According to the report by BNP Paribas Real Estate Poland, at the end of the 1st half of 2018 net office demand, including new leases and expansions of the space occupied so far, reached a record breaking 320 000 sqm.
The authors of the report expect that this positive trend will continue and could result in exceeding the record high demand for the last decade as recorded in 2015. In H1 2018 the most popular offices proved to be those offices located in the central areas of the capital; however the Mokotów district, fighting for tenants’ attention, also recorded relatively good results
New supply – limited volume, fast absorption
173 700 sqm of office space were delivered to Warsaw’s market in H1 this year, out of which approx. 150 000 sqm were delivered in Q2 only, which represents two thirds of the total supply of new space forecast for 2018. The authors of the report highlight that nearly 60% is to be found within schemes located within the central zone, including Proximo II, Spark C, Nowogrodzka Square and Centrum Marszałkowska on the site of the former Sezam department store at the junction of ul. Marszałkowska and ul. Świętokrzyska. Furthermore, the market saw the addition of the office component being part of the CEDET mixed use scheme and the offices within the EC Powiśle complex. According to the report, the increased interest from tenants translated directly into high take-up for office schemes delivered to the market. In Q2 the average take-up for new offices reached over 70%. Additionally, some of them, such as Proximo II and Cedet, had secured tenants for all the space available before their delivery to the market.
Warsaw’s office market is on top form at the moment. Interest from tenants in office space is not waning, while demand for office schemes from both domestic and international investors is on the up and the buildings delivered to the market are on average 70% leased a day after their opening
Małgorzata Fibakiewicz, Head of Office Agency, BNP Paribas Real Estate Poland
At the end of Q2 office stock in Warsaw exceeded 5.4 million sqm. Experts at BNP Paribas Real Estate Poland emphasize that the highest concentration of office space is in the Centre zone with the very dynamically developing Centre West sub-zone. The high popularity of the office buildings in this sub-zone comes from its excellent location and close proximity to the heart of the city centre, as well as convenient access to public transport (the second metro line currently being extended and a good tram and bus network).
Planned supply – a significant development of the Centre West sub-zone
At the end of June 2018 construction work was underway in the capital for approximately 750 000 sqm of new office space, of which half is to be delivered in the next 18 months. The authors of the report highlight that the developments in the Centre zone, in particular around Rondo Daszyńskiego, which will see delivery to the market of as much as 80% of the stock currently under construction, will have the most impact on the situation on the market over the coming quarters. Developers are constructing approx. 290 000 sqm of new office space in the vicinity of Rondo Daszyńskiego, with further schemes being at various stages of preparation. Mokotów remains a key office destination with approx. 26% of the existing office stock. However, the latest schemes are being developed outside of the highly saturated sub-zone of Służewiec, which is experiencing a crisis in terms of demand. Traditionally, the smallest number of new construction projects is planned for the areas outside of the city centre that are not developed office districts.
Demand exceeds new supply
In H1 2018 tenants focused mainly on offices located within the Centre zone, which accounted for 54% of total net office demand recorded in Warsaw, of which nearly half was for the Central Business Area. In turn, tenants for whom a central location is not a priority turned their attention to the Mokotów zone.
The city centre, attractive from an office location point of view, is extremely popular amongst tenants. However, Mokotów, with approx. 22% of gross demand, is not giving up its fight for a good position. The zone has significant selection of available space and offices for those businesses for which a central location is not a priority, and thus represents an attractive option for tenants. Additionally, the limited supply of new space across the city may turn into an advantage for Mokotów and Służewiec. Renovations and modernizations of less attractive office buildings will give these areas the opportunity to benefit from the shortage and attract new tenants
Patrycja Dzikowska, Head of Research and Consultancy, Central and Eastern Europe, BNP Paribas Real Estate Poland
Conventionally, the lowest interest was shown in the zones located outside of the city centre, with 12% of the total net demand recorded there.
Vacancy rate – temporary increase, expected continuation of the downward trend
In Q2 the vacancy rate recorded a temporary and marginal increase, below, 0.5 p.p., which resulted from delivery to the market of a large number of new schemes. All of the capital’s zones, except for the Centre and Mokotów, recorded an improvement in take-up. At the same time, analysts at BNP Paribas Real Estate Poland expect a drop in the vacancy rate over the coming months to be caused by limited new supply and prevailing high demand. The vacancy rate may possibly increase only when a number of large new office schemes is simultaneously delivered to the market in the Centre zone.
The Mokotów zone struggles with the highest vacancy rate, where an increase by 2 p.p. was recorded in H1. This issues concerns in particular the Służewiec sub-zone, where currently approx. 19.5% of space remains vacant. The source of the struggle Służewiec is experiencing as regards finding tenants is to be sought not only in the older buildings offering a lower quality of space, but also in the less convenient transport links and lack of attractive public spaces as compared to Rondo Daszyńskiego and Dworzec Gdański
However, the authors of the report emphasize that despite the fact that the vacancy rate increased marginally in the last quarter, finding office space of over 5 000 sqm and larger with parameters meeting all of the tenant’s requirements “on the spot” is becoming increasingly difficult.
Rents – stable for prime locations, changes in other cost components
In H1 2018 headline rents for prime office buildings in the city centre have not changed and oscillate between EUR 20 and 22 per sqm per month. The very slight increase in the vacancy rate, being a short-term effect of a higher supply of new space, proved to be of no consequence. However, the situation may change in the coming months due to the limited supply expected for the second half of the year and for 2019. This will result in the strengthening of the negotiating position of landlords and attainment by the market a tenant – landlord equilibrium. Experts at BNP Paribas Real Estate Poland highlight that after a period of tenant supremacy, no dramatic increase in rents for prime office schemes is to be expected. Furthermore, tenant incentives in the form of rent free periods and fit-out contributions will become slightly reduced. This will be most visible particularly in respect of new buildings whose owners will want to balance the significant increase in office construction and fit-out costs.
