2023 got off to a challenging start on the Warsaw office market with a significant decline in gross take-up and no new office space coming on stream in the first quarter of the year. Furthermore, service charges hit new highs while headline and effective rents came under upward pressure. According to BNP Paribas Real Estate Poland, landlords are also facing greater ESG requirements.
KEY STATISTICS
- 6.25 million sqm – office stock
- 0 sqm – new supply
- 158,900 sqm – gross take-up
- 235,200 sqm – stock under construction
- 11.6% – vacancy rate
For the first time in many years, there was no new office space added to Warsaw’s office stock in the first quarter of 2023, which means that the projected supply gap became a fact of life. This was due to several overlapping factors: the pandemic and its consequences, the economic slowdown, rising property maintenance costs, the energy crisis and geopolitical tensions. Changes in work perception and practices, including the recent implementation of remote working into the Labour Code, also played a role.
- Theoretically, tenants should feel motivated by the supply gap on the Warsaw office market to make leasing decisions fast, but they are not. This is due to economic headwinds, the overall negative market outlook and high fit-out costs. As a result, transactions are taking longer to finalize, says Małgorzata Fibakiewicz, Head of Office Agency, BNP Paribas Real Estate Poland.
Protracted decision-making is noticeable not only among office tenants, but also investors and developers. Projects are being mothballed due to high construction costs and the expected weaker demand for office space.
Lower supply, higher rents
Office buildings which were completed in the last 12-18 months and were initially commercialized more slowly have now filled up. The spectre of supply constraints pushed rental rates up and resulted in longer leases. Furthermore, headline and effective rents will remain under upward pressure due to falling office supply levels.
The report’s authors also point out that in 2022 Warsaw saw seven office building construction permits issued – the highest number in the last three years and five more than in 2021.
- Developers were more cautious about launching new office projects last year. However, they stepped up formal and legal activities related to the preparation of plots for new developments, which is a positive sign for the market. It is also notable that Wola reconfirmed its strength in attracting modern office projects with three out of the seven construction permits issued for that district, says Klaudia Okoń, Senior Consultant, Business Intelligence Hub & Consultancy, BNP Paribas Real Estate Poland.
Service charges have skyrocketed
The Warsaw office market saw unprecedented increases in service charges in the first quarter of 2023. The record growth was triggered by high electricity, heating and water costs, inflation-driven increases in the prices of goods and rising local taxes and charges. In addition, the minimum wage was raised to PLN 3,490 with effect from 1 January 2023 – up by PLN 480 from the previous year – and is to be increased again on 1 July.
- We estimate that service charges on the Warsaw office market have increased by around 30% compared to the previous year. This growth does matter, because service charges - alongside rents and utility charges - are a key component of monthly office occupancy costs. Lease lengths are also increasing in addition to rising service charges and rental rates says Małgorzata Karczewska, Consultant, Office Agency, BNP Paribas Real Estate Poland.
At the end of the first quarter, prime office rents in Warsaw stood at EUR 26-28/sqm/month. Asking rents in office buildings aged under five years averaged EUR 16.6-18.5/sqm/month. Rents in buildings aged between six and ten years were in the range of EUR 16.7-17.1/sqm/month, while the oldest buildings (those delivered over a decade ago) fetched rents of EUR 14.8-15.3/sqm/month.
The City Centre and Służewiec see strong leasing activity
Gross office take-up for the first three months of the year amounted to close to 159,000 sqm, down by 40.5 pp on the first quarter of 2022. The strongest leasing activity was recorded in in the City Centre/Central Business District and Służewiec, which accounted for 55% and 16% of all deals, respectively.
New leases and pre-lets made up 70% of the leasing volume, followed by renegotiations (23%) and expansions (5%). According to BNP Paribas Real Estate Poland, office demand in the first quarter came predominantly from the business services sectors (19% of the gross take-up), manufacturing (10%), the banking, insurance and investment sectors (9%) and logistics (9%).
At the end of the first quarter of 2023, Warsaw’s vacancy rate was 11.6% - unchanged from the previous quarter. Office availability at the end of March amounted to 724,600 sqm, down by just under 2,000 sqm compared to the fourth quarter of 2022. Half of the capital’s office zones recorded downward movements in vacancy rates, the largest being in the Puławska Corridor (-1.5 pp) and the Central Business District (-1 pp).