Regions overtake Warsaw in terms of volume of office space leased

13 listopada 2020

In Q3 2020, Wrocław, which accounted for over 37% of gross demand, enjoyed the greatest interest of tenants. The Wrocław market is also the leader in the amount of new supply delivered to the market in the third quarter. Nearly 49,000 sqm of space has been delivered to tenants in three new office buildings. In the perspective of the next few quarters the markets of Kraków and Wrocław will grow most dynamically, while Tri-City may exceed 1 million sqm of existing office stock in 2021. Taking into account the biggest lease transactions, IT companies seem to be the most resistant to the current coronacrisis.

Regional markets are currently subject to the same evaluation processes as the market in the capital, although naturally on a smaller scale. This is reflected by the structure of demand, the vacancy rate, or the transaction volume. In the long term, however, regional centres such as Kraków, Wrocław and Tri-City, which has grown to be the fourth regional power, that support the development of shared services, IT and financial services in terms of office spaces, will not lose their attractiveness. The ongoing pandemic has put the economy on hold, and remote working, as a natural consequence, has triggered an avalanche of questions about the future of the offices. In our view, the current situation will not cause the further development of the regional markets to be drastically hampered, but only to slow down in the coming months. Numerous academic centres, well-educated personnel, growing supply of modern office space, relatively low lease and labour costs, as well as the growing near-shoring trend for the services sector will be the reasons for Poland's high attractiveness on the map of Europe and of regional cities on the map of Poland

Małgorzata Fibakiewicz, Managing Director, Office Class Sector and Strategic Projects at BNP Paribas Real Estate Poland

By the end of September 2020, total office stock in the eight largest regional markets (Kraków, Wrocław, Tri-City, Katowice, Łódź, Poznań, Szczecin, Lublin) exceeded 5.7 million sqm. Kraków, which offers 1.52 million sqm of offices, accounting for 26% of the total volume of office space existing in the regions, continues to be the leader in this respect. The level of over 1 million sqm has also been achieved by Wrocław (approx. 1.2 million sqm), while in the remaining six office centres, the size of the existing stock ranges from around 184,000 sqm in Szczecin to about 900,000 sqm in Tri-City.

In Q3 2020, 14 new office buildings with a total area of approximately 129,500 sqm were completed. The largest volume of new supply - 48,500 sqm could be attributed to the Wrocław market, where three new projects welcomed tenants: Centrum Południe (23,700 sqm), 1st phase of the West 4 Business Hub complex (14,400 sqm) and City 2 (10,900 sqm) in the City Forum complex. These projects account for almost 40% of the volume of new supply delivered in the eight regional markets in the last three months. The second market in terms of new supply in Q3 2020 was Kraków with 38,200 sqm of office space. The office sector in this city has expanded by four facilities, including another phase of the Podium Park complex (building B – 16,400 sqm), phase B (12,800 sqm) of the Zabłocie Business Park and the Eastern Office Building (7,700 sqm) in the Unity Centre complex. The market in Tri-City ranked third, with 30,400 sqm of new space. Three projects in Gdańsk have been completed, the largest of which, Wave A, houses 23,600 sqm of new office space. In the last quarter, an increase in the stock of modern office space was also recorded in the Łódź market, where a total of 12,000 sqm was delivered in three small office buildings.

Although the office markets in the regions have expanded by 2 million sqm of new stock over the last four years, developers' activity remains high. At the end of September, there were 71 projects under construction, with a total office space of about 800,000 sqm, to be completed by 2023. In terms of the volume of new space under construction, the projects in the lead are: Kraków (approx. 24% of new stock currently under construction) and Katowice (also about 24%). In the capital of the Małopolska province, the largest office buildings currently under construction are Kreo in the South-East zone and another stage of the Unity Centre complex - Unity Tower - in the City Centre zone. In Katowice, which is the leading market of the Upper Silesia and Zagłębie Metropolis, 14 office buildings are being built. The largest projects are: KTW II, 1st phase of Silesia 4 Business, Global Office Park, which after the completion of the entire project will offer almost 50,000 sqm of office space, and 2nd phase of the Face 2 Face complex, all located in the largest office zone in the city and the entire region, DTŚ Route Corridor. In Wrocław, which accounts for about 13% of the office space currently under construction, the construction of Mid Point 71, located in the southern outskirts of the city centre, is underway.

By the end of next year, the most dynamic developments are expected in Kraków and Wrocław, while Tri-City may join the group of regional markets with the volume of existing office space exceeding 1 million sqm.

Although the market is trying to remain reasonably optimistic, the volume of gross demand in Q3 and its structure by type of agreement concluded reflects the anxiety caused by the ongoing coronacrisis. In the period between July and September, a total of 126,500 sqm of space was leased in eight regional markets, which is 10% more than in the previous quarter, but almost 40% less than in the corresponding period of 2019. For another quarter in a row, the lease structure of offices was dominated by renewal agreements, which accounted for more than half of the gross demand. The volume of signed agreements for new locations amounted to about 36%, and about 17% involved extensions of already occupied premises.

In Q3 2020, Wrocław was the most popular destination for tenants, with approximately 46,000 sqm of space leased, representing 37% of total demand. Tri-City and Kraków ranked second and third in terms of space leased in Q3, with 30,400 sqm and 25,400 sqm respectively. In Wrocław, the largest demand for office space came from the IT sector, which accounted for over 60% of the volume of concluded transactions. In Tri-City, almost half of the space leased was in the retail sector, while in Kraków, the banking and retail sectors accounted for almost 60% of the volume of agreements signed, more or less in equal parts.

The vacancy rate in 8 regional markets reached 11.9%, which means an increase by 1.7 p.p. compared to Q2 of this year, and compared to the corresponding period of 2019, translates into an increase by as much as 2.8 p.p. The large increase in vacant space in Q3 is the result of, among other things, the delivery of 129,500 sqm of new space to the market, with Wrocław and Kraków accounting for 38% and 30% of the volume respectively. The highest vacancy rates of 14.3% each were recorded in Wrocław and Łódź (an increase of 3.1 p.p. and 1.1 p.p. respectively, compared to the previous quarter), while the lowest rate of 7% was recorded in Katowice (an increase of 0.9 p.p. compared to the previous quarter). The Łódź market recorded an increase in the vacancy rate due to the completion of 12,000 sqm of space in three small office buildings.