New office supply is expected to remain low throughout 2024. Although 48,700 sqm was delivered onto the Warsaw market in the first quarter of 2024, only 67,000 sqm of the development pipeline is scheduled for completion by the end of this year. The sharp decline in office development activity is attributed to several factors, including elevated maintenance costs due to high interest rates and hybrid working practices that gained traction during the pandemic.

Consequently, low supply levels have resulted in longer leases being more common.

“The Warsaw office market has recently seen an increase in lease renewals and extensions. Meanwhile, high office fit-out costs amid a focus on ESG compliance have resulted in a stronger preference for longer leases signed for 7-10 years”, says Małgorzata Fibakiewicz, Head of Office Agency, BNP Paribas Real Estate Poland.

Service charge growth slows

In 2023, the record-high inflation, coupled with rising electricity and gas charges, pushed office maintenance costs to new highs. The service charge growth was also fuelled by the growing expectations of sustainability and technology standards. In 2023, monthly advance service charges rose on average by around 25% year-on-year - this represented an unprecedented rate of growth for the office market, according to the report from BNP Paribas Real Estate Poland.

“With electricity prices being stable, the pace of service charge growth slowed significantly in the first three months of 2024 compared to the same time last year. That said, service charges continue to account for a substantial proportion of tenants’ office costs, while the prospect of any further increases is forcing landlords to look for ways to optimize operating costs,” says Małgorzata Karczewska, Senior Consultant, Office Agency, BNP Paribas Real Estate Poland.

The second half of 2023 also saw prime office rents edge up. Average rental rates stand at €22.5-26 per sqm per month in the Central Business District and remain unchanged at €13-15 per sqm per month in Służewiec - the largest non-central office zone in Warsaw.

Diversity in vacancy rates and new builds

At the end of the first quarter of 2024, Warsaw’s vacancy rate stood at 11%, down by 0.6 pp year-on-year. Office availability amounted to nearly 690,000 sqm, with non-central locations accounting for most of Warsaw’s unoccupied office stock. Older office buildings also experienced an uptick in vacancies as many tenants relocated to newer offices and those who had embraced hybrid working opted for optimizing their space.

BNP Paribas Real Estate Poland also notes that office construction activity is now more evenly balanced between central and non-central locations, with 280,000 sqm of new office space scheduled for completion across Warsaw by the end of 2026. Of that total, 62,000 sqm is in office buildings undergoing refurbishment.

Breathing new life into old office buildings

Warsaw’s refurbishment pipeline includes three office buildings: V-Tower (formerly Warta Tower), University Business Center II and G5 Prime Offices (formerly Grójecka 5). The January-March 2024 period saw four office completions: Lixa E & D, the building of Makro Cash and Carry, and Saski Crescent, which had been refurbished for the past year to make it more user and environment-friendly.

“The Polish commercial property market has a strong refurbishment pipeline across the mature office and retail sectors, as well as the industrial segment - the youngest of all. Poland’s office buildings are aged 10- 15 years on average, while the average for offices in Western Europe is about 40-50 years. This comparison shows that Poland has relatively new office stock. However, due to strict EU requirements, buildings completed two or three years ago no longer meet them and must be upgraded accordingly”, says Klaudia Okoń, Senior Consultant, Business Intelligence Hub & Consultancy, BNP Paribas Real Estate Poland.