Scarcity of new office space and lease renegotiations - Warsaw's office space market in the third quarter of 2023

08 listopada 2023

As revealed in the latest periodic report by BNP Paribas Real Estate Poland, titled "At a Glance - third quarter in Warsaw's office market," the analyzed period has witnessed only marginal growth in office space. The constrained supply presents a formidable challenge to tenants, who, with progressively limited options, are increasingly resorting to lease extensions. Simultaneously, the vacancy rate in the capital has decreased, and rental rates have remained relatively stable compared to the previous quarter. A surge in demand for flexible and recycled office spaces is also notable.

Reduced availability and a decline in vacancy rates

According to the report, the Warsaw real estate market concluded the third quarter with a total office space supply of 6.2 million sqm. Merely 1,900 sqm were introduced for use as part of the S-Bridge Office II project. In the same quarter, the construction of the office-hotel complex Upper One commenced, occupying the former Atrium International site and offering 35,900 sqm. Nonetheless, the report emphasizes a prevailing caution among developers regarding new ventures. The total office space supplied to the market in the capital from the year's outset through September amounted to 20,250 sqm, marking a significant drop compared to previous years. In 2020, over 236,000 sqm of office space were introduced, and in 2021, nearly 325,000 sqm.

The dwindling supply poses a considerable challenge for tenants seeking office space until 2026, as their choices continue to narrow. Available office space might shrink further, particularly as there are currently 256,000 sqm under construction, a stark contrast to the years 2017-2019 when an average of 800,000 sqm were being developed. Nevertheless, demand remains robust. Since the year's commencement, nearly 500,000 sqm of office space have been leased in the Warsaw market, a promising outcome, considering the record year of 2019 when 688,500 sqm were leased. The supply gap has also led to a decrease in the vacancy rate to 10.6%, dropping to 9% in central areas. The majority of office zones have experienced a vacancy rate decline compared to the previous quarter, which may exacerbate the issue of limited available office space in the future.

says Małgorzata Fibakiewicz, Head of Office Agency

Demand and rental rates

As the report's authors point out, from the year's commencement through September 2023, the overall demand for office space in office buildings reached 496,600 sqm. In the third quarter alone, gross demand for office space in the capital amounted to 174,000 sqm, reflecting a 5-percentage point improvement compared to the previous quarter and a 36-percentage point increase in year-on-year demand. Nearly 44% of all leasing transactions pertained to office buildings situated in the Center and Central Business District, the most coveted locations for tenants. Służewiec also emerged as an attractive area, with 19% of all agreements in Warsaw signed from July to September. In the third quarter of 2023, new leases constituted the majority of demand, at 52.8%, including pre-leases, and renegotiations accounted for 42.8%. Both expansion and self-use of office space represented 2.2% each of the registered demand.

The past quarter has maintained consistent rent rates compared to the preceding quarter. By the end of September, leasing one square meter in prime locations cost between 26 and 28 euros monthly. In the newest buildings, aged less than 5 years, the rental cost ranged between 19.4 and 20.25 euros. In buildings between 6 and 10 years old, rents fluctuated between 16.9 and 17.3 euros, while in the oldest properties constructed over a decade ago, rates ranged from 14.6 to 15.2 euros.

Lease renegotiations for cost savings

From January to June of this year, a mere 18,700 sqm of new office space were delivered, marking the lowest level of new supply recorded in Warsaw in the first half of the year in over a decade. The limited supply and the high costs of adapting office space in the capital have led to the largest agreements signed in the third quarter of 2023 (excluding pre-leases in The Form office building) being lease renegotiations.

The limited choice in Warsaw's office market, coupled with significantly reduced levels of newly supplied office space, means that many companies and organizations face a challenging decision regarding their office location. Tenants seeking centrally located facilities may encounter challenges. There are more location choices available when looking beyond the city center or nearby Wola. In this context, some tenants opt for renegotiations, which not only allow them to extend their leases for shorter periods (e.g., 2-3 years) but also to optimize rental conditions and save on rental rates.

Ewa Nicewicz, Cousultant, BNP Paribas Real Estate Poland

Flexible offices still on the rise

As the report illustrates, the flexible office market continues to evolve and remains desirable to both developers, who are increasing the number of tenants and expediting commercialization, as well as renters. Currently, over thirty flexible office operators are operating in the capital, offering 190,000 sqm of space and over 26,000 workstations. While most flexible space is situated in the city's central business district, an increasing number of such offices are emerging in predominantly residential neighborhoods.

Short lease agreements and the availability of fully equipped offices tailored for work continue to be highly attractive, especially in Poland's challenging and dynamic economic climate. Operators are responding to the growing demand for flexible spaces by offering new hybrid concepts. Issues related to ESG (Environmental, Social, and Governance) are also playing an increasingly prominent role in this sector. Many flexible offices are now located in buildings that promote and implement environmentally friendly solutions certified by international green or sustainable construction standards.

Klaudia Okoń, Senior Consultant, Business Intelligence Hub & Consultancy

The significance of office recycling

The report's authors highlight a new trend in the real estate market, centered on designing office spaces with a "less waste" approach. Solutions that utilize materials reclaimed from the second-hand market and recycling are gaining prominence in office space design. This is of utmost importance since the typical lifespan of office space ranges from 5 to 10 years, after which most office equipment is discarded as waste. According to estimates from the Environmental Protection Agency in the USA, up to 8.5 million tons of office assets are disposed of in landfills annually. Hence, there is a concerted effort to maximize the use of available materials, such as reusing parts of heating and cooling installations or equipment left behind by previous tenants. Offices that blend responsible sustainable design with functionality while meeting the heightened expectations of users will gain a competitive edge. Office recycling not only aids in reducing the carbon footprint but also results in tangible financial savings.