Take-up volumes in Warsaw’s office market reached record levels in 2015, thanks to strong demand from the financial, ICT and business services sectors. Nonetheless, the massive pipeline of space due to come onto the market in the next few years is putting pressure on developers. With completions set to break records in 2016, developers are facing the prospect of finding themselves sitting at the weaker side of the negotiation table as occupiers try to push for increasingly favourable leases and rental agreements.

“The city’s real estate market boomed after the country joined the EU and prices spiked,” says Jerzy Kalinowski, a partner at consulting firm KPMG Poland. “Then the financial crisis hit, forcing out some of the old investors as new investors came in, renegotiated existing contracts and gave a fresh dynamism to the market.” 

Record levels

Gross office take-up in Warsaw reached a record level of 833,200 square metres in 2015, up by 36% year on year, according to real estate services firm CBRE, as a sizeable number of tenants extended their existing leases and international companies expanded their footprint across the city. Vacancy rates fell to a record low of 12.3%, with firms belonging to the business services and financial services sectors, alongside IT and telecommunications, making up about two-thirds of the total take-up. Among others, Samsung and Goldman Sachs contributed to boost pre-let leases in Warsaw Spire, a 57,000-square-metre tower developed by Belgian firm Ghelamco that is due to open in 2016. 

“Warsaw is unique because there is still downtown space available for development, which is not very common in European cities,” says Mr Kalinowski. 

The surge of office developments coming onto the market has gained Warsaw a place among the top five European cities with the highest office development activity, after Paris, London and Moscow. Some 400,000 square metres of new office space will be completed in 2016 alone, at least 60% more than the average of the past five years, the reason why “2016 is forecast to be a year of challenges for our market”, real estate company CBRE wrote in its latest Warsaw Office report.

“We expect vacancy rates to go up and reach between 16% and 19% in 2016-17,” says Daniel Bienias, the managing director of CBRE Poland.

Yields in decline

Average headline rents in Warsaw continued the declining trend observed in the past few years and fell to about €19 per square metre in the city centre and €14 per square metre in non-central areas in 2015, according to CBRE figures.

“Rents are hitting a bottom,” says Tomasz Trzósło, the managing director of real estate services firm JLL Poland. “If we take into account all development costs, we are at a stage where developers’ margins are quite squeezed, at about 5% to 5.5% for prime, long leases in good locations.” However, in other eastern European countries (Bulgaria, Hungary, Romania) or in the Balkans (Croatia, Serbia, Slovenia) developers can still achieve 7% to 8% investment yields, according to figures from consulting firm PwC. 

The market in Warsaw may suffer from oversupply, but also from the weakening take-up of financial sector firms, which had contributed significantly to office space demand in recent years.

“We presume that due to changes in the legal and tax environment, the expansion of the banking and insurance sector may slow in coming years,” says Kinga Barchon, a partner at PwC, referring to the proposed taxes on the financial sector that the Polish government is trying to push through.