Supply in regional office markets higher than in Warsaw

The fourth quarter of 2022 was similar to previous quarters regarding new supply on the Polish office market. Once again, developers’ activity was higher in regional cities (Kraków, Wrocław, Tricity, Katowice, Łódź, Poznań, Szczecin, and Lublin), where a total of 73,800 sqm was delivered between October and December 2022, with a relatively modest result for Warsaw alone of only 8,700 sqm. The largest completed projects in Q4 2022 were those in Kraków, i.e., Brain Park A and Brain Park B (Echo Investment, 13,900 sqm, and 17,100 sqm), and the next phases of the Fabryczna Office Park complex – building B4 (Inter-Bud, 12,200 sqm). On the other hand, one DPD HQ development was put into operation in Warsaw. Throughout 2022, a total of 642,600 sqm (+16.5% y/y) was delivered on the Polish office market, with a breakdown of 405,800 sqm (+79.3% y/y) in regional markets and 236,800 sqm (-27.1% y/y) in the capital. Thus, by the end of 2022, the sector’s total stock stood at over 12.7 million sqm (+4.24% y/y), with a breakdown of 6.26 million sqm in Warsaw and 6.43 million sqm in regional cities. The largest amount of space outside the capital is located in Kraków (1.7 million sqm), Wrocław (1.32 million sqm), and the Tri-City (1.01 million sqm).

Period of lower development activity begins

“An unprecedented highlight of 2022 was the opening of Varso Tower, the tallest skyscraper in the European Union, in Warsaw. This landmark is a metaphor for the development and culmination of another maturity phase in the Polish office market. It was one of the last projects closing a busy period of developer activity in Warsaw. We are in a supply gap phase, a post-pandemic effect when developers put some projects on hold for fear of uncertain demand. On the other hand, the situation is somewhat different in regional markets, where the results in terms of new supply are a very positive surprise. Perhaps this situation will contribute to the diversification of development plans for some clients,” comments Jakub Potocki, Senior Consultant, Office Agency, AXI IMMO.

Where is the most vacant office space?

The observed increases in new supply and tenant activity have not significantly affected the vacancy rate in the Polish office market, which maintains the status quo at 13.47% (- 0.08%). The result translates into more than 1.71 million sqm of vacant space. In unit terms, Warsaw has 726,400 sqm (-6.68% y/y) available space, about 11.6% of the capital’s total stock, with the vacancy rate falling to 10.5% in the central zones and 12.4% outside the centre. In contrast, vacant space in regional cities is 985,100 sqm (+15.4% y/y), with the highest vacancy rate in Łódź at 21%.

Rents and service charges up

“The supply gap is not only a precursor of far-reaching changes and a partial departure from the tenant market in favour of the developer or investor. With service charges skyrocketing and rental rates rising today, some office building owners require longer leases to secure funds for finishing the so-called fit-out space. Quite unexpectedly, we can expect to witness transactions for at least seven years on the wave of renegotiations or during the signing of new contracts. At the same time, there is still a long way to go to reach the models in Western Europe, where the average lease term can last up to 12 years,” adds Bartosz Oleksak, Senior Consultant, Office Agency, AXI IMMO.

Demand as before the pandemic

Throughout 2022, the volume of lease transactions on the Polish office market amounted to nearly 1.5 million sqm (+20% y/y), with almost 870,000 sqm leased in the capital (+34.1% y/y) and 624,100 sqm leased in regional markets (+4.9% y/y). In Q4 2022 alone, tenant activity amounted to 427,700 sqm, with Warsaw (253,000 sqm) accounting for a higher share of leasing than the regional ones (174,000 sqm). The October-December 2022 demand pattern was dominated by new leases (WAW 52% vs. REG 50%), ahead of renegotiations and extensions (WAW 41% vs. REG 40%), expansions (WAW 6% vs. REG 4%), and space leased for own use (REG 6%). Among the largest lease transactions in Q4 2022 of more than 10,000 sqm were a new lease of almost 14,000 sqm in the Konstruktorska Business Center building by Lionbridge in Warsaw and the renegotiation of a contract by a confidential finance and banking tenant in the Green Day building in Wroclaw (14,500 sqm).

“In 2022, we saw increased inquiries for new office space due to two phenomena. First, the period of renegotiated or pandemic leases extended for an additional 12 or 24 months was ending. Second, the war in Ukraine caused businesses to move from the east to the first safe location, Poland. As a result, the additional surge in demand has influenced greater office space absorption. Some of the relocating companies opted for short-term contracts and subleases. However, most chose to lease space in serviced offices or coworking spaces,” explains Jakub Potocki.

Forecast for the office market in the coming quarters“Regarding trends for 2023, we expect legislative work to be completed on standardizing remote work. We are waiting for proposals and regulations of employer cost-sharing for utilities or electricity and what strategy clients will adopt due to these changes. On the supply side, on the other hand, we are entering a period of reduced activity on the part of developers, which, with rising demand, will probably result in lower vacancy rates. Perhaps this situation will benefit, for example, Warsaw’s Służewiec-Przemysłowy district, which is slowly emerging from its office monoculture, transforming itself into a decidedly more attractive place not only to work but also to life,” says Bartosz Oleksak.