Despite the COVID-19 pandemic, the sentiment on the Polish office market appears to be optimistic. Total office stock currently amounts to just over 11.3m sqm, with Warsaw the undisputed leader, followed by Kraków. During the first six months of the year, tenant activity reached approx. 667,800 sqm, with new contracts accounting for more than half of take-up. Despite limited new supply (275,700 sqm in H1 2020), the vacancy rate increased to 7.9% (+40 bps Q/Q) in Warsaw and 10.2% (+70 bps Q/Q) in regional markets as at the end of Q2. The real estate advisory firm AXI IMMO sums up the first half of 2020 on the Polish office market.

Four trends on the Polish office market

„During the first half of 2020, we observed four trends on the Polish office market, which will most likely stay with us over the next few months. The first one is the fast-track adoption of remote working, which in many companies should remain permanent as part of a hybrid model. Due to the new situation on the market, some tenants no longer occupy their space in full and are therefore considering subletting it to other entities. This solution could help them cut costs. According to our estimates, space currently on offer in Warsaw on a sub-let basis accounts for approx. one per cent of this market’s total stock. Many companies may re-consider whether to lease one large office or several smaller ones. In the second half of the year, we expect a reduction in new supply. Moreover, a large amount of space available through sub-letting signals an impending rise in the vacancy rate. A possible consequence of this situation will be increased pressure from tenants to reduce headline rents,” says Martin Lipinski, Head of Office Agency and Tenant Representation, AXI IMMO.

A moderate supply slightly increases the total stock

During Q2 2020, Warsaw’s total office stock increased by approx. 100 100 sqm, to 5,687,800 sqm. Four new office buildings were delivered, out of which the largest one is Varso II (HB Reavis), offering 40,000 sqm of space. Among other delivered schemes were Chmielna 89 (Cavatina Holding, 25,200 sqm), Biura przy Willi (Echo Investment, 15,000 sqm) and DSV HQ (Capital Park, 20,000 sqm).

Meanwhile on the eight main regional office markets, total stock currently stands at approx. 5,679,600 sqm. Kraków remains the largest local market (1,483,300 sqm), followed by Wrocław (1,186,100 sqm) and the Tricity (868,400 sqm). In terms of new supply (176,600 sqm in all regional markets in Q2), the largest amount was completed in Kraków (69,100 sqm or 39% of the total), Katowice (31,100 sqm or 18% of the total) and the Tricity (29,900 sqm or 17% of the total). The largest of the 15 projects delivered in the regions was Olivia Prime B in Gdańsk (Olivia Business Center, 25,000 sqm), followed by Krakow’s High 5ive (Skanska, 23,500 sqm) and Face 2 Face A in Katowice (Echo Investment, 19,600 sqm).

High demand in the office market despite the pandemic

Despite the ongoing COVID-19 pandemic, there is high tenant activity on the market. In total, approx. 667,800 sqm of office space was leased in Q2, with 334,800 sqm in Warsaw and 333,000 sqm in regional markets. The local leader was Krakow, were 114,700 sqm was subject to leasing agreements. Take-up in Q2 was mostly due to new contracts (62% in Warsaw, 54% in the regions), followed by renewals (30% in Warsaw, 32% in the regions), and expansions (8% in Warsaw, 14% in the regions).

The largest leasing transaction of 2020 so far is an all-time record pre-lease for PZU in Generation Park Y in Warsaw for 46,500 sqm. In addition, DSV leased 20,000 sqm in the DSV HQ building (Warsaw), ABB renewed its lease for 20,000 sqm in the Axis office building in Krakow, Poczta Polska signed a renewal and expansion agreement in Domaniewska Office Hub in Warsaw for a total of 19,800 sqm and Fujitsu Technology Solutions took 16,300 sqm through a pre-let agreement in the Merger building in Łódź (16,300 sqm). Interestingly, 7 out of 12 transactions over 10,000 sqm were processed in the regional markets, and the IT sector was the most active of all.

1 million sq m available immediately

As at the end of H1 2020, over a million sqm of office space was available immediately on the Polish real estate market. Warsaw had approx. 448,000 sqm of ready-to-let space (7.9% of total stock, +0.4 pp. Q/Q) and the regions – 571,600 sqm (10.2% of total stock, +0.7 pp. sqm). Among the regional markets, Krakow had the largest amount of vacant space at 164,400 sqm, followed by Wrocław with 132,700 sqm. The highest vacancy rate in percentage terms was recorded in Poznań, at 14.5%, and the lowest in Tricity and Katowice, both at 6.1%. Most markets recorded no changes in the average headline rents over Q2.

Forecast for 2nd half of 2020

„Looking at the positive take-up data for the first half of 2020, we must remember that this is a result of negotiations that began before the COVID-19 pandemic. The fact that tenants are so active is the result of previously planned activities. Companies typically research available office space and leasing options about one and a half to two years before their contract expires. Currently, due to the ongoing pandemic, tenants are more careful about changing their offices. The issue of air circulation, as well as occupational health and safety, is becoming more and more important.” said Martin Lipinski.

“The time of great caution is ahead of us. However, the new situation, and above all – the unprecedented rise of the sub-rental market – may prompt some tenants to search for space in a location that was previously outside of their budget. Also, we expect that some companies will choose a flexible office arrangement instead of a traditional lease due to the option to terminate on short notice,” adds Martin Lipinski.

* Data based on Axi Immo and PINK.