Polish Office Market Summary Q3 2023: Developer Activity Slowing, Tenant Activity High, Vacancy Near Maximum

Jan Szulborski
Jan Szulborski, office market expert, Cushman & Wakefield

The international consulting firm Cushman & Wakefield has summarized the third quarter of the office market in Poland. Both in Warsaw and in regional markets, a consistent decrease in developer activity can be observed. At the same time, tenant activity in the largest cities outside Warsaw remains nominally high, and the capital itself records a record number of lease agreements signed.

SUPPLY: Developer activity is slowing down

At the end of the third quarter of 2023, the total resources of modern office space in the largest markets in Poland (Warsaw, Krakow, Wroclaw, Tri-City, Katowice, Poznan, Lodz, Lublin, and Szczecin) amounted to approximately 12.8 million square meters. The largest completed projects since the beginning of the year include the expansion of the Ocean Office Park complex in Krakow with the Ocean Office Park II building (28,600 sqm – Cavatina), the commissioning of the Craft office building in Katowice (26,700 sqm – Ghelamco), and the completion of another stage of the Nowy Rynek E complex in Poznan (25,100 sqm – Skanska).

Over the past three years, there has been a decline in the volume of new space of office investments. Despite a slight rebound, due to the commencement of construction of individual office buildings, this trend is still visible both in the capital and in regional cities. For example, in Warsaw, there is currently about 235,000 sqm under construction, and in regional cities, about 310,000 sqm remains under development. This situation results from the sustained high level of construction and finishing costs and the generally more challenging economic climate in Poland and worldwide, explains Ewa Derlatka-Chilewicz, Head of Research, Cushman & Wakefield.

According to Cushman & Wakefield’s estimates, in 2023, the Warsaw office market will expand by about 68,000 sqm, entering a period of supply slowdown, which may last until 2025.

In regional cities, the total supply may amount to 305,000 sqm, which is a value over 25% lower compared to the average of the last five years, and the effect of the supply slowdown in the regions will be delayed by about a year compared to the Warsaw market and will start to have an impact already in 2024, comments Vitalii Arkhypenko, office market expert, Cushman & Wakefield.

DEMAND: Increase in interest in offices is expressed in the number of contracts signed

The total tenant activity in Warsaw in the first three quarters of this year amounted to nearly 497,000 sqm and was 18% lower compared to the same period in 2022. However, the number of transactions was record high – 6% larger y/y and 10% compared to 2019, adds Jan Szulborski, office market expert, Cushman & Wakefield.

In the first three quarters of 2023, relocations dominated the demand structure in the capital, accounting for about 58% of all contracts signed. Renegotiations and expansions accounted for 38% and 4% of all contracts, respectively.

In regional markets, nominal tenant activity was higher, amounting to just under 532,000 sqm, representing a 19% increase y/y and a 3% increase compared to the same period in 2019. New contracts accounted for 59% of signed agreements, renegotiations for 35%, and expansions for 6%. On the demand side in regional cities, as before, the largest impact was had by companies from the IT sector and the business services industry. The absorption rate for regional cities, showing the real increase in space occupied by all tenants, is relatively small and amounts to about 75,500 sqm. This lowest level in 13 years indicates that despite the large volume of transactions, there is mainly a rotation of tenants in currently occupied offices and renegotiation of older contracts. Increasing occupied spaces is less common. The regions are undergoing a restructuring of lease structures, which will in the long term be of value for investors interested in purchasing commercialized buildings, comments Michał Galimski, Partner, Head of Regional Markets, Cushman & Wakefield.

VACANCIES: Vacancy rate close to maximum

The average vacancy rate in Poland was 14.0%, which is a decrease of 0.1 pp compared to the second quarter of 2023, but an increase of 0.3 pp y/y. In the capital, the non-lease rate fell by 0.7 pp compared to the previous quarter and was 10.6%, while increases were recorded in most regional cities except Tri-City, Lodz, and Lublin, reaching an average rate of 17.3%. Across all office markets covered by the analysis, the available space amounted to 1.8 million sqm, which is an increase of 3% compared to the beginning of 2023.

RENTS: Pressure to increase rates only in the best projects

Rental rates for the best office spaces in the Center zone in Warsaw averaged 22-26 EUR/sqm/month, while in locations outside the Center they fluctuated between 13.50-16.50 EUR/sqm/month. In the third quarter of 2023, rents in the capital remained at a level similar to the end of the previous year. In regional cities, the best offices in the center were offered on average in the price range of 12.50-16.50 EUR/sqm/month, while since the beginning of the year there has been an increase in rental rates mainly in newly commissioned buildings and those that have historically been most popular among tenants.

Exceeding the level of 16.50 EUR/sqm is realistic only for a few buildings across all regional cities combined. First and foremost, these will be office buildings in Krakow around the Main Station. While the best buildings will gradually increase rents, locations that have been losing tenant interest since 2020 will face a phenomenon in which aggressive rent reductions will not help in re-commercializing vacant spaces. Fortunately for regional markets, such locations are very dispersed, summarizes Michał Galimski, Partner, Head of Regional Markets, Cushman & Wakefield.