2021 to see essential changes on the office market. A new hybrid model approach to space utilization

Following the extremely successful time experienced by the office sector between 2017 and 2019, the industry entered into 2020 with a high level of optimism as to the months to come. Alas, not only has the global COVID-19 pandemic, a textbook example of an unpredictable black swan event, tempered the prevailing enthusiasm, but it has also expediated the remodelling of the approach to space utilization, which will ultimately lead to a restructure of the office segment.

As at the end of 2020, Warsaw’s total modern office stock stood at just over 5.9 million sqm. Q4 saw the delivery to the capital’s market of nearly 76 000 sqm of new space developed as part of three projects: Mennica Legacy Tower with the area of nearly 48 000 sqm and two office buildings within the Lixa complex (A and B) with the total area of approx. 28 000 sqm. All three of the new office schemes are located in the dynamically growing Centre – West district.

As far as the results for the entire 2020 are concerned, there were a total of approx. 314 000 sqm delivered to Warsaw’s market as part of 15 individual projects. The largest of them included: The Warsaw Hub B and C (a total of 89 000 sqm), Mennica Legacy Tower (office tower with the area of nearly 48 000 sqm) and Varso I and II (nearly 47 000 sqm). Delays in administrative procedures resulting from the pandemic meant that completion of a number of new office buildings had to be rescheduled and will now take place in the first few months of 2021. High developer activity over the past few years has been reflected in the volume of new supply recorded in 2020, a figure nearly twice as high as the volume of new space delivered to the market in 2019 and exceeding the average result achieved in the past 5 years by 15%. The schemes delivered to the market in 2020 were nearly fully leased as a result of the positive situation prevailing on the market in the recent years and the high number of pre-let agreements concluded, which is why the average vacancy rate recorded for the newly completed office buildings did not exceed 15%.

Our analyses show that the current year, i.e. 2021, will also bring a high number of new office deliveries, which might possibly lead to the volume of new supply exceeding the figure recorded last year by 15-25%. However, the volume of space currently under construction in Warsaw is gradually decreasing. As at the end of Q4 2020, there were approx. 570 000 sqm of office space under development and to be delivered by the end of 2022, although ultimately completion of some of the projects might be pushed back as far as 2023.

The Centre – West district holds approx. 35% of the total volume of office space currently under construction. Following completion of all the projects being developed there at the moment (approx. 200 000 sqm), 2022 will see the area becoming Warsaw’s largest business district. Delivery to the market of The Warsaw Hub, Warsaw Unit, Mennica Legacy Tower, Skyliner, Fabryka Norblina, and the next phases of Generation Park and the Lixa complex could lead the Centre – West district to overtaking Służewiec in this regard. This seems possible mostly due to the planned transformation, as announced by Echo Investment, of part of the Empark office complex into residential space. The market trends that we’re witnessing at the moment could in the future be a catalyst for similar decisions in terms of office buildings in Służewiec with a greater residential potential vs. their current office function.

As far as demand is concerned, an increase in the number of lease extensions was recorded in 2020, and in particular in the second half of the year. They accounted for approx. 46% of the total demand recorded between July and December, with a particularly high number of renegotiations being completed during the summer quarter as a result of tenants starting to “unfreeze” their decision making processes regarding their office locations following the end of the first lockdown. As compared to the corresponding period in 2019, a significant increase by 10.1 percentage points was recorded.

At the same time, we have also seen an upsurge in the number of sublease agreements concluded, a trend quite common in times of crisis. Some companies have introduced a hybrid work model and are not planning on actually utilizing all of the space leased by them. It is our estimate that at the end of 2020 there were approx. 100 000 sqm of office space offered for sublease on the market.

Despite the significantly lower demand recorded in 2020 (a drop in net demand by approx. 31% as compared to 2019), the Warsaw office market saw a number of record-breaking transactions in terms of the size of the space leased. One of the largest transactions concluded was a pre-let agreement for 46 600 sqm in the Y building within the Generation Park complex to be occupied by PZU, while another lease for 20 000 sqm was signed to accommodate the headquarters of the Polish division of one of the global providers of transport and logistics services. Moreover, the last quarter of the year saw a confidential client extend their lease for more than 12 000 sqm in the Gdański Business Center I A building, while Leroy Merlin signed a lease for 12 000 sqm in the Forest complex currently under construction.

Warsaw’s office vacancy rate increased considerably (by nearly 2.4 percentage points) in 2020, at the end of December standing at approx. 9.9%. This trend is expected to continue throughout 2021 due to the forecasted high volume of new supply and anticipated continued limited demand from tenants.

The increase in the vacancy rate recorded in 2020 was not a surprise for market experts. Our forecasts published several quarters ago, prior to the sinister name COVID-19 making its appearance, had predicted a rise in this parameter. Figures had shown for quite some time that the volume of new office space delivered to the market would reach its peak in the period between 2020 and 2021 and considerably more space would be available than between 2017 and 2019. Tenant interest in office space, which is currently lower due to the market turmoil caused by the pandemic, is an additional factor here. As a result of the drop in demand and the increase in the volume of vacant space, we expect to see rent adjustments, both with regard to base and effective rents, in the short term – Małgorzata Fibakiewicz, Head of Office Sector & Strategic Projects at BNP Paribas Real Estate Poland

Additionally, 2020 was a year dominated by remote work. In order to ensure that staff remained safe while at the office, and to adhere to the rules of social distancing, some organizations have implemented a hybrid system in respect of the work model and the lease strategy.

The drop in demand for new office space as recorded q-o-q in 2020 is not at all surprising given the unpredictability associated with the domestic and global situation caused by the pandemic as a result of which we’ve been locked us in our homes for 9 months now. Remote work, initially treated as a temporary solution, seems to be here to stay. This, is turn, led to only a small number of employees working from the office, which directly affected the volume of space taken-up. However, most tenants are starting to notice the negative effects of isolation while working from home, the decreasing efficiency, and the fact that their employees are becoming increasingly demotivated, thus we expect that a hybrid work model will be developed in the longer term. We are already hearing from many of our clients that they are planning a to gradually return to their offices mid-year. Remote work, today forced by restrictions and the individual responsibility of each of us for those around us, will remain a permanent element of everyday office life, although it will not be as popular as we initially assumed. This will affect demand, which, even if adjusted, combined with new standards in office design aimed at achieving employee biosafety, might be adjusted only symbolically – Mikołaj Laskowski, Head of Office Agency at BNP Paribas Real Estate Poland

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BNP Paribas Real Estate Poland

Last Updated on April 22, 2021 by Karolina Ampulska