Office market in the optimization phase

There are more and more vacant office spaces on the regional markets. In Warsaw, despite the decline in demand, the availability of offices is getting smaller

– Companies continue to adapt offices to the commonly implemented hybrid work system. The high costs of arranging new space mean that more and more tenants decide to prolong their contracts and stay in the current location. This is especially visible in Warsaw. The process of optimizing the work space is definitely accelerating, which is increasingly often associated with reducing the occupied space - says Michał Porzycki, director in the Tenant Representation Department at Walter Herz. – Tenants are experiencing an increase in office maintenance costs. Before making the final decision on contract renegotiation or relocation, they meticulously analyze the costs of the occupied offices, as well as fees in new locations they plan on moving into, in order to choose the most economically advantageous option – says Porzycki.

According to Walter Herz, in the first half of 2023, there was a noticeable decrease in interest in renting offices in Warsaw. At that time, 326 thousand sq m. of office space was contracted on the Warsaw market. Compared to the first half of 2022, the demand for offices in Warsaw decreased by one third.

Despite the decrease in the absorption of the Warsaw market, the vacancy rate slightly decreased to around 11.4 per cent, and in the central business zone it dropped to 9.9 per cent.

In the regions, the demand for offices is still high

On the eight largest regional markets (Cracow, Wroclaw, The Tri-City, Katowice, Poznan, Lodz, Lublin, Szczecin), apart from Warsaw, the total volume of lease transactions registered in the first six months of 2023 amounted to 341 thousand sq m. The demand was about 12 per cent lower than in the corresponding period of 2022. In the first quarter of this year, 175 thousand  sq m. of space was rented by tenants, and in the second, 166 thousand sq m. of offices were leased. The markets in Wroclaw and Cracow are characterized by the greatest absorption.

– The growing percentage of vacant office space on the regional markets means that rents remain at the current level. In Warsaw, on the other hand, where the availability of offices is decreasing, there is a growing pressure to increase rental rates, which have slightly increased in the central locations. We expect a further increase in rents, as well as in operating costs on the Warsaw market - informs Mateusz Strzelecki_Partner and Head of Tenant Representation at Walter Herz consulting company.

High inflation, which brought an increase in construction costs, service charges and office interior design, has a negative impact on tenants' final decisions, as well as on planning new investments. The authors of the report indicate that the first half of this year was marked by a further slowdown in developer activity on the nationwide market.

– Suspending the implementation of new projects in the office sector has been visible for over two years. As a result, there is more and more talk about the supply gap on the Warsaw office market, which will be seen in the upcoming months, especially in the central business area. Due to the limited access to financing new investments and the high value of money, developers will continue to limit initiating construction of new projects in the near future - says Mateusz Strzelecki.

Few new office investment

In the first six months of the year, only 18.7 thousand sq m. of office space emerged on the Warsaw office market. The Park 9, Wał Miedzeszyński 628 and the first office building in the Bohema complex have been completed.

Only about 250 thousand sq m. of office space is under construction in Warsaw. That’s more than at the end of 2022, when 185 thousand sq m. of offices was being built. However, compared to the boom years, when 800-850 thousand sq m. of offices was under construction on the Warsaw market, investment activity dropped sharply. According to Walter Herz data, over 225 thousand sq m. of office space is currently under construction in the district of Wola and over 22 thousand sq m. in Mokotów.

This year, Echo Investment started the construction of the first stage of Towarowa 22 mixed-use complex (31 thou sq m.) in Warsaw, while Lincoln Property begun The Form project (30 thou sq m.). In addition, the following projects are under construction: Lakeside (22,7 thou sq m.), Vibe A and B (15 thou sq m.), Lixa D and E, Studio (23 thou sq m), The Bridge (47 thou sq m), as well as Drucianka Campus project (42 thou sq m.) based on the revitalization of Warszawska Fabryka Drutu, Sztyftu i Gwoździ factory and Upper One complex (35,9 thou sq m.) in place of Atrium International building, which is currently under demolition.

Among the scheduled projects there are Upper One 2, Adgar Park West D 3, The Park B8/B10, Skanska's project on the plot of the current Ilmet, Spark A, Sobieski Tower, Poleczki Business Park - Stockholm, Lixa G and Diamond Business Park I/J.

More completed offices in the regions

Regional markets offer more new supply than Warsaw. In the first half of 2023, a total of over 116 thousand sq m. of office space was delivered in the regions (68 thou sq m. in the first quarter of the year and 48 thousand sq m. in the second quarter). Among the completed projects there are Ocean Office Park B and Fabryczna Office Park B5 in Cracow, Centrum Południe 3 and Brama Oławska in Wroclaw, Nowy Rynek E in Poznan and Officer in the Tri-City.

At the end of June, the office vacancy rate in the eight major regional markets increased to over 17 per cent. The largest number of vacant offices is in Lodz, and the least amount is in Szczecin.

According to Walter Herz, Warsaw market in mid-2023, offered almost 6.3 million sq m. of modern office space, while all of the resources of the largest regional office markets in Poland amounted to 6.5 million sq m.