Warsaw office market perspectives - Q4 2021
Pandemic uncertainty continues to affect developer activity in the capital's office market. Will it be felt by tenants looking for offices in the coming months?
2021 was another year marked by the COVID-19 pandemic and related decisions. In the first three quarters of the year, the number of companies implementing a hybrid working model, e.g. in the 3+2 formula, began to increase, but with the next wave of the pandemic, the last three months of the year saw a return to a predominantly work-from-home (WFH) model.
The ever-recurring uncertainty surrounding the pandemic is affecting Warsaw’s office market, mostly in development activity. Currently, only 310,000 m² of space is currently under construction, the market’s lowest level since 2010.
As a result of this slowdown in development activity and the supply gap forecast in 2023, we can expect a decline in the vacancy rate. This will be particularly visible in areas outside the city centre, where tenants looking for space in new buildings will have a very limited choice. At the end of 2021, the vacancy rate stood at 12.7% (12.9% in central zones and 12.4% outside the centre), an increase of 2.8 p.p. y-o-y, and 0.2 p.p. compared to the previous quarter. This is also the highest level of vacant space since October 2017. However, a gradual decrease in the vacancy rate is expected in the following years. It is also worth remembering that in the next two to three years we will observe rising vacancy rates in older buildings that do not meet the requirements of tenants in terms of, for example, energy efficiency, available technology or arrangement possibilities.
In 2021, the highest transaction rents for prime office properties were stable and at the end of the year ranged between € 18 and € 24 per m²/month in the city centre and up to € 16 per m²/month outside it. In the next few years, however, we expect rental rates to rise, particularly in prime office buildings.
The office sector remains one of the key drivers of Poland’s investment market. Office investments totalled €438 million during the final quarter of 2021. This brings the total for the year to €1.7 billion, significantly down from the exceptional levels of activity in 2018 and 2019, but still close to the ten-year average. Currently, well-located, low risk, grade A buildings with secure long-term income, let to strong covenants continue to attract a great deal of interest. Therefore, investors have mainly been looking at the major office markets – Warsaw and Kraków.
Transactions concluded in Warsaw accounted for 72% of turnover. In fact, H2 2021 alone saw transactions involving some of the most prestigious Warsaw locations.
In Q4 2021, prime office yields in Warsaw were being discussed at 4.50%.