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Stabilization at Last? – REDD Takes Stock of 2023 and 2024 Trends in the Commercial Real Estate Market

22.04.2024 Reports

“Stabilization at Last?” This question effectively summarizes the dynamics of the commercial real estate market in 2023 and the anticipated trends for the remainder of 2024. Reflecting on the previous year, it’s notable that there has been a reduction in the number of newly completed buildings, reflecting long-term shifts evident since 2020. Consequently, rental prices have experienced a noticeable increase due to rising service charges, presenting a financial challenge for both tenants and landlords. In response to these changes, companies are adjusting by reducing leased space as part of efforts to optimize costs and capitalize on opportunities arising from remote working.

Meanwhile, the future of the real estate market is marked by a heightened emphasis on new technologies and sustainability. This demands that the industry embraces flexibility, innovation, and sustainable management practices.

By the end of 2023, the total office space inventory in the seven primary markets had reached 14.4 million square meters. Remarkably, all major office markets surpassed the 700,000 square meters threshold for the first time, with Łódź joining this group in 2023.

The largest amount of office space is consistently found in Warsaw, where in nearly a thousand buildings there is over 7.5 million square meters. The next cities in terms of supply are Krakow (1.8 million square meters), Wroclaw (1.55 million square meters), and the Tri-City area (1.15 million square meters).

During the same period, 25 office buildings totaling nearly 281.6 thousand square meters were added to the office market in Poland. Among the largest of these are Craft, an office building spanning 26.7 thousand square meters, Building E (26.5 thousand square meters) in the Nowy Rynek complex in Poznań, Cavatina’s Ocean Office Park B in Kraków (24.4 thousand square meters), IGK6 in the Intel Technology Poland complex (23 thousand square meters) in Tricity, and the Kreo office building in Kraków covering an area of 23 thousand square meters.

Since the beginning of 2020, there has been a consistent decline in the number of newly developed spaces, with variations observed across different cities. The most pronounced decrease can be seen in Warsaw, where the volume of supply under construction dropped from 590,000 square meters at the end of 2020 to 180,000 square meters by the end of 2023. Similarly, in Katowice, the volume of space under construction decreased from 150,000 square meters to 65,000 square meters over the same period, while in Kraków, it declined from 154,000 square meters to just 59,000 square meters.

The vacancy rate in the major office markets at the end of 2023 reached 11.5%. However, it varies significantly depending on the city. The lowest rates were recorded in Warsaw (8.3%) and the Tri-City area (10%), while the highest were in Lodz (19.1%) and Katowice (17%). Compared to the beginning of the year, the most significant changes were observed in Katowice (+2.3% pp.), Krakow (+2.4 pp.), and Warsaw (-1.4 pp.).

The average rental rate level in buildings offering office space increased by 2.5% during 2023, reaching €13.57/m². The increase was more pronounced in Class B buildings, rising by nearly 6% (from €10.89/m² to €11.54/m²), while in Class A buildings, it rose by 1% (from €14.47/m² to €14.62/m²). The highest rental rate increases were observed in Katowice (5%), Krakow (3%), and Warsaw (3%), with the lowest increase in Lodz (1%).

It is noteworthy to mention the average duration required to lease office space, as calculated by the proprietary REDD Index. Throughout 2023, its average value ranged between 395 and 439 days. The highest average REDD Index was observed in Wrocław (516.5 days), Katowice (473.2 days), and Kraków (472.7 days).

The present state of the real estate market can be characterized as dynamic, necessitating flexibility from both tenants and property owners. In this environment, innovation, including sustainable considerations, also emerges as pivotal.

“Looking to the future involves two significant considerations,” comments Krzysztof Foks, Head of Research at REDD Group. “Firstly, we anticipate a heightened interest and investment in new technologies. These will play a pivotal role in enhancing efficiency and innovation in property management. Secondly, there is a growing emphasis on sustainability (ESG) issues, compelling companies to adhere to social, environmental, and governance standards.”

Monika Igła, Leasing Manager at Indotek Group: The main challenge expected in 2024 is adapting buildings to comply with ESG standards and regulations. With a portfolio containing “mature” buildings, Indotek is closely monitoring developments in this area to align with evolving expectations. This effort will likely require additional investments in buildings, viewed positively. However, a comprehensive analysis of feasibility and implementation strategies is crucial for older buildings before initiating any changes.

Dorota Mogielnicka, Greensite Consulting: Recently, many office buildings, in addition to environmental certifications such as LEED or BREEAM, are acquiring WELL certification, which emphasizes social and employee aspects. Consequently, an increasing number of buildings are being categorized as green buildings. This trend bears significant importance within the framework of EU legislation and the impending introduction of taxonomy rules, further underscoring the imperative to integrate sustainability considerations at all stages of a building’s lifespan.

Anna Szelc, Asset Management Director, Invesco Real Estate: The most important development in the Warsaw office market in 2024 will be the long-expected supply gap. The reduced supply of square meters of office space was already noticeable in 2023 and is expected to reach a record low level this year. Consequently, there will be a decrease in the vacancy rate, leading to a further rise in rents, particularly in central locations.

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