The office market is adapting to the new reality

offices photo by Walter Herz office buildings

Demand for offices remains high, but there is the least amount of space under construction in over a dozen years. The office real estate market is changing more and more.

Just four years ago, the office sector in Poland was one of the markets that was expanding its resources the fastest in Europe. Today, in Warsaw – the largest office center in the country, office space is shrinking due to the demolition of outdated office buildings, changes in their functions and decommissioning for the duration of modernization. In 2023, Warsaw office market decreased by approximately 40 thousand sq m., even though 60 thousand sq m. of new space was delivered.

According to Walter Herz, Warsaw currently has 6,239,000 sq m. of office space. About 300 thousand sq m. of offices is still under construction. Slightly more than in 2022, but several times less than during the market boom, when 800-850 thousand sq m. of space was under construction. The amount of space under construction has been decreasing for several years. Although developer activity in Warsaw has increased slightly in recent months, this year will not bring many more new offices, compared to the last year. Walter Herz data shows that only about 90 thousand sq m. of space will be delivered.

The lack of available space for rent on the Warsaw market is visible primarily in the city center, where the vacancy rate is only 3-4 per cent. There is only 10 per cent of vacant offices in the entire agglomeration.

Only modern buildings will prevail

– The office market in Poland has slowed down and is at a difficult moment in its development. The popularity of remote work, high investment costs, expensive financing, exorbitant land prices and low supply, as well as the need to take into account ESG requirements force office developers to change their investment plans. Last year, only three building permits were issued in Warsaw. Another huge challenge for the sector is the aging of buildings, some of which will not be able to meet ecological requirements and EU emission guidelines. In the upcoming years, owners of older office buildings will be forced to invest in the modernization of their properties. However, obtaining funds for this purpose may be easier because the policy of banks is changing and they are starting to finance the real estate sector more actively – says Mateusz Strzelecki, Partner/Head of Tenant Representation at Walter Herz.

A slow increase in available space is visible, both in Warsaw and in the regions. Moreover, Walter Herz analysts predict an even greater slowdown when it comes to new investments. In 2023, a total of approximately 315 thousand sq m. of new offices was delivered in the seven largest cities in Poland. Most of them in Cracow (77 thousand sq m.), Wroclaw (75.7 thousand sq m.) and Warsaw (60 thousand sq m.). Among others: Craft in Katowice, building E in the Nowy Rynek complex in Poznan, Ocean Office Park B and Kreo in Cracow, Intel Technology Poland – IGK6 in the Tricity, and Leakside in Warsaw, have entered the market.

A total of over 630 thousand sq m. of space is under construction in the main office centers in the country. A drastic decline in the implementation of new projects is visible across Poland. Walter Herz’s analysis shows that most offices in the regions are being built in Wroclaw – 112 thousand sq m. In Poznan, 72 thousand sq m. of offices is still under construction, in the Tricity – 49 thousand sq m., in Katowice – 46 thousand sq m., in Lodz – 49 thousand sq m., and in Cracow – over 39 thousand. sq m.

Unlike in Warsaw, the availability of work space is increasing on the regional markets. In the Tricity and Poznan, the office vacancy rate is 13-14 per cent, but in Cracow, Wroclaw, Lodz and Katowice it reaches 19-21 per cent.

Remote work has not slowed down the demand

Despite the introduction of a hybrid work system to the market, offices remain crucial for companies and the demand for modern space is still high. Last year, 1,406,100 sq m. of space was contracted on seven key office markets in the country. This good result was achieved both in Warsaw (750 thousand sq m.) and in the main regional markets, where the total demand was record high last year. The absorption capacity of the Warsaw market was slightly lower than in the exceptional in this respect 2022, but much higher compared to 2020-2021.

– We can observe high activity of tenants on the market, but they are consistently optimizing and reducing the space they occupy. Inflation, high prices of utilities and building maintenance costs resulted in a significant increase in operating costs in 2023. The rates increased the most in Warsaw and Wroclaw – by several per cent. Rents for prime space in the center of Warsaw have also increased by about 4 percent y/y. Companies are trying to reduce expenses, but at the same time increase the attractiveness of their offices to encourage stationary work. Tenants who decide to relocate, choose more central locations and more modern offices in the buildings that meet high environmental standards – says Mateusz Strzelecki.

Mateusz Strzelecki points out that the terms of contracts are also changing. He adds that in modern office buildings, the period for which space is contracted is longer, while in older buildings, shorter lease periods are negotiated. Companies also reserve the right to change space during the term of the contract, if it turns out that they will not use it partially due to remote work.

Both building owners and tenants rely on new technologies, which are becoming key to improving efficiency in property management, but also allow companies and their employees to make better use of offices and the range of services available in the buildings.