Office market is drifting in calm waters

Demand in Warsaw is declining, but remains at a good level in the regions. The low activity of developers and the lack of new offices are starting to bother tenants looking for space in the capital

There is less and less available office space in the center of Warsaw. The vacancy rate at the end of Q1 2023 dropped to around 10 per cent in the central business area of the city, which generated a slight increase in rental rates in prime locations.

In the first three months of the year, demand remained relatively stable in Warsaw. Nearly 160 thousand sq m. of offices have been leased by tenants, less than in the previous quarter and 40 per cent less than in the corresponding period last year.

The largest amount of space was contracted in the central business zone, which has been the most popular for a long time. Companies focus on the best spaces. The lease volume in the first months of the year was dominated by new contracts, including pre-let contracts. As a result of the shrinking of the available space in the central area of the agglomeration, as predicted by Walter Herz, we will probably see an increase in the share of renegotiations in lease transactions in the upcoming months.

New investments in Warsaw only scheduled

- Warsaw is characterized by a deepening decline in developers’ activity, which we can observe for the fourth year in a row. This is due to economic and geopolitical conditions, as well as high costs of construction and loan servicing. However, in recent weeks, two new projects have been launched on the Warsaw market. There are now 274 thousand sq m. of space  under construction, three times less than during the boom before 2020. The Bridge, Lixa, Vibe or Skyliner II remain under construction. By the end of the year, there is a chance to complete the construction of only over 70 thousand sq m. of offices - says Mateusz Strzelecki_Partner and Head of Tenant Representation at Walter Herz. – A similar amount of office space – 68 thousand sq m. in, among others, Kreo and Mogilska 35 projects, remains at the finish line of implementation in Cracow, the largest regional market in the country – says Mateusz Strzelecki.

At the same time, developers in Warsaw are turning to the modernization of older buildings and replacing them with contemporary buildings such as Upper One, which will stand in the place of the demolished Atrium.  - The growing number of permits obtained and applications submitted last year indicates that investors want to secure the possibility of starting new construction projects, primarily in the center of Warsaw -  says Mateusz Strzelecki.

- This year, companies are more cautious about their leasing decisions. Fewer large spaces are contracted. Tenants are starting to optimize the cost of maintaining offices, which are becoming more expensive. The market is experiencing a sharp increase in operating costs, which in the case of some properties can be up to 60 per cent higher – says Mateusz Strzelecki.

Regions sustained level of demand

A total of 175 thousand sq m. was leased in the eight largest regional markets in Poland in the first quarter of this year. It is a similar amount as in the previous quarter and a several per cent better result compared to the same period a year earlier.

In contrast to Warsaw, the share of contract renegotiations has increased in the regions, and the number of pre-let contracts in transactions has decreased, despite the fact that there are many offices available in buildings completed in recent years.

In recent months, the vacancy rate in the largest regional markets has slightly increased and averages around 16 per cent. The largest number of vacant offices is in Lodz - over 20 per cent. The increasing amount of available space means that the pressure for rent increases is not as noticeable in the regions as it is in Warsaw. – Nevertheless, a slight increase in rental rates was recorded this year in Cracow, where in the first quarter of the year,  about 10 per cent more space was leased than in the same period in 2022. This market was dominated by new lease agreements – says Mateusz Strzelecki.

In the first quarter of 2023, less than 70 thousand sq m. of news space was completed in regional centers. The most, over 4 thousand sq m. of new offices emerged in Cracow market. Centrum Południe 3 was completed in Wroclaw, Officer - in the Tri-City, and in Cracow - Ocean Office Park B and Fabryczna Office Park B5. Meanwhile, no new buildings were commissioned in Warsaw at that time.

There is less space under construction in the regions. Projects with a total of approximately 530 thousand sq m. are under implementation. The largest number of office meters is still under construction in Wroclaw - approx. 150 thousand sq m. and Katowice - approx. 130 thousand sq m.