Polish Office Market: Supply Slowdown Continues, Tenant Activity Remains High

office real estate

The international advisory firm Cushman & Wakefield has summarized the third quarter of the office market in Poland. In both Warsaw and the regional markets, a consistent decline in developer activity can be observed. Simultaneously, tenant activity in the largest cities outside Warsaw remains nominally high, with the capital itself recording a record number of lease agreements.

SUPPLY: Developer Activity Slows Down At the end of the third quarter of 2023, the total modern office space in Poland’s largest markets (Warsaw, Krakow, Wroclaw, Tri-City, Katowice, Poznan, Lodz, Lublin, and Szczecin) amounted to approximately 12.8 million square meters. The most significant completions 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 completion of the Craft office building in Katowice (26,700 sqm – Ghelamco), and the next phase of the Nowy Rynek E complex in Poznan (25,100 sqm – Skanska).

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

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

Vitalii Arkhypenko, an office market expert at Cushman & Wakefield, comments that in the regional cities, the total supply could reach 305,000 sqm, which is over 25% lower compared to the average of the last five years. The effect of supply slowdown in the regions will be delayed by about a year compared to the Warsaw market, starting to impact as early as 2024.

DEMAND: Increase in Interest Expressed in the Number of Agreements

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

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

Michał Galimski, Partner and Head of Regional Markets at Cushman & Wakefield, notes that in the regional markets, nominal tenant activity was higher, at 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 agreements, renegotiations for 35%, and expansions for 6%. The absorption rate for regional cities, showing the real increase in space occupied by all tenants, is relatively small at about 75,500 sqm. This lowest level in 13 years indicates that despite a high volume of transactions, there is primarily a rotation of tenants in currently occupied offices and renegotiation of older agreements. Expanding occupied spaces is less frequent. The regions are undergoing a restructuring of lease structures, which will be of long-term value for investors interested in purchasing commercialized buildings.

VACANCIES: Vacancy Rate Close to Maximum

The average vacancy rate in Poland was 14.0%, 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 unleased rate fell by 0.7 pp. compared to the previous quarter, amounting to 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 analyzed office markets, the available space amounted to 1.8 million sqm, a 3% increase from the beginning of 2023.

RENTS: Pressure on Rate Increases Only in Top Projects

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

Exceeding the level of 16.50 EUR/sqm is realistic only for a few buildings across all regional cities combined. The first to do so will likely be office buildings in Krakow near the Main Station. While the best buildings gradually raise rents, locations that have been losing tenant interest since 2020 will face a phenomenon where aggressive rent reductions will not help in re-commercializing vacant spaces. Fortunately for the regional markets, such locations are very dispersed, concludes Michał Galimski, Partner and Head of Regional Markets at Cushman & Wakefield.