High inflation is one of the factors that will have a huge impact on budgeting related to leasing office space by tenants in the near future, says Avison Young Poland.
The first and second quarters of 2023 will be crucial for the office market - the indexation of rental rates may reach even 9%. In addition, an increase in operating costs is certain due to the update of utility rates and the new minimum wage rate. The unstable euro exchange rate is also a big challenge, and in most cases, the rent is converted from euro to PLN.
Considering the above, according to Avison Young, in some buildings maintenance costs may increase by over 50 per cent.
In Warsaw, the range of prices for renting office space has never been so wide. In buildings offering the highest standard, located in the very centre (CBD), base rental rates are twice as high as in the office buildings located further away from the centre. In the most prestigious buildings in the city centre, base rents reach €28/sqm/month, and in Służewiec, the once-popular Warsaw business district, they oscillate between €13-15/sqm/month.
The expected update of rental prices will have a significant impact on planning expenses related to running a business. According to Avison Young, this may make some companies verify their budgets and turn to cheaper locations.
Prices will be much higher. Moreover, there will be a supply gap in the office market. In Warsaw, it will be the most visible in 2023 and 2024. The recent period of turbulence and changes has limited the inflow of new investments. At the end of Q3 2022, only 160 thousand sqm of space remained under construction on the Warsaw market, while in 2019 there was over 800 thousand sqm of offices under construction. In 2023, according to Avison Young, Warsaw's resources will increase only by approx. 65 thousand sqm of space. Some of the more interesting projects that are being prepared for construction include Drucianka Campus, The Form, The Vibe, Port Praski towers, the ‘new’ Atrium International, Towarowa 22.
Demand for Warsaw offices remains at a record-high level. In 2021, almost 650 thousand sqm of space was leased. Such high demand meant that the space available on the market in new office buildings was absorbed at the beginning of this year. Now, the offices in the capital are even more popular. From January to the end of September 2022, over 600 thousand sqm has already been leased. Demand begins to exceed supply, and this affects landlords’ expectations concerning rent.
According to Avison Young, the already insufficient number of large office units in centrally located A-class buildings forces tenants to extend lease agreements. In addition, a small supply of new space in the upcoming months prompts companies to take steps to secure space for the future. Tenants who decide to relocate often sign contracts for a longer period, up to 7 years, which allows them to reduce the costs of arranging a new workspace.
High demand for space, generated by the return of employees to offices and an increase in rental rates and operating fees, which reduces the yields of real estate capitalization, motivates investors to enter into transactions in this sector. At the end of September 2022, the total office investment volume in Poland reached almost €1.8 billion, thus exceeding the sector's full-year result from 2021. The office sector had the largest share in the pool of all investment transactions concluded in Poland at that time, which exceeded 40 per cent. Out of 21 office transactions in Q1-Q3 2022, 15 concerned regional office markets. Avison Young contributed to this result - the investment consulting team finalized the sale of the most recognizable office building in Wrocław - Sky Tower.
However, such a large volume was achieved mainly due to two spectacular Warsaw transactions. In addition to the largest transaction in history with a single office asset - the acquisition of The Warsaw Hub by Google for €583 million - Warsaw market also saw the fourth largest transaction in history with a single office asset - Generation Park Y, located at the Daszyńskiego roundabout, which was bought by Hansa Invest for over €285 million.
Avison Young points out that major institutional investors have narrowed down their investment criteria due to high financing costs and the need to take into account ESG aspects. The increase in construction costs in recent years, as well as the continuous increase in rents, has provided a huge competitive advantage and better yields for owners of existing properties, in relation to those under construction.
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