Pretty stable

“Have we returned to the pre-Covid reality?” asks Jacek Zengteler, the president of the management board of developer Yareal Polska. “In a nutshell, no. The world has evolved. We can’t say we have seen a full recovery. But if we take into consideration the take-up, we are back to the 2019 levels. We have recovered from the Covid shock. The pandemic taught us how to be more mobile and flexible. However, as a society we’ve also realised that a completely remote economy can even be harmful and that as human beings we need proper interaction, whether in our private, learning or professional life. This shows us that the trend will be for firms to continue to keep their HQs. There was this notion post-Covid that firms wouldn’t need HQs at all and could reduce their office space to a reception desk for receiving mail.” Nicolas Benhaim, the vice-president of the management board of Yareal Polska, adds to this that: “After the period of full-on remote working, people are coming back to the office. This is by no means the end of the home office, but teams are really happy to meet up at work in a quality environment.”

Mateusz Polkowski, a senior director and head of research and consultancy for commercial real estate in Poland and the CEE region at real estate advisory JLL, is obviously not alone in his view that the hybrid model has become a permanent fixture. But he qualifies this was the following data: “It seems that companies’ policies regarding remote and hybrid work are gradually evolving. According to a global JLL survey, in H1 2022, 20 pct of employees worked fully or almost exclusively in the office. Today, this figure has risen to 35 pct globally. Additionally, the proportion of people working 3–4 days from the office has significantly increased from 31 pct to 45 pct,” he reveals.

Shifting structures

Perhaps the most obvious measure of the health of an office market is its take-up rate. So, how is the Polish office market doing in terms of demand and how does it compare with the rest of the CEE region and Western Europe? Mateusz Polkowski is of the view that there has recently been a significant shift in the structure of the demand in our part of the world: “In the first half of this year, renegotiations accounted for 51 pct of all lease agreements signed in Warsaw. This is a record level in the history of the capital’s real estate market and a confirmation that the post-pandemic adaptation of companies to the realities of hybrid work is still an ongoing process. Companies are often renegotiating their current leases and reducing their occupied space by an average of 20–30 pct. The last two years have been a period in which companies have been making decisions regarding their leasing strategies – during this time, the take-up was relatively high. There were significantly more lease agreements signed in Poland than before the pandemic (1,100 lease agreements in 2019, compared to 1,330 in 2022 and almost 1,700 in 2023). After a wait-and-see period, tenants have become more active but are signing smaller lease agreements.” According to him, this is also the case in Poland’s regional cities and other CEE capitals, where the take-up remains relatively stable although its structure is changing: “In Prague, the net demand in the middle of this year was high, but this was due to a single lease agreement signed by one of the largest Czech banks for a building intended for its own use. Therefore, each city must be analysed individually, taking into account local conditions. Looking more broadly at demand across the entire EMEA region, CEE markets align with European trends. We may expect a slight, gradual improvement in terms of demand in Europe going forward.”

Jacek Zengteler of Yareal Polska, believes that Warsaw is still more attractive in terms of rents than Western European capitals. “While the quality of available and upcoming buildings stands out. In general, we can say that Warsaw provides a high quality living and working environment at competitive price levels. But there is still a noticeable gap between Warsaw and the office markets of Poland’s provincial cities,” he argues. As for those cities, Nicolas Benhaim believes that “the mathematics are more complicated in regional cities, because rents are naturally lower than in Warsaw while construction costs are comparable. This is a completely different model where it is more difficult to find a happy equilibrium. But in Warsaw, a number of significant IT companies have chosen to locate there due to the competitive nature of the market.”

Supplying the data

Mateusz Polkowski agrees with the view that the Polish and the CEE office markets at the moment roughly align with European trends. “However,” he points out, “there is a significant difference on the supply side. In the CEE region, the volume of space delivered this year will be very limited. In Western Europe, it is quite the opposite: we will record the highest result in over 20 years – almost 7 mln sqm. The next two years will also see high levels of new supply – from 5 to 6 mln sqm annually.” So, why should this be the case, given the ongoing debate here and in the West about the future of offices and high financing costs? “It’s all due to the unmet demand for the most sustainable assets in Western Europe. The difference between Warsaw, Kraków, Wrocław, and Western European cities is that in Poland we have very modern office space that meets the sustainability and green targets set by companies. Polish office buildings are 65–70 pct certified. In Western Europe, the office supply is much older than in our country, and the demand for the most modern buildings that meet current world requirements remains solid, which confirms the ‘fly to quality’ trend,” he explains.

From the developers’ side, Jacek Zengteler tells us that “we, as an industry, have delivered app. 60,000 sqm to the Warsaw office market this year – out of a forecasted total of 150,000 sqm by the end of 2024. A typical year, however, would see 400,000 sqm added to the market. And the typical pre-Covid take-up was in the region of 800–900,000 sqm.” Nicolas Benhaim adds this explanation for the continuing sluggishness of the office development sector: “Investors are waiting to see if the market stabilises. But we have access to long-term equity, which certainly helps. And they are also waiting for reductions in interest rates before they seek out new opportunities.” Certainly, since the initial outbreak of the pandemic, many developers have put their projects on hold or halted them altogether – but Yareal does not seem to have been one of them. “At this uncertain time, we have decided to go ahead with the final stages of the Lixa office complex in Warsaw, buildings D and E, expecting a supply gap to occur. This was a good decision as our project has been highly appreciated by the tenants.” The completion of Lixa D and E added 26,200 sqm to Warsaw’s office stock – which, according to Axi Immo’s recent ‘Office Market in Warsaw in H1 2024’ report, was the largest single completion on this market in the first half of the year.

“Construction activity in Poland remains subdued, with only 450,000 sqm currently under construction across the country,” admits Mateusz Polkowski of JLL. “It’s worth noting that in 2018, construction activity was at 1.8 mln sqm, with 60 pct of this activity accounted for by Warsaw, where almost 85 pct of the space being built located in the CBD and wider City Centre – the most sought-after office locations for occupiers. But looking ahead, it seems we will be entering a so-called ‘new normal’ regarding office space construction. This will be characterised by limited new completions, app. 100,000 to 120,000 sqm annually in the capital city,” he predicts.

Flexible decision-making

So, this brings us to the question of which kind of office space is currently the most sought-after in the post-pandemic, hybridised world, in both our part of the globe and elsewhere. Nicolas Benhaim is rather upbeat when it comes to the demand for high-quality space in prime locations and feels that the same positive trends can be seen in Warsaw as in other major European markets: “Maybe tenants are asking for less space,” he admits, but also insists that “the demand for quality class A offices is strong in Warsaw city centre and so the trend is for more qualitative space.” Mikołaj Wojciechowski, the business development and marketing director of APA Wojciechowski Architects, broadly concurs with this view: “If companies decide to change their offices, they are generally choosing the most modern buildings. To encourage employees to return to their offices, the best locations are preferred – mainly office buildings in multi-functional complexes or business areas.” He adds to this that “space that is as flexible as possible is particularly desirable.”

And when it comes to encouraging employees back to the office and recruiting the best employees, the facilities and the layout provided for employees are now crucial, as Jacek Zengteler explains: “Office space these days is being designed to attract employees back and new talent to join the company as it grows. Pre-Covid, common areas were just treated as a necessary evil – for example, kitchens were often located in less attractive, darker places and were rather small and crowded. But common areas can now even reach as much as 60 pct of the space a company leases (depending on its needs). As for kitchens, today the space dedicated to this function is now often treated as one of the most important as it is used not only to provide basic catering needs but as a social centre for the office. Companies are getting used to higher levels of flexibility, with fewer desks and greater workplace rotation.”

The need for flexibility to suit the expectations of today’s employees is also stressed by Mikołaj Wojciechowski. “The most flexible office space possible, open to changes and modifications, is now preferred. Proptech solutions and issues related to ensuring security and access control are essential. This is related to amenities – tenants appreciate space in which they feel good,” he says. He also adds to this that for office tenants environmental goals are becoming ever more important – and that this results from EU guidelines (the CSRD, or corporate sustainability directive): “Certification of office buildings (BREEAM, LEED or Well) is already a standard and makes it easier for tenants to choose an office that meets the highest ESG standards. And, of course, the financial aspects are also very important. Therefore, many companies are deciding to extend their lease contracts for a short period of time and sometimes increase the space they rent within the building.”

The buyers are back in town

If the office development market still remains a bit sluggish, what’s happening when it comes to investment? Mateusz Polkowski of JLL has some optimistic news in this regard. “In H1 2024, the Polish office sector generated a total investment volume of app. EUR 800 mln across 22 transactions, representing robust growth compared to the modest EUR 200 mln spent by investors in H1 2023. What adds to the optimism is that, aside from one large entity deal (the CPI portfolio), the market was also driven by core transactions in regional cities. Additionally, core+ and value-add transactions in Warsaw remained popular, offering highly attractive pricing,” he explains. And where does that leave yields, now that we finally have some transactions to estimate them with? “The decrease in bidding intensity in 2023 coupled with elevated debt costs led to an upward shift in office yields. The rise in active bidders seen in H1 2024 could signal a stabilisation of current prime cap rates. As of the end of June, yields for prime assets in Warsaw with lease agreements longer than five years were expected to be around 6 pct. In Kraków, which continues to be the main regional city, prime cap rates are currently estimated at about 7 pct,” says Mateusz Polkowski.

Given the upturn in investment activity, are developers likely to step up their own activity? “We would definitely consider carrying out more projects like Lixa in the future,” claims Jacek Zengteler of Yareal. “With the diversification and scale of our activity and the fact that we don’t have external debt or bonds that have to be refinanced, we remain very flexible in terms of our approach. And we evaluate each project in terms of how it can bring value to our shareholders. This flexible model has worked for us for the past 20 years and so we aim to maintain an organisation able to adapt and benefit from the market dynamics,” he insists. But his colleague Nicolas Benhaim sounds one note of caution about the prospects for an upsurge in office development, at least in the Polish capital: “There is a scarcity of land in Warsaw city centre. So, at the moment, we are acting more as an asset manager for our shareholders, and for buildings we acquire we are looking to add value to them.”