The effects of the deteriorating macroeconomic situation will probably not be seen in the office market until early 2023, according to PKO Bank Polski’s “Office Real Estate Market” analysis. However, rents are not expected to fall.
The first half of 2022 has so far been the most positive for the office market since the advent of the pandemic. Absorption and gross demand have definitely improved, and from Q2 2022 the market has started to see a decline in vacancy. In Europe, the situation also improved to the point where absorption in most markets is positive. Rents in the country remained stable (in the broad European market they increased by 5% y/y), rising in PLN, according to the report.
Analysts note, however, that the market is waiting for the possible negative impact of the deteriorating macro situation. The impact of this is likely to be seen only in early 2023.
In H1 2022, rents in the country (expressed in euros) both effective and asking rents remained in a sideways trend. Counting in zloty, rents have remained in a mildly upward trend since the beginning of the pandemic. In European markets, on average, rents rose by 5% y/y after Q3 2022. Both in Poland and in Western markets, despite a temporary but strong covidium weakening in the rental market, there have been no significant rent declines. For the next quarters, looking ahead to the end of 2023, we predict further stabilization of rents, possibly a slight increase, especially in the capital. Deterioration of macro sentiment should not quickly translate into increased downward pressure on rents, the report reads.
Analyzing the situation in European markets, they note that the return of absorption to near pre-panic levels is an event still only occurring in the markets of the Central European region. Achieving a pan-European absorption of about 3 million sqm per year seems possible with the understanding that much of this absorption will take place in Central Europe. The situation in the US is worse and may indicate that this market is approaching Peak Office levels.
At the same time, there is an underperformance of markets specializing in IT and bpo/ssc, this is evident both domestically and in other European countries. Workers in the sector are characterized by a high resistance to returning to stationary work, it was also reported.
A leading indicator confirming at least a temporary end to the period of low absorption is gross demand. This indicator for H1 2022 reached a record 982,000 sqm after a 91% year-on-year increase.
“We suppose that the observed consolidation of the hybrid work model as a standard will negatively affect absorption in the long term, but partially compensated by the densification of space due to the implementation of ‘activity-based workplace’ solutions. So far, the market seems to be coping well with the persistence of the hybrid work model without causing deep structural vacancies,” PKO BP analysts wrote.
In addition, the accelerating erosion of old stock is boosting demand for modern space and, as a result of the continued growth of Poland’s office workforce, is keeping absorption at relatively high levels.
At the end of Q2 2022, the stock of modern office space in Warsaw and eight regional markets reached nearly 12.6 million sqm, including 6.27 million sqm in Warsaw. In 1H 2022, the stock increased by as much as 416,000 sqm (332,000 sqm in 1H 2021), a record result for the first half of the year. In Q2 2022 alone, the increase in resources was already limited because it amounted to only 97 thousand sqm.
At the end of H1 2022, the average vacancy rate was 13.56% (up 66 bps y/y). The country’s vacancy rate rose steadily from the beginning of the pandemic until the inflection point of Q1 2022 (vacancy rose 541 bps during this period and reached a historic high of 13.85%). From Q2 2022, the vacancy rate began a slow reduction.
Source: PKO BP and ISBnews
