"The numbers clearly confirm the slowdown in the commercial real estate market. However, the transactions are still going on. Poland seems to be one of the more active markets, compared to other countries in Europe. And just like during the COVID-19 pandemic, investors are adapting to changing conditions, reviewing their assets and investment strategies", says Marcin Purgal, Senior Director, Investment at Avison Young.

Unrivaled Warsaw

In 2022, investors were mainly interested in regional cities, where 15 out of 21 office transactions were concluded. This year, their interest shifted to the Warsaw market only.

The type of assets that investors focus on has also changed since last year. In 2022, transactions involving "core" or "core+" properties prevailed, which can be interpreted as the choice of a low-risk strategy. This year, in addition to "core+" properties, there is also visible interest in "value-add" and opportunistic assets intended for reconstruction or change of function - which in turn proves the tendency to look for investment opportunities.

Tempting cheaper assets

Since the beginning of the year, investors have shown particular interest in cheaper areas outside the centre of Warsaw, including Mokotów and Słuzewiec districts. Avison Young team has recently finalized two transactions in this area (Obrzeżna Center and HOL 7.7), and further projects are under negotiation. However, the subject of the largest transactions were assets located in the centre of Warsaw.

The largest transaction by the end of Q3, worth almost €70 million, was the purchase of Wola Retro building by the Hungarian Adventum fund. Avison Young investment team represented the seller - Develia. The second largest transaction concerned Warta Tower, taken over by Cornerstone, which confirms the growing activity of Polish capital, especially in the case of "value-add" and opportunistic properties.

Avison Young notes that despite a much lower total transaction volume, investment activity in 2023 remains high in terms of the number of transactions. Liquidity is at a comparable level to the results from Q1-Q3 2016 and 2017, but the average transaction volume is much smaller.

Smaller projects dominate the structure of office transactions. There are no acquisitions of larger investments whose prices have not yet undergone the expected correction. The main reasons for the stagnation in the office sector, apart from the remaining discrepancy between the price expectations of sellers and buyers in the first half of 2023, are the high costs of financing and the perception of office real estate as less stable investments due to the  popularity of the hybrid work model.

Regional investors and domestic capital

Global institutional funds remain dormant. The lack of competition on their part is taken advantage of by local investors and private businesses. Most of the capital invested in the Polish commercial real estate market this year, came from Central and Eastern European countries and the Baltic countries. In the first half of 2023, the share of investors from the CEE region in the total transaction volume in Poland amounted to 45 per cent. That's 20 per cent more than in 2020-2022.

Another source of capital that takes advantage of limited competition and enters the game is domestic capital, which is seeking opportunities and price reductions in the real estate sector. It can be divided into two groups. One is companies with Polish capital that are taking advantage of the slowdown, are able to properly assess the risk, secure financing and finalize a good transaction. The second group are ‘family offices’, wealthy people representing wealthy families interested in additional investment options. Investors from this segment target all major asset classes, the value of which does not exceed €50 million, from ‘core’ real estate to investments carrying higher risk, but enabling high returns.

Moderate optimism

The prospects for the office sector are moderately optimistic. In 2024, new assets may appear on the market due to a large number of refinancings and the redemption of a large number of commercial bonds issued by developers and investors.

The availability of office assets may also increase as a result of portfolio verification by investment funds that have implemented a new operating strategy and plan to sell properties that do not fit into it, or those that verify their portfolios in terms of meeting ESG conditions. Global and European entities wishing to optimize their portfolios may reduce their allocation to office assets and transfer capital to currently more attractive sectors, such as industrial or PRS.

The level of interest rates will be crucial for the activation of operations on the investment transaction market in 2024. Over the year, capitalization rates for key projects in Poland increased by an average of 0.5 to 1 percentage point. However, it is difficult to determine the rate for prime assets as no ‘prime’ transactions have been recorded in the office sector.

Avison Young expects that investment activity in the office sector may remain at a limited level due to the remaining rather skeptical market attitude towards this class of real estate, while in other sectors it should stabilize.

The reconstruction of transaction volumes may also be brought about by a change in the policy of banks, which are still very selective in their approach to project financing. Therefore, cash investors still have a strong advantage and a greater opportunity to conclude attractive transactions.