Poland Demand is strong, but renting expensive

Three years after the pandemic, after switching to a hybrid work model on the office market, we can talk about an investment stagnation. The economic situation in Poland and in the world, unfavorable for the implementation of new projects, inflation and the rising costs of construction and financing of investments have meant that investors now sporadically initiate the construction of new office projects. Caution in decision-making is very visible on the market, even though the demand for offices remains at a high level.

In 2022, the demand on the office market returned to the levels from its best periods. Limited new supply and high interest in leasing resulted in a significant decrease in vacant space in Warsaw. This year, we expect a continuation of this trend, which will be followed by increases in rents. A slight increase in rental prices was already visible at the end of last year, and this year we are dealing with further price indexation. Unlike Warsaw, the pressure for price increases is not as strong in the regions, due to the greater availability of space.
Bartłomiej Zagrodnik, Managing Partner, CEO at Walter Herz

Walter Herz advisors expect that the demand for offices will decrease slightly this year due to the rising rent and fit-out costs. This is due to the increasingly common verification of the demand for workspace related to the hybrid work model. Tenants are reviewing the demand for offices, optimizing the size of occupied space, while raising their standard. Walter Herz predicts that this year the level of interest in solutions that allow to reduce maintenance charges and utility costs, will also increase. Building owners will focus on implementing ESG solutions. They will make it possible to meet the increasingly stringent EU guidelines, but above all to introduce savings and reduce the costs of maintaining and operating real estate. Projects aimed at modernizing older office buildings will also be undertaken soon, due to the growing environmental requirements.

The demand for office space in Warsaw last year was record high. It was at a similar level as during the market's greatest prosperity before the pandemic. Business relocated from across our eastern border also contributed to this result. According to Walter Herz data, in 2022, approx. 846,000 sqm of offices in Warsaw were leased by tenants, one-third more than a year earlier. The companies aimed primarily at central locations, where about 60 pct of space was contracted. In 2022, Warsaw market increased its office resources by almost 236,000 sqm of space.

There are half as many offices under construction than a year ago. Over 203,000 sqm of space is under construction in the capital, while at the peak of the market boom in 2019 that number amounted to 800,000 sqm. The construction of The Bridge, Lixa, Vibe and Drucianka Campus investments is underway, and preparations for implementation include such projects as, among others, Upper One, T22 and The Form.

According to Walter Herz, the increase in office supply in the capital this year and next year will drop to around 80,000 sqm. The high absorption capacity of the Warsaw market, on the other hand, causes a decrease in the vacancy rate, which currently stands at around 10.7 pct. This is an opposite phenomenon to that observed in the largest European business centers, which proves the great potential of the location.

The situation on regional markets is slightly different than in Warsaw. More is being built, the vacancy rate (over 15 pct) is not dropping and may even increase with more delivered projects down the line. At the end of 2022, there were about 620,000 sqm of space under construction in the regions. Most in Wroclaw, in Katowice, and in Kraków. In 2022, over 405,000 sqm of space was delivered in the regions, almost 80 pct more new offices than the year before were launched onto the market, but at the same time 25 pct less than during the boom.

2023 will be marked by optimization on the office real estate market. We expect a slight decline in demand due to deteriorating economic conditions and rising prices on markets across Poland. Both tenants and property owners are currently facing higher costs of maintaining space. Rising energy prices and labor costs translated into higher service charges. Therefore, this year, we will witness an even deeper adjustment of the size of the leased office space to the real needs of companies.
Mateusz Strzelecki, Partner, Head of Tenant Representation at Walter Herz

Last year, a total of approx. 624,000 sqm of office space was leased on the regional markets outside Warsaw. It was slightly more than in 2021 and slightly less than in 2019, which was a record-breaking year in this respect. The highest tenant activity was recorded in Kraków, where contracts for almost 200,000 sqm of offices were signed.

The total stock of modern office space in the nine largest markets in Poland exceeds 12.7 mln sqm.