"Many companies are continuing with hybrid working while considering which model to settle on. However, we are also seeing increased tenant activity both in terms of new agreements and interest in flexible office spaces. This does not change the fact that there is a record low level of space under development in Warsaw and, according to our forecasts, there will not be a return to pre-2020 construction levels in the next three years. Looking ahead to the next few quarters, however, higher vacancy rates will prompt landlords to rethink their leasing strategies and ramp up their operations", says Piotr Kamiński, Head of Office Leasing, JLL.

Demand – new agreements

In the first nine months of 2021, Warsaw tenants leased 398,100 sqm, an 10% drop on the same period in 2020. As much as 60% of this number was connected to the Centre and COB (Central Business Area).

"Q3 saw the highest tenant activity so far this year. In the aftermath of the pandemic, companies are still cautious about leasing office space, but we see the share of new agreements in total take-up rising to 54%. This demonstrates that companies are becoming bolder in their decisions regarding the next steps for their property portfolios", says Mateusz Polkowski, Head of Research & Consulting, JLL.

The current split in demand between new agreements and renegotiations is well illustrated by the biggest transactions of the year: a renegotiation of a lease agreement signed by a confidential tenant for 20,600 sqm in the Senator building; a renegotiation of a lease agreement signed by a confidential tenant for 13,900 sqm in Atrium Garden; a pre-let for Warsaw City Hall for 11,300 sqm in Widok Towers; a pre-let for 9,800 sqm by the Public Transport Authority in Fabryka PZO; a renewal for 7,500 sqm by Johnson & Johnson in Wiśniowy Business Park; a renegotiation for 7,500 sqm by Credit Suisse in Atrium 2; and a pre-let for CMS in Varso Tower for 7,000 sqm.

"It is worth noting that ongoing redefinitions of long-term office strategies, coupled with growing interest in the Warsaw market on the part of companies from the modern business services sector, may positively influence the volume of lease transactions in the following months", adds Mateusz Polkowski.

Less sublets, more flex space

In Q1-Q3, a slowdown in the growth rate of sublease offers in Warsaw was noticeable. Currently, 119,000 sqm of space is available for sublease in the capital's office market. The possibility of another wave of the pandemic is having an influence on companies' decisions to maintain a hybrid working model. Therefore, flexible spaces are of great interest, especially to SMEs.

"Increasing tenant activity in the traditional market is causing more and more large companies to temporarily use flex spaces while waiting for their desired office space. As the increase in the supply of flexible space has markedly slowed in the past months, the average occupancy level of many operators already exceeds 80%. This translates into relatively stable prices and, as a consequence, an increase in the coming quarters looks on the cards", explains Adam Lis, Flexible Office Solutions Manager, JLL.

Supply – only 330,000 sqm under construction

During the first three quarters of 2021, the Warsaw office market expanded by 290,200 sqm in 13 buildings including Warsaw Unit (59,300 sqm, Ghelamco Poland), Skyliner (44,700 sqm, Karimpol) and Generation Park Y – the tower (44,000 sqm, Skanska Property Poland).

"A significant increase in the new office supply in Warsaw is not expected by the end of the year. The number of sqm under construction is decreasing quarter by quarter due to the low activity of developers in launching projects. Over the last few months, construction of only one new tower project has started in Warsaw - The Bridge, developed by Ghelamco Poland", says Piotr Kamiński.

Vacancies and rents

"Current tenant activity, which has not fully returned to pre-pandemic levels, combined with the delivery of several more developments, means the vacancy rate in Warsaw office buildings is at a four-year high, hitting 12.5% at the end of September – up 2.9 p.p. y-o-y. We do see stabilisation, but we still have to wait for a real noticeable decrease in the rate", comments Mateusz Polkowski.

As a result of low development activity and the prospect of a possible supply gap, vacancy rates are expected to drop no earlier than 2023. This will especially be the case outside the city centre, where companies looking for an office in a new building will face a very limited choice.

The highest transaction rents for prime office properties continue to be in the range of €18 to 24/sqm/month in the centre and up to EUR 16/sqm/month outside the central district. Base rates in prime buildings should remain at a similar level. On the other hand, there is a noticeable expansion of incentive packages for tenants, in particular regarding the fit-out budget.

"It is worth noting that owners of some office buildings under construction are deciding on offering their first tenants much more favourable conditions as regards rates, incentives and other elements of the agreement", adds Mateusz Polkowski.

Warsaw office investment market – not only the city centre

The office sector remains one of the key drivers of Poland’s investment market. However, current investor activity is rather moderate compared to previous years.

"The Warsaw office market dominates this year in terms of investor activity. Since the beginning of the year, the value of office investment deals concluded in Warsaw exceeded €860 million - that's about 70% of 2021’s office transactions in Poland. Investors' attention is focused on prime schemes, which are most likely to attract and retain tenants. In recent months, several of the most prestigious office buildings have changed hands, as exemplified by Echo Investment's sale of the Offices at Warzelnia project to Deka Immobilien for €152,3 million. But investor interest is not limited to the centre. The last quarter of the year opened with the sale of another Echo Investment project, Moje Miejsce I in Mokotów, for over €47,3 million. At the turn of the year, we expect further transactions outside the very centre of Warsaw, which will further confirm the attractiveness of this location and the liquidity of the office assets there", comments Marcin Sulewski, Head of Office Investment, JLL.

At the end of September, prime yields in Warsaw were estimated at 4.50%.