Two-speed new supply – supply gap in Warsaw, high activity in regions

As predicted, 2023 marked the end of a period of increased new supply of office space in Warsaw, with projects such as the Varso complex, The Warsaw Hub, Forest, Norblin Factory, Skyliner, Generation Park office complex, Central Point and SkySawa, among others, delivered to the capital’s market. Since 2016, the Warsaw skyline has been enriched with iconic projects of most key developers. It has shifted the so-called business hub of the city from Służewiec to the Daszyński Roundabout area. From 2023 until the end of 2024, the capital will witness a supply gap. During the indicated period, a low volume of new supply will be delivered in Warsaw, not exceeding about 100,000 sqm per year. Nevertheless, contrary to the situation observed in the capital, in the regional office markets, we will witness high activity of developers, and 2023 itself was full of significant new projects delivered, such as Ocean Office Park B in Kraków, Craft in Katowice, Nowy Rynek E in Poznań.

According to Axi Immo’s preliminary analysis, the new supply in 2023 on the Polish office market should be around 420,000 sqm, with a breakdown of 70,000 sqm delivered in Warsaw and approximately 350,000 sqm in the regions, which will increase the sector’s total stock and exceed the 13 million sqm mark. In line with the situation observed in recent quarters, the eight largest regional office markets, with an unlimited supply of 6.75 million sqm, will surpass Warsaw with an inventory of 6.32 million sqm, with the capital still the dominant market in Poland.

Postcovid demand continues

According to preliminary data from analysts at Axi immo summarizing 2023, gross demand on the Polish office market will remain at around 1.5 million sqm for the second consecutive year. However, the demand structure will differ: in 2022, more contracts were signed in Warsaw, while in 2023, tenants were more likely to opt for new agreements, renegotiations, and office space expansions in the regions. From January to December 2023, estimates indicate that gross demand in the capital will be around 700,000 sqm, while tenant activity in the regions will reach 800,000 sqm. Regarding the capital, it’s worth noting that tenants were mostly interested in relocating to the city centre, so a systematic decrease in vacancy levels is observed, especially in central zones. On the other hand, in the regions, the opposite trend of increasing the offer of available space with each quarter is noted.

Nonetheless, on the Polish office market in 2023, tenant activity has once again allowed large deals to close, with the largest ones in Gdansk, where Intel decided to expand and take an additional 23,000 sqm within its complex, and Wroclaw, where BNY Mellon will take the entire space in the Centrum Południe 3 building (20,300 sqm). In Warsaw, meanwhile, Lux Med has leased 13 thousand sqm in the Lakeside building in Mokotów. In addition, after Ukrainian companies adopted the Polish market, some signed longer leases, relocating from previously leased coworking spaces and serviced offices.

Remote/hybrid work in the Labor Code

The amendment to the Labor Code on so-called remote and hybrid work, announced since the COVID-19 pandemic, has influenced the consideration of the model of operation of new forms of employment and the definition of rules and requirements for employers and employees. As of April 2023, many companies, permanently and taking into account the legal provisions, have switched to a hybrid work model combining stationary work with an individually determined rotation system that considers the employee’s presence in the office. Nevertheless, even before the law’s amendment, tenants’ first decisions were visible. The popularization of hybrid work, among other things, influenced the optimization of space and the evolution of office space towards more diverse and flexible workplaces, including zones for collaboration or individual work. In turn, introducing innovative relaxation and recreation zones is expected to improve employees’ overall well-being and align with the idea of wellness.

Nonetheless, the cost of arranging space has increased due to the rental market, among other factors, but also to an increase in the price of materials needed to furnish an office. Currently, the cost for the so-called shell & core space fit-out in Warsaw ranges from a minimum of 500 to as much as €1,000 per sqm and more, depending on the office fit-out project and the length of the contract.

Intelligent solutions in office buildings

The COVID-19 pandemic was a prelude to changes in the organization of workspaces, but also to redefine how we use office buildings and how technologically advanced they are at this stage. Prop-tech, or combining real estate and cutting-edge IoT solutions in 2023, introduced several applications for moving around office buildings. The most popular solutions that property owners opted for were the contactless selection of the floor to be driven to after programming, automatic license plate reading and remote parking space selection, or desk reservation in coworking areas. Implementing intelligent building management systems that optimize energy consumption, control air conditioning, and support office space management allows for large savings. In 2024, we expect to see the popularization of the trend in companies toward forming virtual community spaces for employees working remotely, supporting interaction, exchanging ideas, and building relationships online.

E(cological)SG awareness

Increased sustainability awareness among tenants and developers is leading to an increase in certified buildings that meet green standards. In 2023, many companies are seeking ESG-compliant space. The obligation of additional non-financial reporting by tenants is influencing landlords’ decisions to modernize office buildings in terms of, among others, access to renewable energy, charging spaces for electric cars, the quality of air injected into offices, increasing green zones in the building or renovating common areas as in the case of the renovated Saski Crescent office building, the BGK headquarters and the repositioned LIFE building, i.e., the former Atrium Tower. The ESG trend will, therefore, become a  permanent part of the future of the modern office sector.

New supply – several scenarios

According to estimates by analysts at Axi Immo, as of the end of December 2023, about 540,000 sqm will remain under construction on the Polish office market. Prominent projects include The Bridge, Office Building B within the Towarowa 22 mixed-use project, Studio A, Skyliner II, and The Form. According to developers’ announcements, more space is expected to be delivered in the coming quarters in regional cities (300,000 sqm) than in Warsaw (240,000 sqm). Nevertheless, the situation regarding space under construction is very dynamic. As of today, the supply gap and the prospect of rapid absorption of new supply may encourage developers to start more projects. We expect that we will enter a period of increased tenant activity in the Polish office market in a few months, which will have a domino effect. Currently, companies may opt for shorter extensions of their current leases for lack of attractive alternatives. After a period of revitalization and recent modernization of office buildings, some developers may decide to demolish and replace old office buildings with new ones. The trend will be related to the high cost of land plots and the need to maximize their efficiency. One of the projects being developed under this formula is  Upper One, which is being built on the Atrium International office building site. In addition, the future of buildings such as Ilmet, for example, has been under discussion in Warsaw for many years. On the other hand, as a result of consolidation, PKO BP and PZU have moved their headquarters to new office buildings in recent years, leaving their previous locations deserted. Soon, the capital’s skyline may see quality modern buildings with high architectural value in the city center.

However, regarding the limited availability of office space in Warsaw in the most attractive locations, Axi Immo analysts expect pressure for higher rents in prime properties. Rental rates have remained stable in recent quarters, while service charges have increased significantly.