An analysis of the office market in a shifting landscape: availability and occupier demand At the end of 2021, Poland’s total office stock stood at 12.2 million sq m, having grown by approximately 1.25 million sq m in 2020-2021.

Text | Jan Szulborski At the end of 2021, Poland’s total office stock stood at 12.2 million sq m, having grown by approximately 1.25 million sq m in 2020-2021. The Polish office market comprises Warsaw and eight regional cities: Krakow, Wrocław, Tricity, Katowice, Poznań, Łódź, Lublin and Szczecin. With over 50% ofthe nation’s total stock concentrated in the capital city, Warsaw is the largest office market in Poland. The biggest regional city office markets include Krakow (13%), Wrocław (10%) and Tricity (8%).

In March 2020, the Polish office market found itself at the epicentre of changes spurred by the coronavirus pandemic, successive lockdowns and the rise of remote working. These factors impacted Warsaw and regional cities alike. The ex tent of the impact, however, varied from market to market and largely depended on the growth phase of each at the outbreak of the COVID-19 pandemic.

WARSAW AND REGIONAL CITIES Warsaw saw a record level of occupier demand in 2019 with over 877,000 sq m of office transactions – the highest result in its history. Meanwhile, supply constraints in 2018-2019 pushed the capital’s vacancy rate down to 7.8% in Q4 2019, its lowest since 2012. Regional city office markets repor ted strong growth in the last decade, with some markets more than doubling or even quadrupling in size. Interestingly, the total office stock in Krakow and Wrocław surpassed the one million square metre mark in under ten years and amounted to 1.4 and 1.2 million sq m at the end of 2019, respectively. The rapid growth in supply in the regional city office markets was fuelled by more and more office space requirements coming from the business services sector, which is the main driver of demand in regional cities. ARE WE AT RISK OF AN UNDERSUPPLY? At the end of 2019, Poland’s office development pipeline comprised 89 projects with a combined area of 1.6 million sq m, most of which were under construction in Warsaw (28 projects), Krakow (13), Tricity (15), Łódź (10) and Katowice (10). Of that total, more than 68% are projects sized over 10,000 sq m. The volume of space under construction was in line with the historically high demand for office space and the continued influx of investments into the business services sector in Poland. The first case of COVID-19 in Poland was reported in March 2020 and the country soon went into its first lockdown, which had a significant ripple effect on the growth of its office market.

The COVID-19 pandemic impacted the supply side of the office market in two time frames. In the short term, no legislation that could have delayed construction works was introduced during the first national lockdown. However, completion of some projects was pushed back from the second to the third quarter of 2020 due to protracted administrative procedures, limited labour availability and potential disruptions to supply chains. Having said that, most projects scheduled for delivery in the second half of 2020 and in 2021 were completed on time thanks to high prelet levels. Due to economic uncertainty and the more subdued demand for office space as tenants temporarily shelved expansion plans, new projects planned for 2020-2021 were mothballed, which in the longer term will result in an undersupply in 2023-2025. The number of projects breaking ground has fallen since 2019. Atthe end of 2021, the development pipeline in the largest Polish cities stood at 980,000 sq m of office space which was scheduled for completion in 2021–2024. Cushman & Wakefield estimates that 2022’s new office supply will amount to 750,000 sq m. However, given the turnaround times of office projects, a substantial proportion of developments underway were commenced in the prepandemic environment. Cushman & Wakefield forecasts that new office completions in 2023 will provide approximately 180,000 sq m, which will represent a significant fall in supply. The weaker supply will result from adjusting the number of new projects to the current demand level and the growth in construction, energy and labour costs, which accelerated further following Russia’s invasion of Ukraine in February 2022. According to estimates from Cushman & Wakefield, the tight development pipeline is likely to persist until 2025.

The high levels of new supply in 2020-2021 and the muted demand since the onset of the pandemic pushed the overall vacancy rate up to 13.4% at the end of Q4 2021, an increase of 4.5pp on 2019, with this growth varying by market and impacted by the volume of new completions scheduled for delivery in the last 24 months in each market, prelet levels and occupier demand for office space. sublease or shortterm lease renewals in exchange for additional financial incentives from landlords. As a result, regearing and renewals accounted for a large share of office take-up both in 2020 and in 2021 compared to pre-pandemic.

Despite ongoing uncertainties, leasing activity in 2021 improved by 5% over 2020. As expected, the Polish office market bounced back in the second half of 2021 following a drop in occupational demand has not offset absorption whose current decline illustrates cuts and decisions made during the hardest period of the pandemic. Additionally, due to rising office construction and fit-outs costs, new leases tend to be made for 7-10 years rather than the typical five years to allow for depreciation of the higher spend.

CAUTIOUS TENANTS In 2020, occupier transactions in Poland’s nine core office markets totalled 1.18 million sq m, down by 24% on 2019. However, it is worth noting that 2019 was a record year in terms of office take-up and preliminary forecasts predicted even a twofold decrease in leasing volumes as in the second half of 2020 we saw

very cautious activity among tenants with regard to making longterm commitments, attempts to downsize offices through marketing some space for activity in 2020. However, it has not recovered to prepandemic levels yet. The dwindling supply has not fully offset rising vacancy rates and the growth in THE PROSPECT OF HIGHER ASKING RENTS The pandemic has also solidified the hybrid work model, especially among the largest office users, driving further the evolution of an optimal work model which is being increasingly suited to the type of work performed – not only within separate sectors but also within each organisation. This – depending on decisions taken – will either increase or decrease demand for currently used office space. Office rents have remained relatively stable for the last 24 months, both in Warsaw and in regional cities. The outbreak of the COVID-19 pandemic pushed Poland’s inflation to new highs, with Russia’s invasion of Ukraine exacerbating the negative impact of the rising inflation rate on the Polish economy. High inflation will push up the costs of new projects for both developers and investors. Rising costs are very likely to translate into higher asking rents in the coming months, particularly in new office projects.

To sum up, business hates uncertainty and the office market is relatively highly susceptible to changing macroeconomic indicators. Nevertheless, the cautious recovery in office demand and the low level of new supply in the next three years will allow for a gradual absorption of available office space both in Warsaw and in the regional city office markets, as well as a gradual return to a healthy balance between supply and demand.

Jan Szulborski | Senior Consultant, Consulting & Research, Cushman & Wakefield