdynia, near Gdansk, who are working to build hypermarket-anchored shopping centers in midsize cities throughout the country — places where there is little competition, he says, and where “retail is 1960s U.S.A.”

Polimeni is CEO of The Polimeni Organization, of Garden City, N.Y., which has been developing retail properties in Poland for nine years. He is among a wave of foreign investors, most of them European, who have helped transform Poland’s retail from a bleak, Soviet-dictated past to a glistening Western model.

The speed of that transformation has been remarkable. Poland’s first shopping center opened in 1993. Six years later some 2.3 million square feet of retail space opened in Warsaw alone. This year 17 million square feet will come onto the market countrywide — the largest burst of new retail anywhere in Europe, according to international brokerage Cushman & Wakefield Healey & Baker.

“All types of retail are under construction or are planned,” said Piotr Kaszynski, a Cushman & Wakefield partner and head of the brokerage’s Warsaw retail operations. “The market is very sophisticated, and conditions look very positive.”

Polish promise
Adding to the optimism is Poland’s entry into the European Union last year, which lowered trade barriers and is widely expected to stimulate even more foreign investment.

“Since Poland went into the EU, it’s been incredible,” said Polimeni. “Investors are pouring money into the place.” Polimeni’s company is planning or building centers in five Polish cities in a joint venture with Heitman, a Chicago-based real estate investment firm.

This retail development boom was born in the big cities, especially Warsaw, and impressive urban projects, usually with sizable entertainment components, continue to sprout.

Last year’s big event was the opening of Arkadia, a two-story enclosed mall in a northern section of Warsaw that contains a Carrefour hypermarket, 200 shops, a movie theater complex and a home improvement center. At 1.1 million square feet, it is Poland’s largest center. There is an American connection too — Simon Property Group owns 35 percent through its European Retail Enterprises joint venture.

The latest and grandest development is Zlote Tarasy, a modernistic, downtown mixed-use project with 700,000 square feet of retail that is scheduled to open in the spring. Zlote Tarasy, which means “golden terraces,” is being built by ING Real Estate, a subsidiary of Dutch giant ING Group near the massive Palace of Culture and Science, which Joseph Stalin built in 1952 as a “gift” to the Poles. (The building housed Poland’s Communist Party headquarters.)

The boom is also seen in other large cities, such as Gdansk, Katowice, Kraków and Poznan. Smaller cities are starting to benefit too, as Polimeni and other foreign investors seek untapped markets. “The big cities are still seeing growth for now in retail, but on top of that, hypermarkets and [do-it-yourself] are focusing on smaller markets,” said Kaszynski.

Poland owes its retail development spurt to three things: the size of its population, the relative health of its economy and the 44 shopping-starved years it spent under austere communist rule.

With 38 million people, Poland is among the most populous countries in Eastern Europe. It is also highly urbanized, with seven cities of more than 500,000 residents each. That density has helped create a ready market for the enclosed centers and hypermarkets springing up in downtown areas.

Since the fall of communism in 1989, Poles have embraced free markets, and the economy has done well, despite bouts of inflation, stubborn unemployment and a sharp downturn in 2001. Poland’s gross domestic product expanded by an unexpectedly large 5.7 percent last year, and the government forecasts growth of 5.2 percent this year. Foreign investors are drawn to the ample population and the low corporate tax rate, and both the housing market and the manufacturing sector are growing.

Then there is the issue of pent-up consumer demand. In an analysis of Poland’s retail transformation, Wieslaw Michalak of Toronto’s Ryerson University notes that the communist regime’s strict central planning and dislike of consumerism created a “legacy of widespread neglect, regimentation and shortages.”

This created an enormous pent-up demand that was harnessed by the new government’s privatization of state-owned businesses. Hungry for consumer goods, Poles embarked on a spending spree, and entrepreneurs responded with small stores and street stalls, even selling merchandise out of their cars. By 1995, Michalak said, nearly 25,000 new stores had opened.

This enthusiasm captured the attention of foreign investors and retailers, especially hypermarkets. France’s Auchan, Carrefour and Leclerc opened new centers at a fast clip, as did the Netherlands’ Royal Ahold and Britain’s Tesco. According to Cushman & Wakefield Healey & Baker, Poland now has 184 shopping centers, totaling nearly 42 million square feet, most of them anchored by hypermarkets.

Though the red-hot growth cooled a bit over the past few years, Cushman & Wakefield Healey & Baker says it expects a record amount of space to open this year. In the best locations, demand for space remains strong, says Kaszynski, though there are signs in some areas that saturation approaches. Still, “rents overall are stable, with a small tendency to grow,” he said. Colliers International, a real estate services firm, says monthly rents for small shops in the trendy Arkadia mall have reached €85 per square meter, or roughly $10 per square foot.

Poland’s boom is not without problems, though. Polimeni notes that local zoning rules can be difficult. “The paperwork is a nightmare,” he said. “Everything is done in quadruplicate.”

Indeed, in many areas zoning is getting tougher all the time, as a backlash grows against hypermarkets and other discounters. Such efforts, led by smaller local retailers and similar to those targeting Wal-Mart in the United States, have resulted in local regulations restricting stores to about 21,500 square feet.

Infrastructure is a big problem too. Retailers have been hampered by a lack of warehousing and distribution facilities, though that has been changing in recent years with the construction of some large warehouse facilities. The roads are a bigger hindrance. Most are of poor quality, and modern highways are rare even though the government has made their construction a priority.

Despite these problems, though, it seems likely that the influx of retail development will continue. Cushman & Wakefield Healey & Baker notes that Poland’s low shopping center space per capita — just under 1,100 square feet, compared with 1,700 across the EU — may indicate that there is room for growth.

Polimeni, who has been to Poland so many times that he has had to get an insert for his passport, certainly thinks so. And he anticipates spending a lot more time aboard airplanes for the foreseeable future. “Coming to Poland is a major move,” he said, “but the market’s there.”