With financing costs declining as expected, rental values increasing steadily and investors becoming accustomed to the geopolitical situation, the Polish office real estate market might attract more interest from international investors than in recent years, according to Baker McKenzie experts. The need to modernize older office buildings and adapt them to the requirements of sustainable development is an emerging challenge.
Despite the economic slowdown caused by the pandemic and the outbreak of war in Ukraine, Poland is seen as an attractive destination for foreign investors. While continued use of hybrid working models means there is less demand for office space, there is still no shortage of start-ups in Poland that are interested in leasing attractive office space, Baker McKenzie experts say. Foreign funds, which have limited their activities in this part of Europe in recent years due to macroeconomic and geopolitical turmoil, will also slowly begin to return to the market.
“Before the pandemic, the Polish office real estate market was growing extremely dynamically and was one of the fastest growing in Europe. The situation we are facing now is a correction about that period and a gradual return to normality,” says Weronika Guerquin-Koryzma, partner at Baker McKenzie heading the real estate practice. “In Poland, we have never seen a sell-off of distressed assets. This is a healthy market that is experiencing a slowdown, not a collapse.”
According to analyses conducted by JLL and Cushman & Wakefield, which monitor the situation on the market, office stock in Warsaw decreased by 40,000 sqm and amounted to 6.23 million sqm in 2023. The reason for this is a reduction in development activity and the withdrawal of some buildings from use and their renovation or change of function. The office investment market also experienced a slowdown. Compared to 2022, the total value of transactions fell by 80 percent to €427 million, the lowest level in more than a decade.
Experts at Baker McKenzie point out that the start of a cycle of interest rate cuts initiated by the European Central Bank and the US Fed, a correction in valuations and a narrowing gap in price expectations between sellers and buyers will be factors that could contribute significantly to a recovery on the office property transaction market this year. Bank policies are also changing, with banks more actively financing real estate and looking for alternative forms of lending, including syndication. This greater activity is also being driven by debt maturity.
“The number of syndicated loans in real estate projects is increasing, which may indicate that banks are looking for ways to get back into the business, despite the persistently high level of risk,” adds Weronika Guerquin-Koryzma. “There is also a growing interest in alternative forms of financing, with foreign funds offering such financing beginning to appear on the Polish market.”
Investors from outside the CEE region have become much less active in the Polish office market because of the war in Ukraine. Investors from the Czech Republic, Hungary and the Baltic states, including Lithuania and Sweden, have predominated among recent asset buyers.
“The market abhors a vacuum. In our view, the period of limbo we are now facing is coming to an end. Both buyers and sellers will want to increase activity and this will encourage a recovery in the market,” said Veronica Guerquin-Koryzma. “The market is flexible and adapts to changing conditions.”
An example of this type of adaptation is the increasing amount of office space dedicated to co-working spaces. This is the result of building owners adapting to changing working models and responding to the demand of smaller companies looking for flexible leases. Another phenomenon is the combination of purposes within a single building, i.e. mixed-use projects. Another important trend in Europe is a change in building use – mainly from office to residential, which is also visible in Poland.
Standard leases are also changing, with tenants seeking to negotiate shorter leases or rights to reduce office space during the term of the lease so that they can better adapt to changing external conditions. There is also a strong emphasis on controlling operating costs, especially utility consumption. Both landlords and tenants are increasingly indicating ESG requirements. Tenants are relocating, looking for offices that are more modern and that meet high environmental standards.
The Polish market is also beginning to feel the effects of ageing office buildings, which will soon fail to meet zero-emission standards. In Western Europe, this is a critical factor shaping the market. Modernizing buildings and finding the financial resources to do so is one of the most important challenges for the coming years, agree lawyers at Baker McKenzie.
