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Polish Office Market: Construction Slowdown Meets High Demand, Forcing Market Reassessment

REAL ESTATEPolish Office Market: Construction Slowdown Meets High Demand, Forcing Market Reassessment

Demand for office space continues to remain high, but construction is at its lowest in years. The office real estate market is undergoing significant changes.

Four years ago, the office sector in Poland was one of the fastest-growing hubs in Europe. Today in Warsaw, the country’s largest office hub, office resources are shrinking due to demolished outdated office buildings, repurposed buildings, and buildings withdrawn for renovation. In 2023, the Warsaw office market decreased by approximately 40,000 sqm, even though 60,000 sqm of new space was delivered.

As reported by Walter Herz, Warsaw currently has 6,239,000 sqm of office space. About 300,000 sqm of offices are still under construction. Slightly more than in 2022, but several times less than during the market boom when 800 – 850,000 sqm were under construction. The amount of space under construction has been falling for several years. Despite developer activity seeing a slight increase in recent months in Warsaw, this year will not see much more new office space than last. According to Walter Herz data, only about 90,000 sqm will be made available.

The unavailability of rental spaces in the Warsaw market is primarily felt in the city center, where the vacancy rate stands at a mere 3-4%. Across the entire agglomeration, only 10% of office space is vacant.

Only modern buildings will survive

“The office market in Poland has slowed down and is in a difficult stage of its development. The normalization of remote work, high cost of investment implementation, expensive financing, staggering land prices, and their low supply, as well as the need to meet ESG requirements, are forcing office developers to reassess their investment plans. Last year in Warsaw, only three building permits were issued. A huge challenge for the sector also lies in the aging of buildings, some of which will not be able to meet ecological requirements and EU guidelines regarding emissions. In the coming years, owners of older offices will be forced to invest in object modernization. However, funding for this purpose may be easier to acquire as banks begin to more actively finance the real estate sector,” says Mateusz Strzelecki, Partner / Head of Tenant Representation at Walter Herz.

The slow increase in office space is noticeable, both in Warsaw and other regions. Walter Herz analysts predict an even further slowdown concerning new investments. In 2023, the seven largest cities in Poland added a total of approximately 315,000 sqm of new offices. Most were in Krakow (77,000 sqm), Wrocław (75.7 thousand sqm), and Warsaw (60 thousand sqm). The Craft in Katowice, building E in the Nowy Rynek complex in Poznan, Ocean Office Park B and Kreo in Krakow, Intel Technology Poland – IGK6 in Tri-City, and Leakside in Warsaw were among the new additions.

The main office hubs in the country are still building, with over 630,000 sqm of space under construction nationwide. A drastic drop in new project implementation is visible throughout Poland. Walter Herz analysis shows that the most office space in the regions is being built in Wroclaw – 112,000 sqm. In Poznan, there are 72,000 sqm of offices under construction, 49,000 sqm in Tri-City, 46,000 sqm in Katowice, 49,000 sqm in Lodz, and over 39,000 sqm in Krakow.

In contrast to Warsaw, the availability of workspace in regional markets is increasing. The vacancy rates for office space in Tri-City and Poznan is 13-14%, but already in Kraków, Wrocław, Łódź, or Katowice, it reaches 19-21%.

Remote work hasn’t slowed down demand

Despite the introduction of a hybrid work system, offices remain crucial for companies, and the demand for modern spaces is still substantial. Last year, seven key office markets in the country contracted 1,406,100 sqm of space. Both Warsaw (750,000 sqm) and the main regional markets contributed to this great outcome, with the latter seeing record-high demand last year. Absorption in the Warsaw market was slightly lower than in the exceptional year of 2022, but significantly higher compared to 2020-2021.

“On the market, we can observe a high level of tenant activity, though they consistently optimize and reduce the spaces they occupy. Inflation, high utility prices and building maintenance costs led to a serious increase in operating costs in 2023. The most significant, by several percent, increases are in Warsaw and Wrocław. The rent for the best spaces in the center of Warsaw also increased by about 4% y/y. Companies are trying to cut costs, but at the same time, they raise the attractiveness of their offices to encourage employees to work on-site. Tenants choosing to relocate are opting for more central locations, selectingmodern offices in buildings meeting high environmental standards,” says Mateusz Strzelecki.

He points out that the conditions of contracts being signed are also changing. “In modern office buildings, the period for which spaces are contracted is being extended, while in older buildings, shorter lease periods are being negotiated. Companies also reserve the right to change the space during the contract if it turns out that some of it will not be used due to remote work,” he adds.

Both building owners and tenants are focusing on new technologies that are becoming key for improving efficiency in managing properties, as well as helping companies and their employees better utilize offices and avail services provided in the buildings.

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