Given its significant office supply pipeline, we have revised down our rental forecast for Warsaw offices this year despite a recovery in the labour market. And while we expect rents to pick up in 2022, we think that the shift to remote working will keep a lid on rental growth over the coming years.
- Given its significant office supply pipeline, we have revised down our rental forecast for Warsaw offices this year despite a recovery in the labour market. And while we expect rents to pick up in 2022, we think that the shift to remote working will keep a lid on rental growth over the coming years.
- 2020 was a poor year for Warsaw’s office market. Take-up was the weakest since 2010, falling by nearly 35% y/y. And with around 314,000 sqm entering the market, albeit that 86% was pre-let, the vacancy rate rose by over 200 bps to 9.9%. In turn, prime Warsaw office rents ended the year 0.5% lower.
- We have revised down our rental forecast for 2021 to minus 2% compared to our previous forecast of a 0.5% drop. Near-term economic weakness will continue to weigh on rents. And while we expect a recovery in the labour market later in the year, which bodes well for occupier demand, we don’t think this will be enough to prevent rents from falling. (See Chart 1.) What’s more, the slow start to the vaccination rollout in Emerging Europe means that lockdown restrictions could be in place for longer than we had initially expected, delaying the recovery in economic activity.
- Meanwhile, supply conditions are still unfavourable. Indeed, JLL report that over 700,000 sqm of office space is due to be delivered by the end of 2023, amounting to around 12% of stock. Even assuming some delays, a substantial proportion of the pipeline is set to come to market this year – around 300,000 sqm with an additional 100,000 sqm of delayed deliveries from 2020. Moreover, much of this pipeline is expected in the city centre. As a result, with net additions outpacing net absorption, the vacancy rate is set to edge higher, which will weigh on rents. (See Chart 2.)
- Moreover, there are growing signs that occupiers are rethinking their space needs, which will put further downward pressure on office rents. Agents have noted a sharp rise in tenants subleasing office space in Warsaw. The share of tenant-controlled space in the Polish capital rose from 0.3% of total stock in 2019 to nearly 2% by end-2020, one of the highest shares in Europe. In the past, an increase in subletting has tended to weigh on market rents.
- Beyond 2021, we expect rents to return to growth as the pace of office developments slows. However, given that its share of remote working has been rising and is closer to the euro-zone average than elsewhere in Emerging Europe, we think that the potential for more remote working is high in Poland. Therefore, with occupiers likely to continue to reassess their office footprint over the coming years, we think that net absorption will remain subdued compared to the past. (See Chart 2 again.) As such, we think that Warsaw office rental growth will average around 0.5% p.a. over 2021-25, leaving it as one of the weaker CEE office markets.
Chart 1: Poland Employment & Warsaw Office Take-Up
Chart 2: Warsaw Demand and Supply Indicators
Sources: Refinitiv, Capital Economics
Source: Capital Economics
Yasemin Engin, Property Economist, firstname.lastname@example.org