2023 Prudent in investment

2023 will be a year of great prudence for investors and financing institutions, as well as opening investment opportunities in commercial real estate sector in Poland. The office market will experience the greatest changes due to the unprecedented increase in rental costs

Bartłomiej Zagrodnik, Managing Partner, CEO of Walter Herz

When the market situation deteriorates, the basic truth about real estate comes to the fore more clearly than during time of prosperity. What matters most is location, location, location. Top projects will always speak for themselves. In 2023, the market will slow down, but it will also bring an attractive investment offer.

Investors are closely watching the real estate market in Poland, they are attracted primarily by competitive prices of assets compared to the European markets. An obstacle to investing in our country are high interest rates and project financing costs, rising energy prices and the ongoing conflict beyond our eastern border. Entities planning to invest on the Polish market are now paying even more attention not only to the location and standard of real estate, but also to the structure of tenants, which guarantees a stable return on investment.

Changes in geopolitics and reshuffles in the global economy had the least negative impact on the warehouse sector. Looking at the transactions concluded in Poland and in the CEE region, it is clear that the interest in logistics projects is not weakening. We observe the greatest investment activity in last mile warehouses. This segment enjoys constant interest from both investors and tenants.

In the residential sector, due to the practically suspended mortgage opportunities, cheaper locations suffered the most. The best top residential properties for investment buyers continue to be developed. There is a new supply and demand in the premium segment. Developers with capital are constantly looking for land for projects that they plan to launch on the market in 3-4 years. Funds from the PRS sector are also regularly investing in attractive real estate.

High costs of construction and financing of investments cause rental rates to increase on the office market. At the same time, the availability of attractive office assets is increasing. In this respect, regional markets are starting to take the lead, offering properties ensuring higher rates of return with tenants, dominated by global companies from the BPO/SSC sector. On the Warsaw market, the minimum new supply does not create such great investment opportunities.

Piotr Szymoński, Director Office Agency at Walter Herz

Fees for renting space have been increasing on the logistics market since the spring of 2022. At the same time, demand remains very high and the vacancy rate has dropped to historically low levels. The good shape of the sector is reflected in the increase in yields for the best properties. This is also one of the reasons for the decline in the transaction volume in this sector in recent months. A large increase in new supply and the historically highest amount of space under construction allows for increasing the availability of attractive assets on our market.

The retail sector invariably enjoys great interest of investors. The focus is primarily on retail parks where rents are denominated in euro.

Mateusz Strzelecki, Partner, Head of Tenant Representation at Walter Herz

In 2023, major changes are coming to the Polish office market, caused by a drastic increase in the costs of renting space and maintaining buildings. The office sector is currently experiencing the highest construction price increases in history. The cost of arranging space increased by an average of 30 per cent. Tenants must take into account surcharges, especially in the case of demanding projects. Longer, seven-year lease agreements are now being concluded to compensate landlords for the increase in fit-out costs and to reduce fees for tenants.

We have record inflation, exceeding 17 per cent, and forecasts estimate 20-23 per cent in Q1 2023. Thus, the cost of renting offices increases. In 2023, the main challenge will be maintenance charges. Inflation, rising prices of energy and other utilities, as well as the announced increases in the minimum wage will result in significant increase in the cost of maintaining real estate. Advance payments towards maintenance charges will be much higher.

Developers are postponing new projects. It is difficult for them to estimate the costs of construction and financing of projects, and ultimately the real level of return on investment. Five times less new space is under construction in Warsaw than three years ago. Thus, access to prime offices is very limited. This also applies to other business zones in the country. Modern classified buildings located in city centers are running out of office space. The limitation of the offer will be most noticeable in 2023 and 2024, when we will be dealing with a supply gap.

The low level of increase in supply, with stable demand, causes rental rates to go up. The increase in prices for office lease is particularly visible in high-class buildings located in the central business zone in Warsaw, as well as in the best properties on regional markets.

The low supply of office space and rising rents, and in the future, higher maintenance charges are not the only challenges the office market is currently facing. Employers also have to face the new preferences of their employees, who are reluctant to return to their offices. Despite the assumptions adopted in most companies regarding remote work 2-3 days a week, office attendance oscillates around 30 per cent.

Choosing an attractively located space and interesting interior design is not enough now. The goal is to create workplaces that are conducive to building relationships and bonds with colleagues and efficient communication in the company. Offices today play the role of centers of creative work, and their main function is the exchange of ideas, knowledge and building social capital. In a hybrid work system, they must be cross-functional, which means reducing the number of desks in favor of the most flexible space for cooperation.

In order to provide employees with the most comfortable working conditions, companies are moving to central locations, which have access to full infrastructure. They arrange modern conference zones that support hybrid meetings. They design creative and social spaces, as well as chillout zones. Workplaces are changing faster and faster every year.