With the planet facing its biggest ever economic wobble, Warsaw’s office sector has been defined by its cautious, wait-and-see approach, a point reflected by a year-on-year slowdown in tenant activity of 31 percent. “Due to the pandemic, companies have started to take a more conservative approach to office demand decisions, postponing them until the situation stabilizes,” says Tomasz Czuba, Head of Office Leasing and Tenant Representation, JLL, a global commercial real estate services company. “As a result, compared to expectations at the end of 2019, demand for offices last year was 29 percent lower and the volume of new supply delivered to the market was 26 percent lower. Looking at developers’ current activity, we can expect a supply gap in the Warsaw office market, especially in non-central locations.”
The uncertainty that has been born from Covid has seen many tenants reassess their needs and place their plans on ice. Despite this, according to insider analysts, Covid has served to simply accelerate a trend that had already been foreseen. “Tenants reacted to the developing pandemic fairly quickly, temporarily withholding expansion or relocation plans,” says JLL’s Mateusz Polkowski. “At the same time, since the beginning of 2020, the vacancy rate began to increase – in the regional markets by 2.8 percentage points and in Warsaw by 1.8 percentage points. It is worth noting, however, that as early as 2019, we were forecasting an increase in this parameter in cities which were experiencing a high level of new office supply.”
Connecting the dots, most would understand this to show the hallmarks of a market heading toward oversupply. However, this is not necessarily the case. In accordance with the most currently available data, developer activity had already been close to being pegged back to a level similar to that registered in 2014. “When we put all these variables together, we say that between 2021 and 2022, 24 percent less space will be delivered to the market than was forecast in 2019,” says Piotr Kamiński of JLL’s Office Leasing department. “This, in turn, is likely to translate into a gradual absorption of available office space and will offset the increasing level of vacancy.”
In a nutshell, talk of oversupply could yet be premature.
As has come to be expected, where the Polish capital is concerned the areas most in demand proved again to be Mokotów and the city center, with both accounting for in excess of two-thirds of total demand in 2020 (602,000 sqm). But these constants aside, seismic shifts in thinking have underlined the rapid changes that the market has experienced.
“Last year, brought quite a reshuffling of the demand structure and an increase in the importance of lease renewals,” says Polkowski. “Companies often opted for short-term contract extensions and are waiting for a return to normal before making long-term commitments. One of the key trends was the growing supply of space offered for sublease,” he continues. “Currently, there is approximately 130,000 sqm of such space available in Warsaw, with nearly 60 percent located in the central parts of the capital. The share of sublease space in the total stock fluctuates at around 2 percent.”
Of the deals that were recorded, the largest have included a 46,500-sqm pre-let by PZU of Generation Park Y, a 20,000-sqm sale and lease-back by DSV in Mokotów and a renewal and expansion of 19,800 sqm by Poczta Polska in the Domaniewska Office Hub. “When analyzing 2020, we should also pay attention to the growing popularity of the offer of flexible offices,” adds Czuba. “Such a solution is especially favored by large companies which want to provide their employees with the convenience of working from an office during relocation or when establishing the number of staff they require. Securing the interests of employees gives corporations the opportunity to look for traditional office space with ease. This is something that is clearly visible in the statistics of flex operators, where the average occupancy in the central districts of Warsaw exceeds more than half of the available space, with some buildings having an occupancy rate of up to 80 percent by the end of the year.”
Crucially, no matter how innovative the sector was becoming before Covid, the ongoing pandemic has prompted a collective rethink as to what functions an office should serve. According to the findings of Colliers, the office as we know it will in the future be treated as a place for interaction, creative meetings and the exchange of thoughts and ideas. In this fresh role, it will come to be seen as a factor in improving the team ethos as well as strengthening company identity.
With global research strongly indicating that there will be no return to “the old way of working,” flexibility has now been commonly accepted as the future-forward method that employees should embrace. The concept of remote working will not disappear, and as such firms are being urged to look at their work environment “not as a singular space, but an ecosystem of places, designed and geared up to facilitate an engaged, healthy and effective workforce.” In commercial real estate terms, this will mean that offices of the future need to be prepared to support a variety of interactions – from face-to-face, virtual and hybrid – whilst also being easily adaptable to meet organizational requirements. Indelibly redefined by Covid, the office environment promises to never be the same again. “In the post-pandemic future companies will have to refocus their real estate strategies from planning for efficiency to maximizing resilience,” says Dorota Osiecka of Colliers, a multinational professional services and investment management company. “Creating a flexible and adaptable ecosystem that enables employees to have a voice in where and how they want to work, will be key to maintaining competitive advantage.”
For all that, there can be no avoiding the fact that demand has slowed, and this looks set to be evidenced by a temporary reduction in rental rates for both base and effective rents. “This will affect virtually every class of office building, excluding those developments whose attractiveness was not significantly affected by the pandemic,” says Polkowski. “We are already seeing significant pressure on rents in older buildings and developers are applying very aggressive financial policies in an attempt to secure the first tenants for their ongoing developments.”
Simultaneously, much food for thought has been provided by the supply side. The pandemic has not prevented Warsaw from growing yet further, and that’s been especially true of the Wola district with the previous year seeing the launch of Ghelamco’s 89,000-sqm Warsaw Hub and Golub GetHouse’s 47,900-sqm Mennica Legacy Tower. Already, the latter has proved a firm hit and was recognized in February as Europe’s best investment in the Commercial High-Rise Architecture category at the European Property Awards. Cited for its high-quality finishing, state-of-the-art technology and overall functionality, the 140-meter tower has been a welcome addition to the local skyline. Joachim Schuessler, of Goettsch Partners – the Chicago-based architectural practice behind the building – says: “We believe that buildings should reach beyond their sites to enhance and transform the urban experience. With its variety of rich programmatic experiences and its large landscaped public outdoor plazas and thoroughfares, Mennica Legacy Tower demonstrates how private real estate developments can positively impact the city.”
A stone’s throw away, headlines have also been made by Generation Park Y. Receiving its occupancy permit in March of this year, the 140-meter project promises to be Warsaw’s greenest skyscraper and something of a calling card for its developer, Skanska. “Generation Park Y is the culmination of our largest project in Warsaw,” says Arkadiusz Rudzki of Skanska. “We are delivering our flagship project and are pleased that one of Poland’s most important companies, PZU, is on board. The Generation Park complex and its commercial success to date confirm that our strategy of creating future-proof, healthy and safe office spaces, taking into account both the needs of people and the natural environment, brings desired results. In times of uncertainty, we have forged a sure and steady path.”
That Wola has become Warsaw’s business hub is not open to question. What is most striking is the style in which it has done so. Set to join the district’s commercial forest this year is Norblin Factory, an ambitious mixed-use project that will tout a GLA of 65,000 sqm, of which approximately two-thirds has been kept aside for offices. Regardless of its copious office offer, the development will add to the area’s fabric by also presenting retail, F&B, entertainment, culture and wellness functions and will even include a museum honoring the plot’s former role as a historic center of manufacturing. Further down the road, the pipeline will also deliver the long-awaited Varso Tower, a 310-meter behemoth developed by HB Reavis and designed by the acclaimed British studio Foster + Partners.
Despite these headline developments, Warsaw will no longer be a never-ending story of changing horizons – at least not at its current rate. “After several years of steadily increasing developer activity, the volume of space under construction is now falling,” says Czuba. “For several years, under-construction volume in the capital ranged from between 700,000 sqm to 800,000 sqm. It currently stands at around 500,000 sqm. Developers are much more cautious about starting new construction, and only a small number have done so in the past few months.” The investment market, meanwhile, has remained surprisingly robust with 2020 surpassing expectations to record a turnover of nearly €2 billion. Whether or not this year is a similar success depends largely on the success of Poland’s fight against Covid – a return to some semblance of normality is seen as critical.
“An additional driver could be the potential supply gap expected after 2022, which will reduce the already severely limited number of prime projects available on the market,” says Tomasz Puch of JLL. “This may translate into a more aggressive approach by investors when placing bids and, as a result, would mark a return to yield compression.”