Key findings:

• The vacancy rate hit its highest since Q3 2018.
• Occupier activity plummeted by 35% year-on-year in the first three quarters of 2020 due to lockdown.
• Subdued occupier activity and increased space availability pushed prime office rents down in Warsaw.
• Due to the lockdown caused by the outbreak of the COVID-19 pandemic, Poland’s GDP contracted by 8.9% in Q2 2020 compared to the same period in 2019.
• The Polish economy is expected to bounce back strongly in 2021.

Supply

Warsaw saw 238,300 sqm come on stream in the first three quarters of 2020, bringing total office stock to 5.82 million sqm. The largest completions in the last three months included the mixed-use complex The Warsaw Hub (Ghelamco, buildings B and C with 43,400 sqm and 45,600 sqm, respectively), Biura przy Warzelni (Echo Investment, 24,000 sqm) and the next phase of The Park (White Star Real Estate, 10,000 sqm).

The office development pipeline totals close to 590,000 sqm which is due for delivery in 2020-2022. Cushman & Wakefield estimates that Warsaw will see the completion of almost 355,000 sqm in 2020 and approximately 340,000 sqm in 2021.

“Given the current pandemic situation and subdued occupier activity, we expect a limited number of new projects coming onto the market in 2022-2024, which is likely to result in a supply gap in that period,” says Jan Szulborski, Senior Consultant, Cushman & Wakefield.

Vacancy rate

Uncertain market conditions and weaker occupier activity in the last two quarters have caused Warsaw’s vacancy rate to reverse its downward trend. Unoccupied office space increased in Warsaw by more than 110,000 sqm in the last three months, bringing the capital’s total amount of vacant space to 559,200 sqm. Only around 8% of that volume was in projects completed in Q3 2020. The higher space availability pushed the vacancy rate up by 1.7 pp quarter-on-quarter to 9.6% at the end of Q3 2020.

In addition, the Warsaw office market has seen was a notable increase in sublease listings in recent months. The total volume of office space for subletting amounted to more than 85,000 sqm in Q3 2020, which represented an over 74% quarter-on-quarter increase in the availability of such space.

Take-up

The lockdown period and the uncertainty of the economic impact of the coronavirus pandemic pushed some tenants to temporarily withhold their decisions regarding lease negotiations. Gross take-up climbed to 447,500 sqm in the first three quarters, representing a 35% decrease on the same period in 2019. In Q3 2020 alone, total leasing activity hit 113,200 sqm, down by 65% on the same period in 2019. The considerable percentage fall in the transaction volume year-on-year in the last quarter results, among other things, from the record occupier activity in Q3 2020.

The previous structure of occupier demand which used to be dominated by new leases changed in Q3 2020. While new lease agreements accounted on average for 61% of all transactions in the last five years, they made up 48% of total take-up in the three months to September 2020; lease renegotiations and expansions accounted for 48% and 4%, respectively.

“We expect this trend to continue in the coming quarters as some tenants whose leases are due to expire soon may opt for short-term extensions,” adds Katarzyna Lipka, Head of Consulting & Research, Cushman & Wakefield.

Rents

Due to the worsening sentiment of market participants, prime headline rents edged down by €0.25/sqm/month, standing at €23.75/sqm/month in the centre and at €14.75/sqm/month in non-central locations.

“The correction to rental rates was caused by an increase in sublease listings and the growing pressure on developers to provide lease incentives. Looking ahead, further corrections to commercial conditions are likely in the coming quarters if the downward trend in demand for office space continues and the economy remains stuck in low gear," adds Jan Szulborski.