By : Alexander Stocks

While real estate agencies are trying hard not to worry about falling office rents, builders are already shifting into other areas of work to make up for the slowdown.

"I wouldn't say there is an oversupply ... It's a quite normal situation when the buildings aren't fully let in the very beginning," said Adam Reczak, a broker with property consultant Healey & Baker.

He said he saw Warsaw office prices already beginning to fall in early 1998 when class-A space in central Warsaw went below $40 per square meter in many cases, despite developers seeking $45.

In 1999, he said, similar space was advertised at $40 square meter but going for $35-$38.

According to Reczak, however, there is no reason for developers and the construction firms they hire to panic. And the ongoing price decline actually slowed in 1999 compared to the previous year, he said. While analysts said the drop in premium office rates was unavoidable in a maturing market in Warsaw, it was certainly noticed by the construction sector, which had been enjoying nearly a decade of boom.

Reczak estimated that the vacancy rate for class-A, modern office buildings in Warsaw is 10%, and that doesn't include some buildings still under construction. Rafal Jankowski, a construction sector analyst with CDM Pekao Securities, agreed that occupancy rates are on the decline. They are "very low ... (down) from 90% a few years ago," he said.

Jankowski said he sees developers -- and thus the construction firms they hire -- adapting to the lower returns and higher risks in office construction in Warsaw by building projects for which yields are sometimes higher. Jankowski said construction firms were adept at changing their focus to other segments of the industry and to other regions when returns from one sector or region become less lucrative. That could happen increasingly in Warsaw if the office market does not resume strong growth and stimulate new building. Other opportunities, he said, include shopping centers as well as office construction in Poland's provincial cities.

They may also find opportunity in warehouse and residential construction, which have not matured as rapidly as the Warsaw office market, the first type of construction to expand explosively in the capital. The German Von der Heyden Group, for example, which has developed office buildings in both Warsaw and Poznan, is trying to stay ahead of market shifts by developing luxury residential projects both in central Warsaw and in the eastern suburbs.

But Jankowski said he believes that for many builders, the supermarket construction beginning to dot the provincial landscape in places such as Poznan, Katowice, Gdansk and Silesia represents the "market of the future" -- the near future. But this type of construction will eventually face a similar economic cycle to that which office construction has seen -- from boom to maturity.

Real estate agents and construction firms do not expect the office market to resume rapid growth until more foreign firms locate to Poland.

But though the years of explosive growth in office construction could be over, although Jankowski said that he does expect 2000 to turn out better economic results for Poland than what was seen in 1999, which may help the construction market pick up again. "I see a direct link between the construction sector and gross domestic product (GDP)," he explained. Some 15% of Poland's industrial output is construction related, analysts said.

He added that Poland's economic slowdown in 1999 mirrored that of Russia and Southeast Asia, both of which saw their construction sectors hit hard. As with those countries, the Polish cycle seems to be on the upswing, Jankowski said. "For the next few years I think (the building sector) could see a little growth in office prices," he said.