Tenants on the office market are cautiously optimistic as demand for offices outside Warsaw grows. Advisory company JLL summarizes the situation on the Polish office market in H1 2021.
During the first six months of the year, over 514,000 sqm of modern office space was leased in Poland. More than half of the total was accounted for by the major markets outside Warsaw.
"As a result of the further lifting of restrictions combined with a mass vaccination campaign, cautious optimism is returning to the market. In Q2, companies leased nearly 70% more office space in the country’s major regional markets than in the first quarter of 2021. Demand outside Warsaw exceeded 264,000 sqm. The highest tenant activity was recorded in Kraków (74,100 sqm), Tri-City (72,200 sqm) and Wrocław (45,900 sqm). IT and modern business services companies continue to lead the rental field", explains Karol Patynowski, Director of Regional Markets, JLL.
The largest lease transactions outside Warsaw included: Rockwell’s renegotiation and expansion totaling 19,500 sqm in A4 Business Park in Kraków, 15,600 sqm renegotiated by a confidential client from the business services sector in the Kapelanka 42 office building in Kraków, 12,300 sqm leased by 3M in MidPoint 71 in Wrocław, and 11,400 sqm renegotiated by IBM in the Korona complex in Kraków.
"The share of renegotiations remained relatively high at 46% with pre-lets only making up 10% of total activity in the regional markets. This illustrates the rather conservative attitude of tenants towards making strategic decisions regarding their real estate portfolio. However, we are now having a lot of discussions with tenants who would like, in the coming months, to make informed and data-driven decisions about the development of office locations and formats", adds Karol Patynowski.
After experiencing rapid increases at the end of 2020, the first half of this year has seen the sub-rental market stabilize.
"At the end of Q2, over 168,000 sqm was available for sublet outside Warsaw, 54% of which was located in Wrocław, Kraków and Tri-City. In total, there is approximately 300,000 sqm available for sublease in Poland", says Ewa Grudzień, Senior Research Analyst, JLL.
Supply – 760,000 sqm under construction outside Warsaw
The total office stock in Poland now stands at over 12 million sqm. The balance between Warsaw and regional markets is pretty much evenly distributed (less than 6.1 million sqm vs. over 5.9 million sqm).
In H1 2021, 11 office buildings with a total area of 126,500 sqm were completed outside Warsaw. The largest volume of new supply was recorded in Kraków (42,400 sqm), followed by Poznań (35,900 sqm) and Tri-City (35,000 sqm). The largest completions included: Nowy Rynek D (35,800 sqm, Poznań), Palio A (16,500 sqm, Tri-City), and Tertium Business Park III B (13,400 sqm, Kraków).
"Developer activity outside Warsaw remains strong, and in fact at a higher level than in the capital. A further 760,000 sqm, which is under construction in the country’s eight major regional markets, is scheduled to be delivered by the end of 2023. The highest levels of development activity are currently being seen in Wrocław, Katowice and Tri-City", comments Ewa Grudzień.
A total of 1.1 million sqm of modern office space is currently under construction in Poland.
Vacancies and rents
The average vacancy rate in Poland is 12.9%, up 3.9 p.p. compared to H1 2020. The vacancy rate in the eight main regional markets is 13.4% (a 3 p.p. increase on a year ago), while in Warsaw it stands at 12.5%.
The highest rents outside Warsaw were recorded in Kraków (€14-15.5/sqm/month), while the lowest was to be found in Lublin (€10.5-11.5/sqm/month).
Investment market
Across the country, office properties worth around €800 million changed hands in the first half of the year.
"Outside Warsaw, the total value of office investment transactions was a moderate €375 million – still 10% higher than the H1 average of the last decade. Poland's largest office deal concluded in the first six months of 2021, was the sale of Buma Group's portfolio in Kraków and Wrocław for approximately €200 million to Partners Group. Almost 50% of regional investment activity was in Kraków, with 27% in Tri-City, including Torus’ sale of its Alchemia Neon in Gdańsk. Given the transactions currently in the pipeline, we estimate that total office volumes for this year should be close to 2020’s result", says Marcin Sulewski, Head of Office Investment, JLL.
At the end of H1, prime office yields in regional cities (Kraków and Wrocław) were estimated at 5.75% (4.5% in Warsaw).
