Record-high inflation is sending office rents ever higher on regional markets, weighing heavy on tenants. The overall vacancy rate edged up by 0.6 pp in Q1 2023, with a supply gap becoming imminent. Despite these headwinds, gross office take-up surpassed pre-pandemic levels and leases are gradually becoming longer.
At the end of the first quarter of 2023, the combined office stock of Poland’s eight core regional cities was 6.47 million sqm. The largest office markets, after Warsaw, are Kraków (1.75 million sqm), Wrocław (1.31 million sqm) and Tricity (1.01 million sqm). New office supply for January-March 2023 amounted to 68,000 sqm, down by 70 pp on the same time in 2022. Kraków led the way for new office deliveries in this period with two completions: Cavatina’s Ocean Office Park B (28,600 sqm) and Inter-Bud’s Fabryczna Office Park B5 (14,000 sqm). The first quarter also saw new space added to the office stock of Wrocław and Tricity.
According to the report’s authors from BNP Paribas Real Estate Poland, over 60% of the office space under construction will come on stream in 2023, followed by 22% in 2024 and 16% in 2025. Wrocław and Katowice, taken together, account for over 50% of the development pipeline. The three largest office buildings under construction in regional cities are: WI-MA in Łódź (33,800 sqm, Cavatina Holding, scheduled for opening in Q4 2023), Craft in Katowice (26,700 sqm, Ghelamco, Q2 2023) and Nowy Rynek E in Poznań (26,450 sqm, Skanska, Q4 2023).
TAKE-UP, SUPPLY AND RENTAL GROWTH
In the first quarter of 2023, gross office take-up in the regional cities totalled almost 175,000 sqm, marking an increase of 13 pp compared to the same time in 2022. This shows that regional occupier activity returned to pre-pandemic levels, surpassing the leasing volume for the first quarter of 2019 by 35 pp. The most active sectors were IT & services and manufacturing, which accounted for 38% of the gross take-up.
New office supply for the first quarter reached 68,100 sqm and was delivered through several office buildings. The largest office completions were Ocean Office Park B in Kraków (28,600 sqm, Cavatina Holding), Centrum Południe 3 in Wrocław (20,850 sqm, Skanska), Fabryczna Office Park B5 in Kraków (14,000 sqm, Inter-Bud) and Officer in Gdynia (4,700 sqm, Panorama/Allcon).
In 2022, prime office rents rose on most of the core regional city markets. Today, faced with rising service charges and rental rates, some landlords are demanding longer leases so that they are able to secure funds for office fit-out projects. Looking ahead, new leases and renewals are likely to be signed for a minimum of seven years in the near future.
AGAINST THE BACKDROP OF RISING COSTS
High inflation rates are having a knock-on effect of office occupancy costs in regional cities. Other factors influencing the office market in the first quarter included rent indexation, rising service charges and an increase in the minimum wage. The report’s authors estimate that the actual growth in service charges will average around 30%, reaching up to 50% for some buildings.
“A supply gap is fast approaching in the regional markets. Tenants have noticed this and are increasingly opting for leases for six to seven years. Not only do longer leases help secure the right workspace, but they also bring financial savings. It is even more significant as tenants are making decisions against the backdrop of rising occupancy and fit-out costs,” says Dorota Fabisiak, Associate Director, Office Agency, BNP Paribas Real Estate Poland.
VACANCIES
At the end of the first quarter of 2023, office availability on the eight surveyed markets amounted to 1.03 million sqm, equating to a vacancy rate of 15.9% (up by 0.6 pp q-o-q and 0.4 pp y-o-y). The highest vacancy rate of 20.5% was in Łódź while the lowest of 3.1% in Szczecin. New office supply pushed vacancy rates up over the quarter in Wrocław (+1.8 pp) and Krakow (+1.4 pp). By contrast, the largest downward movements of 2.7 pp and 2.2 pp were recorded in Szczecin and Lublin, respectively, the two smallest office markets in Poland.
“The past three years saw many changes take place on the office market. Office spaces are being reinvented as both employers and employees are adapting them to new working models such as remote or hybrid working. Offices are competing with employees’ homes and are increasingly successful at this by offering tools and solutions that are not normally found at home while providing a comfortable work environment,” says Agnieszka Witkowska, Consultant, Landlord Representation, Office Sector, BNP Paribas Real Estate Poland.
