WBJ: The vacancy rate in Warsaw’s office property market decreased to 8.7 percent at the end of last year, which is the lowest level since 2012. Can we talk of a supply gap in the Polish capital?

Krzysztof Misiak: When it comes to the vacancy rate, it is expected to decrease even further in the coming months, possibly to record-low levels not seen since the 1990s. As for the supply gap issue, it is very relative. Technically speaking, we can talk of a supply gap in the market in a situation when the absorption level is higher than the total supply of space. It’s worth emphasizing that over the last two years, the absorption in Warsaw exceeded the level of new supply. In this situation, tenants leasing space in new office projects have been vacating areas in older, often less popular buildings.
However, if we talk about the availability of sizable office areas in recently completed and under-construction office schemes in Warsaw, it is indeed limited. What is now a major challenge in Warsaw’s office property market for us as a real estate services firm is to find space for clients with requirements covering more than 5,000 sqm. The significant number of large lease transactions that we have seen in the city in recent months has also narrowed the choice for tenants looking for medium-sized office areas, which applies to central office locations in particular.

Should developers react by delivering more space?

In my opinion, when we look back at the performance of the office sector in the past we will see that increased development activity always gave a boost to the market, even if that meant, in the short term, an increase in the vacancy rate. A situation when tenants have difficulty finding suitable space is not healthy – a 10 percent vacancy rate is said to be healthy and we are already below that level in Warsaw. The 8.7 percent rate is an average – in central locations the rate is even lower, while in Mokotów – still the city’s biggest office hub – it is much higher.

Do you expect developers to launch more projects this year then?

The problem is not that developers are being too conservative, but that they are facing major challenges preventing them from reacting more quickly to the strong demand. Obtaining the necessary administrative permits takes time. Construction costs have risen, which developers are now trying to offset by increasing effective rents. However, the most serious difficulty is the shortage of employees in the construction industry. It is now more difficult to secure a good general contractor than before.
Meanwhile, it is worth noting that the scale of office projects in Warsaw has changed significantly in recent years, with many of the new schemes being high-rise developments. We are talking about construction processes that no longer take the standard one and a half years, but rather two and a half years. Admittedly, the situation in the construction industry is expected to stabilize in the near future, mainly because the boom in the residential sector, which used to drain the market of contractors, seems to be coming to an end.

Do owners of older office buildings in Warsaw find it difficult to lease their properties?

The approach of the owner plays a major role here. If the owner looks after the property in the proper way, for example by renovating the common areas and investing in greenery, and if they devise all kinds of initiatives targeted at the tenants, then the building should not have any problems with leasing. Adapting to clients' needs is the most important thing in the entire process.
Who is now driving the demand for office space in the Polish capital?
Most office space in Warsaw is leased by tenants from the financial sector, including banks and insurance companies. Also, the BSS (Business Services Sector) industry accounts for a large chunk of the take-up volume in the city. Warsaw continues to be an attractive location for international businesses due to its pool of qualified employees. Suffice it to say that such well-known companies as Credit Suisse, J.P. Morgan and Goldman Sachs have leased office space in the Polish capital in recent months.
Have any of the recent office lease deals in Warsaw happened because of Brexit?

There has indeed been talk in the market of the possibility of attracting London tenants to Poland, but such relocation processes do not happen overnight. I have not heard of any companies that would say openly that they want to move their business from the UK to Poland because of Brexit. However, we are in touch with many tenants that have some operations in London and who are saying they want to grow in Poland too. Crucially, very often those companies want to move advanced operations to our country and open knowledge centers here.

Flexible office space operators last year accounted for approximately 20 percent of the total take-up volume in Warsaw’s central locations. Will the sector continue its rapid growth this year?

Definitely, there is still room for growth in the flex sector. Several large lease transactions involving flexible office space operators who are already present in Poland are now being negotiated in Warsaw. We also expect a few more foreign operators to enter the Polish market this year. However, the flex sector’s share in the total take-up volume will in 2019 rather not be as high as in 2018. Last year was unique in that some of the biggest operators, WeWork among them, were building their presence in Poland then and were leasing a lot of space.

Will the Wola district remain the hottest office location in Warsaw in the coming years?

Yes, when you look at the pipeline, most of the major office projects scheduled to launch this and next year are in Wola. Relatively few new schemes are planned in Mokotów, the city center and the Jerozolimskie corridor, the three other big office hubs in the Polish capital. The area between Rondo Radosława and the Dworzec Gdański railway station, where several interesting projects are planned, may become an alternative to Wola.

Is there a chance that Warsaw will see the emergence of other new office locations in the near future? The eastern part of the city, for instance, has recently become more attractive due to the construction of the second subway line…

The creation of new office locations is a slow process. To date, developers have mostly been focused on the left side of the Vistula, adding space in the Rondo Daszyńskiego area. However, we should not forget that there are big residential areas on the other side of the river. The emergence of new office locations in that part of the city would be an interesting alternative for businesses, as many potential office workers would not need to cross the Vistula to get there. We know that a number of major developers are considering launching projects which would be located east of the river.