Tenants cannot afford to make mistakes or lose top talent. Corporations are ready to give up some space to adapt to smaller budgets, but now, more than ever before, they are targeting offices in prime locations and modern ESG-compliant buildings, says Anna Szymańska, Head of the Office Department at Newmark Polska.
What type of offices are tenants inquiring about in tough times?
The best. With good public transport connections. And in the capital - close to metro stations.Office buildings near Daszyńskiego Roundabout are an excellent example - they have always attracted strong interest and were leased very quickly. Many companies have moved here from Industrial Służewiec, for instance. Corporations are ready to give up some space to adapt to smaller budgets, but now, more than ever before, they are targeting offices in prime locations and modern ESG-compliant buildings.
This is also the reason why most relocating companies will move out from peripheral locations to lease space closer to the city centre. A better office will improve the chance of recruiting talented professionals who also have higher expectations. This trend is particularly notable in sectors competing for talent such as IT and banking. They will opt for prime buildings with easy access to services and trendy places. Our experience shows that employees also value easy access to healthcare centres, drug stores, gyms, restaurants, canteens or cafés.
How have offices changed in the last few years?
I guess it is crystal clear to everyone now that hybrid working which was originally intended for the lockdown period will stay with us longer. For over three years companies have been carefully examining their needs and possibilities and learning how to combine in-office and remote working. As a result, offices have also had to change. Organizations are increasingly transitioning from assigned and customised desks to activity based working. Looking ahead, we will continue to see offices transform into spaces fostering integration, creativity and teamwork.
Many companies have failed in the face of rising occupancy costs, making a stronger case for the hybrid model…
That’s why they ask employees to work two or three days from home to make some savings. And, as you know, the office market has been hit particularly hard by rising service charges which have increased over the year from under 20 to up to 40 zlotys per square metre in some locations. Some companies have downsized their offices or consolidated two or three locations into one. Having a similar headcount in a smaller office, they need to invest more energy in utilizing the resources they have. And this is where various types of IT systems and apps come in handy, allowing employees to book desks, meeting rooms, lockers or parking spaces on their own. The limited availability of parking lots is likely to be an issue in case of space consolidations.
Occupier demand on the Warsaw office market has returned to pre-pandemic levels despite a slowdown in construction activity. Is the capital set to experience a supply gap?
Companies looking for large offices are already facing a limited choice, especially in central locations. There is currently around 180,000 sqm under construction in Warsaw; of that total, only 60,000 will come on stream this year. Preliminary forecasts show that the supply gap will last until 2025, but the market is evolving and there is no certainty that all projects will be completed on schedule. Due to supply constraints, some companies have mothballed relocation decisions for two or three years. They don’t want to lease when the choice is limited and compete with others for available space.
Meanwhile, many leases signed in 2018-2019, the peak years for occupier demand, are about to expire. 2018 witnessed a record 1.5 million sqm of office space transacted, followed by close to 1.6 million sqm a year later. This year, most companies will have to decide what’s next.
So what’s next?
The constrained supply of office space as well as high fit-out and maintenance costs will trigger a large wave of regearing this year. Last year, renegotiations accounted for close to 40 per cent of all leases in Warsaw and I think this year will see a similar percentage.
Another increasingly popular option for tenants is a sublease. Sublease availability increased sharply during the pandemic - in Warsaw there was around 130,000 sqm of such space marketed at the time. This trend later weakened to a degree, but companies are now again reassessing their post-pandemic needs and will want to vacate some square metres. If they cannot reduce their office footprints under existing leases, they will try to sublease some space.
Would they make sure to include such an option in new leases?
I think many tenants would, some are doing it. The past three years have transformed the property market - tenants now have different needs and landlords are ready to make concessions they would have thought unthinkable a few years ago. I mean lease flexibility more than anything else. Due to uncertainty about the future or the direction of growth in the coming years, companies expect leases to contain clauses that would give them some flexibility. Without it, we wouldn’t make a step further. When negotiating a contract, tenants want to make sure that they have an option to cut a lease short, take more space or downsize an office. Not everything is possible, of course, but in advising our clients we go the extra mile to get to know their needs and potential development paths, and then to negotiate key lease provisions.
Flexibility is and will continue to be an important factor on the property market for some time to come. Companies want not only flexible leases, but also flexible fit-out options - they order multifunctional furniture that can serve as desks for project meetings at one point and then rearranged for seating or an auditorium.
Regional city office markets surpassed Warsaw in 2022 in terms of the total office stock for the first time in history. What does it say about the market?
While the largest regional cities still have land for office developments, Warsaw is already beginning to experience a shortage of suitable plots. Developers have noticed strong demand in the regions, driven largely by the shared services sector and IT, and are announcing new projects. The BPO/SSC sector has been growing in Poland for many years and still has very strong growth ahead. Due to economic headwinds, international corporations are also looking for savings and are outsourcing services to low-cost countries with a high-skilled workforce such as Poland. That’s why the shared services sector in Poland is growing, leasing offices and hiring. The BPO/SSC accounted for 19 per cent of last year’s total regional office take-up.
Are green leases becoming an office market standard?
Yes, very quickly. Green clauses were something new for us last year, but today they are included in most leases. They are designed to create a sustainable office in terms of fit-out, use and property maintenance. Such clauses are very important to developers because investment funds looking for buildings to buy inquire about them.
Green leases are also for older office buildings. I think that landlords will want to add such clauses to leases in the next two years during renegotiations or will put pressure on tenants to sign relevant annexes. However, in order to adapt to green clauses, the owners of older buildings will need to invest and implement tools to reduce and monitor utility consumption. Non-certified buildings will have to undergo certification, which will have a positive influence on the natural environment and employee wellbeing.