Warsaw office sector saw the lowest volume of space under construction in 11 years along with relatively low tenant activity. However, the business services sector provides hope for the future.
JLL has summarized the situation in the Warsaw office market at the end of the first quarter of 2021.
The first three months of 2021 again proved to be challenging for both the economy, and the office market. Further restrictions slowed down the dynamics of the capital's office sector.
The first quarter of 2021 brought a continuation of last year’s trends, which were reflected in lower developer and tenant activity caused by the pandemic. The volume of office space under construction and demand on a quarterly basis are the lowest in 11 years. It is worth noting, however, that the ongoing processes, together with growing interest in the Warsaw market from the modern business services sector, may have a positive impact on the volume of lease transactions in the next few months. Furthermore, companies are increasingly confident in planning their return to the office. Most of them assume autumn 2021 is doable.
Demand – tenants' cautious attitude
In the first quarter of 2021, Warsaw tenants leased nearly 110,000 sqm, which was down 20% on the same period in 2020.
The relatively low level of tenant activity was mainly caused by uncertainty regarding the size of offices after the return to the new normal. At the same time, however, we can observe a slight slowdown in the growth dynamics of sublease offers, which was one of the dominant trends in the Warsaw market last year. Currently, there is over 120,000 sqm available for sublease in the capital, which is approximately 10,000 sqm less than at the end of last year.
Some of 2021’s largest leasing contracts include the Public Transport Authority's 9,800 sqm pre-lease agreement in PZO Factory, Credit Suisse's 7,500 sqm renegotiation in Atrium 2 and Royal Bank of Scotland's 5,700 sqm renewal in Wiśniowy Business Park. Currently, tenants often choose to extend their lease for a short period and wait for things to return to normal before making long-term commitments.
Flexes have entered the stabilization phase
Currently, the occupancy of flexible offices in the central office zones of Warsaw remains at a fairly high level. Last year, we could see a lot of fluctuation in the flex segment, which translated into significant changes in rates per workstation. Currently, we are seeing a stabilization in prices and we can assume that the worst is behind us.
Supply – Warsaw offices now offer six million sqm of space
Eight buildings totalling over 167,000 sqm were delivered to the Warsaw market in the first quarter of 2021. As a result, the total supply of modern office space in Warsaw now exceeds 6 million sqm. The largest new developments include Skyliner by Karimpol (48,500 sqm) and the next phase of Generation Park - Tower, the Y building (44,000 sqm) completed by Skanska Property Poland.
While in recent years there has been between 700,000 sqm and 800,000 sqm under construction, this number now stands at 420,000 sqm, the lowest volume of office space under construction since 2011.
"In Warsaw, after several years of steadily increasing developer activity, the volume of space under construction has decreased significantly. Developers are more cautious about starting projects, and in recent months only one new investment has been launched in Warsaw – The Bridge by Ghelamco Poland. As a result, in 2023 we can expect a supply gap. It will be especially visible outside the city centre", comments Tomasz Czuba.
Vacancy rates and rents
In Q1 2021, the vacancy rate increased to 11.4% (12.2% in central zones and 10.9% outside the city centre). However, the limited new supply planned for the next few years may have a positive impact on the office space available for lease.
"A significant number of owners, primarily of top-tier buildings, continue to pursue relatively rigid policies regarding the rates they offer and the length of lease agreements. Nevertheless, the tenant incentive package is growing, particularly with the fit-out budget. An exception among "prime" assets are some offices under construction. Their owners are willing to accept much more favourable terms regarding rates, incentives and other elements of the lease agreement in order to conclude the first contracts", comments Tomasz Czuba.
Prime transaction rents are stable, ranging from EUR 18 to EUR 24/sqm/month in the centre and up to EUR 16/sqm/month outside.
Investment market
The value of office investment transactions in Warsaw totalled nearly EUR 250 million in Q1 2021. The largest deal concluded was Echo Investment's sale of Biura przy Willi (part of Browary Warszawskie) for EUR 86.7 million to KGAL Group. Equally significant was the acquisition of the Spark B building by Stena Realty and Immofinanz portfolio of four buildings bought by Indotek. The largest transaction in Mokotów was the acquisition of the Neopark complex by Amundi Real Estate.