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The office market in Polish regions is growing, but developers are cautious

REAL ESTATEThe office market in Polish regions is growing, but developers are cautious

According to a report by advisory company Newmark Poland titled “Office Occupier – Office Market in Regions”, the total activity of office tenants in 2023 in the largest regional cities in Poland exceeded 741,300 sqm. This represents an increase of almost 19% compared to 2022, and 7% compared to the record year 2019 (pre-pandemic). Meanwhile, matters related to ESG, improving functionality, and efficient management of office space and rental cost optimization have permanently integrated into the language and strategies of both tenants and developers.

By the end of 2023, the total resources of modern office space in the eight largest regional markets outside Warsaw (Krakow, Wroclaw, Tri-City, Katowice, Poznan, Lodz, Lublin, Szczecin) reached nearly 6.7 million sqm. Over the past 12 months, developers delivered a total of over 279,600 sqm in 21 buildings. However, the third quarter was characterized by the highest developer activity, during which buildings accounting for over 42% of the new supply were completed. Among the largest projects completed in 2023 were office buildings such as: Ocean Office Park B (Krakow, Q1), Craft (Katowice, Q3), Nowy Rynek E (Poznan, Q2), and Kreo (Krakow, Q3).

The last quarter of 2023 marked another consecutive quarter with a decrease in the volume of office space under construction. By the end of December, about 300,000 sqm remained under construction, which is over 22% less than in Q3 2023, almost 47% less than a year earlier, and over 73% less compared to the record year 2017 when nearly 1.1 million sqm of offices were under construction.

The large availability of office space in existing buildings and common space optimization mean that developers are cautious about initiating new investments, especially those not secured by lease agreements, says Joanna Bartoszewicz, Senior Advisor in the Office Tenant Representation Department at Newmark Poland.

In the fourth quarter of 2023, tenants in the main regional markets rented nearly 210,300 sqm, representing an increase of over 6% compared to the previous quarter and the best quarterly result of the year. In total, the demand in 2023 amounted to over 741,300 sqm, which is almost 19% higher than in 2022, and 7% higher than the record year 2019. Despite the growing interest in renting offices, tenants are still focused on optimizing the area they occupy and choose buildings with high energy efficiency and environmental friendliness.

In 2023, the most office space, as much as 201,300 sqm, was rented in Krakow. Wroclaw was second with 165,550 sqm of signed contracts, and in the Tri-City the activity of tenants reached over 143,900 sqm. These three cities accounted for almost 69% of the total demand registered in the regions in 2023.

Rents for the highest quality office space in the main regional markets remain at the level of 16.00-17.00 euro/sqm/month. This particularly applies to office buildings equipped with modern technologies and meeting ecological and social criteria (ESG), as their owners generally show less inclination to negotiate rent levels. We can observe upward pressure on rents for newly constructed office buildings, adds Urszula Sobczyk, Director of Valuation Department at Newmark Poland.

In 2023, the majority of contracts signed were new agreements (45%), followed by renegotiations and renewals of contracts with a 41% share in the rental volume. The remaining 14% were transactions for own needs (6%), expansion (5%), and pre-rents (3%). The fourth quarter was dominated by renegotiations, which accounted for more than 55% of total demand. According to expert forecasts, tenant activity in renegotiation may continue to be relatively high due to wanting to avoid relocation costs and finishing new space.

By the end of December 2023, the vacancy rate on the main regional markets reached 17.5%, which is an increase of 0.2 pp compared to the previous quarter and 2.2 pp on an annual basis. The vacancy rate exceeded 10% in all markets except Szczecin, and in four of them, it exceeded 18%.

The volume of unleased space in existing office buildings continues to grow, and at the end of the fourth quarter, tenants had almost 1.2 million sqm at their disposal. In addition, a significant pool of offices offered for subletting is also available on regional markets, summarizes Agnieszka Giermakowska, Director of Market Research and Advisory, Leader for ESG, Newmark Poland.

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