Cushman & Wakefield has summarized the first quarter of 2023 and trends shaping the Polish office market. While development activity in the core office locations continues to slow, occupier demand appears to be recovering, particularly in regional cities. Prime office rents in central locations are, however, on an upward trajectory.
TAKE-UP: regional cities are reporting an upturn in demand
Total leasing activity in Warsaw for the first quarter of 2023 climbed to almost 159,000 sqm, around 26 percent below the quarterly average for 2022. However, this relatively sharp decline was largely due to a high base effect and many large-scale deals made in 2022. Despite this, with this level of occupier activity, Warsaw achieved the third-best result among the largest European office markets, just behind Paris and London.
“Occupier activity in Poland’s regional cities hit 175,000 sqm, 12 percent above last year’s quarterly average. This result indicates a gradual recovery in office demand in the largest regional markets,” comments Vitalii Arkhypenko, Office Market Expert, Cushman & Wakefield.
SUPPLY: high construction costs impacting development activity
At the end of the first quarter of 2023, the total office stock of Poland’s largest markets was just over 12.7 million sqm. In the three months to March, new office projects with a combined area of 68,100 sqm were completed only three regional cities: Krakow, Wrocław and Tricity. The largest office completions were Ocean Office Park II (28,600 sqm), which was added to Cavatina’s Ocean Office Park in Krakow, Skanska’s Centrum Południe 3 in Wrocław (20,900 sqm) and Inter-Bud’s Fabryczna Office Park B5 in Krakow (14,000 sqm).
“Poland’s office development pipeline has shrunk significantly over the last three years. This is a notable trend, especially in Warsaw, where only around 181,500 sqm is underway. Office stock under construction in regional cities amounts to approximately 410,000 sqm, marking more than a twofold decrease from the pre-pandemic 850,000 sqm. This slowdown is due to high office construction and fit-out costs and the overall economic downturn in Poland and globally,” says Katarzyna Lipka, Head of Consulting and Research at Cushman & Wakefield.
RENTS: upward pressure on rents continues
At the end of the first quarter of 2023, prime office rents averaged €22-26/sqm/month in the centre of Warsaw, reaching a maximum of €28/sqm/month, while in non-central locations they were in the range of €13.50-16.50/sqm/month. Rental growth in 2022 was most noticeable in the capital’s central locations, with rents going up by around €1. In the first quarter of 2023, rental rates remained largely unchanged since late 2022.
Prime office rents in central locations in regional cities stood at €12.50-16.50/sqm/month.
“An upward trend in rents which began in early 2022 continued throughout the first quarter of 2023. We have observed that projects in the pipeline are experiencing the strongest upward pressure on rents,” says Jan Szulborski, Office Market Expert, Cushman & Wakefield.
This pressure is due to their significant exposure to rising construction and fit-out costs. In addition, rental growth for existing office buildings will be driven in the quarters ahead by the record-high indexation under EUR-denominated leases and rising operating costs. However, the pricing policy of landlords will largely depend on the location, quality and occupancy levels of their buildings portfolios.
At the end of the first quarter of 2023, Poland’s overall vacancy rate stood at 13.8 percent, up by 0.3 pp in the fourth quarter of 2022 but on par with the figure posted in the first quarter of 2022. Warsaw’s vacancy rate remained unchanged since the previous quarter, with upward movements recorded in Krakow and Wrocław. Office availability in all the surveyed markets amounted to 1.75 million sqm, marking a 1 percent increase compared to early 2022.
Office market trends
“Demand in regional cities is recovering despite significantly reduced requirements for office space reported by the largest employers. This is partly due to growing demand from the flexible office sector. We are seeing activity from tenants pursuing high-margin projects in such areas as modern technologies, finance and engineering. Looking ahead, we expect rental growth to continue amid stagnation in supply in some cities and a more pronounced polarization between office locations in the coming years,” comments Michał Galimski, Partner, Head of Regional Markets, Cushman & Wakefield.