High inflation, as one of the factors, will have a huge impact on tenants’ budgeting of office space costs in the near future.
The first and second quarters of 2023 will be decisive for the office market – the indexation of rents may reach up to 9%. In addition, an increase in operating costs through updated utility rates is certain, and the new minimum wage rate will be taken into account. The unstable euro exchange rate is also a major challenge. And in most cases, rent is converted from EUR to PLN. Given the above, in some buildings, Avison Young predicts, utility cost rates could rise by even more than 50 percent.
In Warsaw, the spread of office rental prices has never been so wide. In buildings offering the highest standard, located in the very center (CBD), base rental rates are twice as high as in office buildings located farther from the center. For the most prestigious space in buildings in the center, base rents reach EUR 28/sq.m./month, while in Służewiec, Warsaw’s once most popular business district, they fluctuate between EUR 13.0 and EUR 15.0/sq.m./month.
The expected update of rental prices will have a not inconsiderable impact on the planning of expenses that go along with running a business. According to Avison Young, this could cause some companies to reconsider their budgets and turn to cheaper locations.
Prices will be significantly higher, and on top of that, there will be a supply gap in the office market. In Warsaw, it will be felt most strongly between 2023 and 2024. This is because the recent period of upheaval and change has limited the inflow of new investments. In the Warsaw market, only 160,000 sqm of space remained under construction at the end of Q3 2022, while in 2019 more than 800,000 sqm of offices were under construction. In 2023, according to Avison Young’s estimates, Warsaw’s stock will increase by only about 65 thousand sq. m. of space. Some of the more interesting projects preparing for construction are Drucianka Campus, The Form, The Vibe, Port Praski skyscrapers, the “new” Atrium International, and Towarowa 22.
Demand for Warsaw offices, on the other hand, remains at record high levels. Almost 650,000 sqm of space has been leased in 2021. Such high demand meant that space available on the market in new office buildings was absorbed early this year. Now offices in the capital are enjoying even greater success. From January to the end of September this year, more than 600,000 sqm has already been leased. Demand is beginning to outstrip supply, and this is affecting rental expectations on the part of landlords.
Already, as Avison Young points out, an insufficient supply of large office modules in centrally located Class A buildings is forcing tenants to extend their leases. In addition, scarce new supply in the coming months is prompting companies to take steps to secure space for the future. Tenants who decide to relocate often sign contracts for a longer period of time, as long as 7 years, which allows them to reduce the financial expenses incurred in arranging new work space.
The high demand for space, generated by the return of employees to the offices, and the increase in rents and operating fees, which is driving down real estate yields, is motivating investors to make deals in this sector. At the end of September 2022, total office investment volume in Poland reached nearly €1.8 billion, surpassing the sector’s full-year result of 2021. The office sector accounted for the largest share of the pool of all investment transactions concluded in Poland during the period, exceeding 40 percent. Of the 21 office transactions recorded in Q1-Q3 2022, 15 involved regional office markets. Avison Young contributed to this result – the investment advisory team finalized the sale of Wrocław’s most recognizable office building, Sky Tower.
However, such a high volume was achieved mainly due to two spectacular Warsaw transactions. In addition to the historically largest single office asset transaction – the acquisition of The Warsaw Hub by Google for €583 million – the Warsaw market also recorded the fourth historically largest single office asset transaction – Generation Park Y, located at Daszyńskiego Roundabout, which was purchased by Hansa Invest for more than €285 million.
Major institutional investors, however, as Avison Young points out, have narrowed their investment criteria due to the high cost of financing and the need to consider ESG aspects. The increase in construction costs over the past few years, as well as the continued rise in rents, has provided a huge competitive advantage and better returns for owners of existing facilities relative to those newly built.
