The office real estate market in regional cities in Poland is currently experiencing a shift due to stabilization of vacancy rates and limited developer activity, according to a report titled „At a Glance – Office Market in Regional Cities in the Second Quarter of 2024“ prepared by BNP Paribas Real Estate Poland.
Expanding Office Resources in the Region
As of the end of June 2024, the total modern office space in eight major regional markets outside Warsaw (Krakow, Wroclaw, Tricity, Katowice, Poznan, Lodz, Lublin, Szczecin) amounted to over 6.73 million square meters. In the second quarter of 2024, five new office projects with a combined area of 30,000 square meters received occupancy permits.
The office space resources in the regions were expanded by B10 in Wroclaw (14,000 square meters, Vastint), Willa Leona Rappaporta in Lodz (7,700 square meters, Bodex), Silk in Tricity (5,500 square meters, LPP), Sky Garden in Szczecin (1,800 square meters, Idea Invest), and Roko Office Point in Krakow (1,400 square meters, Roko).
Ewa Nicewicz, Senior Consultant, Office Leasing Department at BNP Paribas Real Estate Poland, explains that the decrease in developer activity in the regional office market, similar to the trend in the capital, can be attributed to various factors such as limited land availability, higher interest rates and financing costs, as well as hybrid work arrangements leading to reduced office space requirements by some tenants.
Moderate Demand for Office Spaces
The total volume of office leasing transactions in the second quarter of 2024 reached nearly 146,000 square meters, representing a 4% increase compared to the previous quarter but a 13% decrease compared to the same period last year. The highest demand for new spaces was observed in Krakow (49,000 square meters), Tricity (32,000 square meters), and Wroclaw (24,000 square meters).
Experts at BNP Paribas Real Estate Poland point out a trend of tenants reducing their leased office space.
According to Ewa Nicewicz, „In regional markets, tenants are cautious about relocation due to high fit-out costs, and the prevalence of hybrid work has led to a 25-30% reduction in office space. The average size of leased office space in regional markets in 2024 is 950 square meters, compared to over 1,700 square meters in 2020 and 2021.“
Renewals of lease agreements accounted for 51% of all transactions, while new contracts made up 38% of the market activity. Some of the largest lease transactions in the second quarter of 2024 include renewals by Aptiv Services Poland in Enterprise Park F in Krakow (10,000 square meters), Takeda in Sterlinga Business Centre in Lodz (5,700 square meters), and IBM BTO in Newton in Krakow (5,000 square meters).
Vacancies Persist
As of the end of June 2024, there were over 1.19 million square meters of vacant office space available for immediate lease in the eight major regional markets, resulting in a vacancy rate of 17.7% (a decrease of 0.1 percentage points compared to the previous quarter but an increase of 1.1 percentage points compared to the same period in 2023). The vacancy rate remains high, especially in Lodz (23.3%), Katowice (20.8%), and Krakow (20.2%).
Analysts at BNP Paribas Real Estate Poland predict that the availability of unoccupied space will persist in the coming months, and vacancies will be absorbed by the market over the next 3-5 years. Older buildings, over 10 years old, have the most significant impact on the vacancy rate, with more than half of their unoccupied space remaining vacant for an extended period.
Location or Modernization?
In the eight major regional markets, 37% of buildings are over 10 years old, while nearly 30% are under 5 years old. While older office buildings offer attractive and well-connected locations, the increasing availability of modern, certified spaces that meet ESG requirements means that older properties will require modernization to retain tenants.
Sara Romanowska, Consultant, Office Leasing Department at BNP Paribas Real Estate Poland, emphasizes the importance of modernization for older buildings to remain attractive to tenants and meet their current needs. She notes that such investments are essential to achieve the goals outlined in the Green Deal and reduce operational costs.
Data shows that by the end of June 2024, the oldest office buildings in the regions accounted for over 40% of unoccupied space. Therefore, modernization efforts are crucial to ensure the competitiveness and sustainability of these properties in the evolving office market landscape.
In conclusion, the office real estate market in regional cities in Poland is undergoing significant changes driven by factors such as stabilization of vacancy rates, limited developer activity, and evolving tenant preferences. As the market continues to adapt to new trends and demands, stakeholders must consider strategies such as modernization and sustainability initiatives to remain competitive and meet the evolving needs of tenants in the future.