Less new space and renegotiations of contracts - the office space market in Warsaw in Q3 2023
As indicated by the latest cyclical report by BNP Paribas Real Estate Poland "At A Glance - Q3 on the office market in Warsaw", little office space was added in the analysed period. The supply gap is a challenge for tenants who, having increasingly limited choice, are inclined to extend their contracts. At the same time, the vacancy rate fell in the capital and the level of rents did not change significantly compared to the previous quarter. Flexible offices and recycled offices are gaining in importance.
Less vacant space and falling vacancy rates.
According to the report, the Warsaw property market closed the third quarter with a total stock of office space of 6.2 million sq m. Only 1,900 sq m of space was delivered as part of the S-Bridge Office II project. Q3, on the other hand, saw the start of construction of the Upper One office and hotel complex, which will occupy the site of the demolished Atrium International and offer 35,900 sq m. However, the authors of the report point to caution on the part of developers in starting new investments. The total amount of office space delivered in the capital's market from the beginning of the year to the end of September was 20,250 sq m, which is a significant decrease compared to previous years, where over 236,000 sq m of office space was delivered in the whole of 2020 and almost 325,000 sq m in 2021.
"The low supply poses a challenge for occupiers looking to find office space by 2026, who have a smaller choice of vacant offices to lease. The stock of available space may be declining, especially as 256,000 sq m is under construction, compared to an average of 800,000 sq m in 2017-2019. However, demand is shaping up well all the time. Since the beginning of this year, leases have been signed for almost 500,000 sq m of office space in the capital's market, which is a good result considering the corresponding period with the record result of 2019, where 688,500 sq m was leased. The supply gap also means that the vacancy rate has fallen to 10.6% and even 9% in central areas. Most office zones recorded a decrease in the vacancy rate compared to the previous quarter, which may exacerbate the problem of a lack of vacant office space to lease in the future," says Małgorzata Fibakiewicz, Head of Office Leasing at BNP Paribas Real Estate Poland.
Demand and rents.
As the authors of the report point out, from the beginning of the year to the end of September 2023, the total demand for space in office buildings reached 496,600 sq m. In Q3 alone, gross demand for office space in the capital amounted to 174,000 sq m, an improvement of 5 p.p. compared to the previous quarter and 36 p.p. compared to the y-o-y demand figures. Nearly 44% of the total lease volume concerned office buildings located in the Centre and Central Business District zones - these are the most popular with tenants. Służewiec is also attractive, where 19% of all agreements concluded in Warsaw between July and September were signed. In Q3 2023, the highest share of the demand structure went to new contracts - 52.8% (including pre-leases), and negotiations - 42.8%. Both expansions and space leased for personal use accounted for 2.2% of the registered demand each.
The past quarter maintained rental fees at a similar level compared to the previous quarter. At the end of September, it was necessary to pay between EUR 26 and EUR 28 per month to rent a square metre in the best location. In contrast, in the youngest buildings five years old and under, the rental cost was between €19.4 and €20.25. In buildings six to 10 years old, the rent ranged between EUR 16.9 and EUR 17.3, and in the oldest buildings, built more than a decade ago, the rates were between EUR 14.6 and EUR 15.2.
Renegotiating contracts as a way to save money>
Between January and June this year, 18,700 sq m was delivered and this is the lowest level of new supply recorded in Warsaw in the first half of the year in over 10 years. Limited supply and the high cost of adapting office space in the capital influenced the fact that the largest contracts signed in Q3 2023 (apart from the pre-leasing agreement in The Form office building) were contract renegotiations.
"Currently, the limited choice in the office market in Warsaw and the much smaller levels of office space being delivered mean that many companies and organisations are faced with a difficult decision regarding the location of their office. Tenants looking for centrally located facilities may have a problem. There are definitely more location choices when looking outside the centre or nearby Wola. In this situation, some tenants are just deciding to renegotiate, which allows not only to extend the agreement for a shorter period (e.g. 2-3 years), but also to optimise the terms of the lease and save on the rental rate," emphasises Ewa Niecewicz, Consultant of the Office Space Leasing Department at BNP Paribas Real Estate Poland.
Flexible offices still on a roll.
As the report shows, the market for flexible offices is evolving all the time and is in demand both by developers, who are increasing the number of tenants and accelerating commercialisation, and for landlords. There are currently more than 30 flexible office operators in the capital, offering 190,000 sq m of space and more than 26,000 workstations. Although the largest amount of flexible space is located in the capital's central business district, more and more such offices are now opening in typically residential areas.
- Short leases and the possibility of renting a ready-made, fully fit-for-purpose office is extremely attractive, especially in the difficult and volatile economic situation in Poland. Operators are responding to the increasing demand for flexible space by offering more and more hybrid concepts. ESG issues are also playing a growing role in this sector. More and more flexible offices are based in facilities that promote and implement green solutions confirmed by international green or sustainable building certificates, explains Klaudia Okoń, Senior Consultant, Business Intelligence Hub & Consultancy BNP Paribas Real Estate Poland.
The importance of office recycling.
The authors of the report point to a new trend on the real estate market, consisting in designing office space in the spirit of less waste. Solutions using reclaimed and recycled materials in office space are gaining importance. This is important because the life cycle of an office space is on average 5-10 years, after which most office equipment ends up as waste. According to estimates by the Environmental Protection Agency, up to 8.5 million tonnes of office assets end up in landfills every year in the US. Therefore, the aim is to maximise the use of available materials, e.g. by using parts of the heating and cooling system or pieces of equipment from a previous tenant. Offices that combine the aspect of responsible sustainable design with functionality, while adapting to the increasing expectations of users, will gain the upper hand. Recycling offices will not only reduce the carbon footprint, but will also be a measurable financial saving.
Author: BNP Paribas Real Estate