The calm before the storm in the office sector

Inflation will change the office market

The next few months will show the extent to which the increase in the costs of renting office space and property maintenance will affect further development of the office sector. Higher costs of running a business will force companies to verify their budget plans.

Increases in rent and operating costs

Office tenants must prepare for an increase in operating costs. Avison Young points out that these costs will be much higher, not only due to the rising energy prices, but also due to inflation-related increase in costs of various services that make up the fee. The charges will be also higher due to the change of minimum wages. The first estimates of their amount, while maintaining the scope at the current level, are to reach PLN 30/sq m. and more, depending on the building and its location. So we are looking at an increase of 50 percent or more of the current value.

The increase in building maintenance costs will put both property owners and tenants in a difficult position. Budgeting long-term lease contracts will certainly be a big challenge for both parties. Avison Young expects pressure from tenants to introduce provisions in their contracts that will effectively limit the uncontrolled risk of increases.

Any pre-let contracts for buildings that will be delivered, for example, in two years, will be a very difficult issue. Today, looking at the changes that took place in the current year alone, determining the amount of the obligation in advance seems practically impossible.

Indexation of rental rates

Another important element is rent indexation, which is an integral part of any lease agreement. Avison Young points out that the indexation of rental rates is closely related to the price index of the market basket - most often HICP on an annual basis in the case of contracts denominated in EUR, and in the case of contracts in PLN it’s related to the data published by Statistics Poland. In recent years, the HICP has been stable, ranging from 0.1 to 2.6. Unfortunately, we already know that this indicator will increase significantly in 2022. It is predicted that the index may amount to 7 percent or more, depending on the dynamics of changes in recent months. Agreements concluded in PLN will achieve even higher increases, where the inflation indicated by Statistics Poland is higher. The effects of these changes will affect all tenants; however, the users of modern buildings located in city centers, where the rates are the highest, and thus the basis for calculation is the highest, will take the strongest hit. 

Regardless of the upcoming transformations in the functioning of office buildings, property owners and tenants agree on the implementation of changes in building maintenance. The owners are already analyzing the possibilities of optimizing energy consumption. Savings are to be brought by the installation of solar panels, LED lights, and the use of motion sensors controlling the light, as well as regulating ventilation, cooling and heating devices Avison Young points out that these actions, however, are only a response to the difficulties arising today. An issue that is likely to be resolved in the upcoming years, and that may significantly change the market will be the implementation of solutions that allow for the construction of passive buildings. The only question remains, whether we are ready to bear the costs of these changes?

Author: Robert Pastuszka, Director, Office Agency at Avison Young