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Krakow Office Market in 2023: Balancing Growth with Shifting Demands

REAL ESTATEKrakow Office Market in 2023: Balancing Growth with Shifting Demands

According to the report by the advisory firm Brookfield Partners, “Office Market Pulse – Summary of the Office Market in Krakow,” the total office space in the capital of Lesser Poland at the end of 2023 amounted to 1.75 million square meters. Of this, 1.45 million square meters were Class A buildings (modern office buildings with high standards and amenities), 288,000 square meters were Class B buildings (less modern but still offering a good standard), and 10,000 square meters were Class C buildings (lower standard buildings or structures adapted for office use).

New Supply and Projects Under Construction

In 2023, approximately 100,000 square meters of office space was put into use in Krakow. Among the facilities completed were Kreo, with about 24,000 square meters, the next phase of the Ocean Office Park (Building B, 28,600 square meters), and Fabryczna Office Park B5 (14,000 square meters). The new office supply in 2023 was about 4% lower compared to the previous year. On average, about 158,000 square meters were commissioned annually between 2016 and 2020.

The construction of new office buildings in Krakow, the second-largest office market in Poland, has significantly slowed down recently. This slowdown is due, in part, to the growing popularity of hybrid work.

Currently, the vacancy rate in Class A buildings in the capital of Lesser Poland reaches 20%, which may temporarily satisfy demand. Additionally, it should be noted that about 20 new office investments are planned, placing Krakow second after Warsaw. Given these issues, it seems that Krakow will not lose its position as the second-largest office market in Poland, says Hubert Capik, Advisor at Brookfield Partners.

Currently, the largest office project under construction in Krakow is the TEN Office complex, consisting of three buildings with a total area of about 32,000 square meters.

Demand in the Krakow Office Real Estate Market

In Krakow, leasing activity was stable throughout 2023. Demand for modern office spaces reached about 200,000 square meters, the highest rental volume compared to all regional cities (27% of total demand).

In terms of location, the Old Town and Grzegórzki, Podgórze, and Prądnik Czerwony were the most popular among tenants in 2023.

In Krakow’s demand structure in 2023, new lease agreements predominated (56%), while renegotiations and expansions accounted for 29% and 10%, respectively. The modern business services sector, including ITO centers, accounted for about 30% of the registered demand.

Office spaces in Krakow, especially those in convenient locations near the center, quickly find new tenants. However, new construction investments are limited.

As a result, due to the limited availability of space in the city center, many tenants may be forced to look for alternative locations. Krakow also has a relatively high vacancy rate, which may be caused by the growing popularity of remote work in recent years, adds Hubert Capik from Brookfield Partners.

Challenges for Tenants

According to the “Office Market Pulse” report, asking rents for office space in Warsaw remained stable in 2023. In the best office buildings in central zones, monthly rates ranged from 14.5 to 17.0 EUR/sq m. Tenants interested in modern office buildings with high standards and amenities must expect rising rental rates. In Podgórze, the largest office zone outside the Old Town and Grzegórzki, rents hover around 13.0 to 15.0 EUR/sq m per month.

One of the widely discussed issues in recent months has undoubtedly been the increase in operating costs that tenants have had to face. Prolonged high inflation in Poland and the eurozone, combined with increases in the minimum wage and other charges, will affect the level of service charges. In the coming months, tenants will have to face significant rent indexation and further increases in operating costs, the first changes of which were observed last year.

Vacancy Rate

At the end of December 2023, the volume of office space available for lease in all classes in Krakow was about 330,000 square meters, which translates to a vacancy rate of 14%. There was about 300,000 square meters of Class A office space available, with a Class A vacancy rate of 21%.

Currently, the most available space for tenants is in Podgórze, with about 73,000 square meters (15.5%) of modern office space available. The Old Town, where the available office space is less than 10,000 square meters (2.1%), attracts the most tenant interest despite high rent rates. It is most difficult to find tenants in Czyżyny and the northwestern parts of the city.

At the beginning of the fourth quarter of 2023, no office building was under construction in the capital of Lesser Poland. The ongoing low supply of new offices may lead to a gradual decrease in the availability of office spaces, especially in the most attractive locations in the city – concludes Hubert Capik, Senior Advisor at Brookfield Partners.

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