The Warsaw office market saw a shrinking volume of space under construction and increasing pressure on rents in 2022. However, according to the latest report by Cushman & Wakefield, the capital's market could see a significant tenant recovery as contracts signed in the record period of 2018-2019 come up for renewal.
Tenant activity increased despite market uncertainty
Total tenant activity in 2022 was 860,100 sqm, more than 33% higher than in 2021 and only 2% lower than pre-pandemic 2019’s record performance.
"The high demand in 2022 was a result of both the accumulation of large-scale deals by tenants from the financial, business services and IT sectors, as well as an improved rental market. This is confirmed by the number of transactions finalized in 2022, which totalled 860, an increase of nearly 39% compared to the same period in 2021", comments Katarzyna Lipka, Head of Consulting & Research, Cushman & Wakefield.
In 2022, new contracts (52%) and renegotiations (39%) accounted for the highest share of demand, while expansions accounted for only 8% of total tenant activity.
"In the next twelve months, the Warsaw office market will see contracts concluded in the record years of 2018-2019 coming up for renewal. The increased number of processes expected to start this year may have a positive impact on the demand for office space throughout 2023. Nevertheless, the prospect of the economic slowdown may translate into tenants becoming more cautious about their business plans and as a consequence, leasing office space", explains Joanna Blumert, Head of Occupier Services, Cushman & Wakefield.
In addition, as a result of changes in the market regarding the working regime and rising inflation over the past three years, we will see a number of tenants optimizing costs, including extending contracts to amortize higher capital expenditure for office finishing. The structure of the concluded deals will also change, with the share of renegotiations over relocations growing.
Lower development activity is now a reality
In 2022, developers completed 237,000 sqm in 12 office projects, bringing the total stock of office space in Warsaw to around 6.27 million sqm. Some of the largest buildings completed in the last twelve months include - Varso Tower (63,800 sqm - HB Reavis), Forest Tower (51,500 sqm - HB Reavis) and P180 (32,000 sqm - Skanska).
"There is currently about 181,500 sqm under construction in Warsaw. According to our estimates, the capital's office market will expand by just 66,000 sqm this year, which will mark the start of a "supply gap" that could last until 2025", says Jan Szulborski, Office Expert, Cushman & Wakefield.
In 2023, the cost of building and finishing space will continue to rise while the rate of price increases will be slower and more predictable relative to early 2022, according to Cushman & Wakefield.
"Better control over the level of development costs may give the Warsaw office market a positive boost in terms of launching new projects. Meanwhile, due to the current economic environment, new projects are likely to be situated in the most attractive locations, enabling developers to maximize their return on investment", adds Jan Szulborski.
Lower planned supply with relatively high tenant activity will reduce available office space
At the end of 2022, the vacancy rate continued on its downward trend. The availability of office space in December totalled 726,400 sqm, down 52,000 sqm on the same period in 2021. The vacancy rate in Q4 2022 was 11.6%, down 0.6% (QoQ) and a decline of 1.1% (YoY).
"With a reduction in new supply in 2023, we will see a continued downward trend in the rate of available space, which will allow markets to absorb any excess available office space in the existing stock. However, it is important to note that the rate of absorption will be strongly correlated with the dynamics of economic growth, which will influence companies' decisions to invest and increase staffing levels", summarizes Katarzyna Lipka.
Office rents in 2022 have come under particular upward pressure due to the uncertain geopolitical situation, the energy crisis and the increase in construction and fit-out costs, which on the one hand increase the cost of maintaining the space, but do limit the owner's profit margin.
In Q4 2022, rates for prime office space in Warsaw were €22.00-26.00/sqm/month in the Center zone and €13.50-16.50/sqm/month in non-central locations.
Cushman & Wakefield's observations show that projects under construction are currently under the greatest upward pressure regarding rental rates, due to the significant exposure to rising costs of both construction and finishing space. In addition, rent increases in the coming months will be influenced by the indexation of EUR-denominated leases, which will be around 9%. The increase in rates for the market as a whole will cause changes in landlords' pricing strategies depending on the location, quality and occupancy levels of their building portfolio.
