Regional Office Markets in the Coronavirus Era

The Covid-19 pandemic has resulted in a global economic slowdown, which the property market is naturally not immune to. Individual segments of this market have responded to the current situation in a number of different ways, as companies try to modify their business strategies to adapt to the present economic reality in the best way they possibly can. The repercussions have impacted the office market too, including Poland’s regional markets, which in the months leading up to the pandemic had been exhibiting impressive growth.

A noticeable slowdown has occurred in the leasing of office space. And yet, crucially, things have not come to a complete standstill. Transactions involving large corporate clients are still taking place, although some of these have been proceeding at a slower pace. However, a pullback can be seen from small companies interested in areas of up to 300 sqm. Deals have been frozen in about 50 pct of such cases. The regional markets, although smaller than the Warsaw market, are largely focused on the same client profile – both small private companies and large corporations. Cities such as Kraków and Wrocław now offer over 1 mln sqm of modern office space. As a result, the leasing environments there, as well as the potential impacts, are similar to those of the office market in the capital city.

In the smaller regional markets, where the market is generally structured around small companies, local branches and private businesses, the impact of the coronavirus pandemic has been more keenly felt. These kinds of companies will always be more cautious when it comes to making commitments – especially under the current conditions, when sales of goods and services are slowing down. On the other hand, the office markets in these cities are certain to rebound, resulting in higher take-up. Developers have not halted projects under construction, thus vacancy levels are expected to increase in the next few quarters. Over time, however, the traditional cycle for regional markets could re-establish itself – high demand contending with low supply, since in the current situation developers have become more wary of launching new projects – and some have already been postponed.

Opportunities, hazards, forecasts

In the long run, those regional markets perceived as stable and saturated – such as Kraków or Wrocław – could in some ways benefit from the current situation. The slowdown in demand could help to strengthen rent levels. Large corporations might decide not to relocate and to prolong their leases in their current locations instead. The conservative approach to launching new projects will not increase the supply, but demand will recover over time and we should see rising rents in prime locations.

One of the greatest threats that might lie ahead for regional markets -- and for the real estate sector as a whole – would, of course, be the economy grinding to a halt. Growth means new jobs, which translates into greater demand for office space. The Covid-19 pandemic will naturally force employers to re-evaluate the working conditions they provide. They will have to decide whether to increase their office space in order to fulfil social distancing obligations, or to introduce shift work for some employees and increase the number who work remotely, which, of course, is not feasible for every company.

My prediction is that due to the coronavirus pandemic small regional markets and developing markets, such as, for example, the TriCity, will experience a slowdown in development and thus will reach maturity later than had been expected. However, larger markets, such as Wrocław or Kraków, will remain stable and should strengthen their position on the basis of their existing office tenants. I’m a cautious optimist when it comes to the prospects for the market and so I don’t expect such nightmare scenarios to arise as soaring vacancy and plummeting rents. At the moment, the crucial thing is to survive the slowdown period. The retail market, in particular shopping centres, is in a much more serious situation, including the real risk of widespread bankruptcy. Sales in this segment translate into rent levels, and so many shopping centres could struggle to survive, especially those in less attractive locations.