After the cautious first quarter of 2021, the office market began to recover in April. “The successful roll-out of Covid-19 vaccination has changed public sentiment across the country and has impacted corporate decisions. This hope for going back to normal has very quickly translated into new processes, especially relocations and renegotiations. Office take-up on Poland’s nine core markets totalled 309,000 sqm in the second quarter, which represented a 50 per cent increase on the first three months of the year,” says Artur Sutor, Partner and Head of Office Department, Cresa Poland. “As employees were moving back to in-office working, in various configurations, the office market began to make up for the lost time of over a year, which quickly resulted in a build-up of new negotiations. Processes that should have been going on for at least a year coincided with those that were about to commence as some tenants were already short of time,” explains the expert.

Office demand is driven by IT and finance. BPO continues to rule supreme in regions

In 2021, office take-up came largely from the public sector as well as IT and finance. “Close to 300,000 sqm was transacted by IT and financial services companies in the first three quarters of this year, which accounted for almost 40 per cent of the total leasing volume posted in that period. Other active occupiers included public sector organisations that leased nearly 63,000 sqm, which made up eight per cent of all deals,” says Agnieszka Giermakowska, Research & Advisory Director, Cresa Poland. “Business services continue to grow at pace in regional cities as they accounted for close to 60 per cent of the total take-up reported across regional city markets in the first three quarters of this year,” she adds.

Cresa Poland estimates that regearing will account for approximately 40 per cent of all deals in 2021. The largest renegotiation in the year to date was the lease renewal for 20,600 sqm in Warsaw’s Senator building by an energy sector company. Another major deal was Rockwell Automation’s lease renewal and expansion for 19,500 sqm in A4 Business Park III in Katowice. A financial services company renegotiated its 15,600 sqm lease in Kapelanka 42 in Krakow. The largest new leasing deals in the capital were the pre-lets of 11,300 sqm in Widok Towers and 9,800 sqm in Fabryka PZO, signed by the Warsaw City Hall and the Warsaw Transport Authority, respectively.

Reinvented and redesigned offices

Market indicators such as take-up and supply have changed in the last two years, and so has the office itself, with companies embracing remote and hybrid working. However, planning for hybrid working is a lot more complicated task than simply setting the minimum time employees should spend in the office, says Artur Sutor. “If we want offices to continue to drive business success, they need to be reinvented. By reinvention I mean new space divisions, new functions and office layouts customised to the current structure of companies and their requirements. Today, it is quite common for some people to work at home and for some in the office – and these people have to communicate with one another. Additionally, those working in an open space environment used to be in meetings for most of the day, and today they rely on video calls for that. Many calls taking place in an open space at the same time will be disruptive to others. We are facing a completely different office reality now,” says Artur Sutor, adding that the analysis and implementation of effective, tailored workplace strategies will be a very important direction of travel for the office market in the year ahead.

To avoid a supply gap

However, to reinvent and redesign the office, the tenant needs extra funds. Landlords are likely to share in such costs, but not for nothing. To obtain an additional fit-out contribution, the tenant usually has to renew the lease for another year or two. It is similar with fitting out newly-leased office space. “Due to the mounting costs of construction services and materials amid stable rental rates and contributions, budgets allocated one or two years ago will hardly suffice to fit out an office today,” says Artur Sutor. “That’s why tenants will frequently opt for longer leases in order to secure a financial contribution allowing them to fit out an office to their required standard. Large companies are, therefore, not leasing offices for five years today. Seven, eight or even ten-year leases are becoming increasingly commonplace. We advise our clients against signing shorter contracts as their expiry would coincide with the expected supply gap,” adds the expert.

The market is unlikely to bounce back before H2 2025

A major supply gap is on the cards for the Polish office market, and Warsaw in particular, for 2023-2024 as the number of new projects breaking ground, especially in the capital, has fallen sharply. Warsaw’s development pipeline currently stands at just over 360,000 sqm and 2021 saw only three projects commence: Ghelamco’s The Bridge (47,000 sqm), Skanska’s Studio (the first phase comprising 16,200 sqm) and the next building of The Park (B9, White Star Real Estate, 11,200 sqm). Next year, new office supply in Poland is forecasted to hit its lowest since 2014. Just over 603,000 sqm is expected to be completed across the country, with Warsaw accounting for close to 230,000 sqm of that total. Supply levels are likely to fall sharply over the next quarters as only a total of between 200,000 and 250,000 sqm of office space will be built on the Warsaw market in 2023-2024.

“As the prices of lands and building materials as well as wages remain on an upward trajectory, we estimate that the cost of delivering an office building has soared by as much as around 30 per cent in the past year. This has caused many developers to shelve projects and wait for the prices on the construction market to stabilize,” says Artur Sutor. “The office market is expected to witness green shoots of recovery in 2025, a year which will see approximately 200,000 sqm of new office space delivered in Warsaw. However, it remains to be seen whether that volume will be sufficient to satisfy occupier demand after two years of an undersupply,” he adds.

Regional market conditions remain stable

According to Agnieszka Giermakowska, the supply gap will be much less pronounced in regional cities where development activity remains relatively strong. More than 800,000 sqm is under construction there, with developers very much focussed on Katowice (25 per cent of the office pipeline), Krakow (22 per cent) and Wrocław (18 per cent).

“Occupier demand for office space is expected to continue to grow over the coming quarters. Although regional development activity will remain relatively healthy, further completions will depend on how quickly office buildings – both existing and underway – are leased. Prime effective office rents are expected to hold firm across regions, but landlords will continue to provide large incentive packages,” concludes Agnieszka Giermakowska, Cresa Poland.