Investors and tenants still careful. We will wait for the boom on the office market

The return of Warsaw’s office market to normal as expected by many experts has not happened yet. The first three months of 2021 on the capital’s market saw leases signed for 109,000 sqm of office space, which is approx. 20% less than in the corresponding period in 2020. The effects of the year-long pandemic are noticeable and manifest themselves in a decreased developer activity, for instance with decisions to commence new projects being held back at the moment. Flexibility continues to be the key factor taken into consideration by most tenants when making office leasing decisions (reduced lease terms, option to sublease the space occupied during the lease term, surrender part of the space leased, and/or increase the space occupied when needed).

Approx. 167,000 sqm of modern office space were delivered to the market in the capital in Q1 2021 as part of eight new schemes. Consequently, total modern office supply in Warsaw exceeded the 6 million sqm threshold. The largest projects delivered to the market during this period were Skyliner developed by Karimpol (48,500 sqm) and a successive phase—the tower—of Generation Park Y (44,200 sqm), completed by Skanska Property Poland, where the two projects added to the existing office stock in the Centre zone. Additionally, occupancy permits were issued for Forest Kampus (19,700 sqm, in the Centre zone), two more buildings (M and N) within the Koneser complex (17,700 sqm, in the East zone), the second phase of the Moje Miejsce complex (15,200 sqm, in the Mokotów zone), X20 (13,700 sqm, in the Mokotów zone) and the first building of the Baletowa Business Park complex (8000 sqm, in the Puławska corridor).
w korytarzu Puławskiej).

The construction boom on the office market observed for several years has slowed down during the pandemic. Q1 saw some conservative activity on the part of both tenants and developers. The last re-examined their decisions to commence new projects and are considering the option to possibly push back their start even further: there were no new office projects commenced in the capital between January and the end of March 2021. The volume of office space under construction is currently at its lowest in a decade: 430,000 sqm, approx. half of which is expected to be delivered to the market by the end of this year. Tenants, on the other hand, closely watched the market and the situation in their own organizations, with the option of implementing the hybrid work model being the hot topics under discussion. Businesses make individual decisions based on their in-depth analyses of the current and future condition of the organization. Today, this work is bearing fruit and we are seeing more and more concrete solutions proposed by tenants and resultant decisions as to the future of their own office space

The increase in supply in Q1 goes hand in hand with reduced tenant activity, with take-up reaching 109,000 sqm of office space. Compared to the corresponding period last year, this represents a drop by 21% and is the lowest quarterly figure recorded in recent years. Q1 2021 saw the Mokotów and Centre zones attract the most tenant interest. As far as the take-up structure between January and the end of March 2021 is concerned, the highest share was held by new leases: 66% (11% of which were pre-lets). Existing lease renegotiations and renewals accounted for 32% of the take-up recorded, while expansions represented 2% thereof. The largest transactions completed in Q1 2021 were the pre-let agreement signed by Zarząd Transportu Miejskiego for 9800 sqm in Fabryka PZO, the renegotiation by Credit Suisse of 7500 sqm in Atrium 2, and the lease renewal signed by Royal Bank of Scotland for 5700 sqm in Wiśniowy Business Park. The sectors displaying the highest level of activity on Warsaw’s market are financial services, manufacturing, and consumer services.

Office space absorption in Q1 2021 decreased by more than 60% as compared to the previous quarter, and it now stands at 22,600 sqm, confirming the strong position of the Warsaw market. At the same time, Warsaw is seeing a slowdown as regards the number of sublease offers on the market, which currently stand at approx. 120,000 sqm

In Q1 of this year, the vacancy rate increased to 11.4% (12.2% in central zones and 10.9% outside the centre). This means that the vacancy rate in Warsaw increased by 1.5 percentage points over one quarter, while over the year, i.e. during the pandemic, it increased by as much as 3.9 percentage points. The highest increase in the vacancy rate was recorded in the central zones, which is directly correlated with the high volume of new supply in this area. In total, there are more than 691,000 sqm of office space available in the capital.

Rents in Warsaw range between EUR 16.75 to 22.00 per sqm per month. In locations outside of the centre, this cost drops to EUR 12.5-14.5 per sqm per month, while in prime central locations rents range between EUR 22.5 to 24.5 per sqm per month. Slight rent adjustments of up to EUR 0.5 were recorded in the central zones as compared to the previous quarter.

This year will be all about employees returning to the office. The office industry faces the challenge of resuming work in office spaces. The accepted reality of the past 25 years, i.e. working in the office, is now gaining a new dimension. The hybrid work model, as proposed by numerous organizations, will make it possible to spread out existing workstations in offices. Consequently, employees will be provided with more room to work comfortably in a quiet environment that meets the requirements of their jobs and tasks at hand, while at the same time giving them the assurance that a safe distance between the individual workstations is kept. Furthermore, offices will promote teamwork and creative collaborations, as well as the informal interactions between employees which are so sorely missed by everyone at the moment.

Authors:

Klaudia Okoń, Consultant, BNP Paribas Real Estate Poland
Agnieszka Żygieło, Senior Consultant, BNP Paribas Real Estate Poland
Mikołaj Laskowski, Head of Office Agency, BNP Paribas Real Estate Poland

Last Updated on July 12, 2021 by Łukasz