Poland’s Office Market: Drawing Investor Attention Amidst Favorable Trends and Challenges

Polish Office Real Estate Market Poised for International Interest Amidst Economic Shifts

As financing costs exhibit a declining trend as anticipated, coupled with a steady uptick in rental values and a growing sense of stability in geopolitical affairs, experts from Baker McKenzie suggest that the Polish office real estate market may witness heightened interest from international investors in the coming years. Despite the economic headwinds precipitated by the COVID-19 pandemic and the recent escalation of conflict in Ukraine, Poland retains its allure as an attractive investment destination, buoyed by its resilience and robust fundamentals.

One of the emerging challenges facing the Polish office real estate sector is the imperative to modernize older office buildings and align them with the principles of sustainable development. This mandate underscores the evolving priorities within the market, as stakeholders increasingly prioritize environmental sustainability and energy efficiency in building design and operations.

Despite the broader economic slowdown and shifts in working patterns induced by the pandemic, Poland continues to attract interest from both domestic and international investors. While the adoption of hybrid working models has tempered demand for office space to some extent, the market remains buoyant, fueled in part by the presence of a thriving start-up ecosystem. Polish start-ups, eager to secure attractive office spaces conducive to collaboration and innovation, continue to drive demand within the market, presenting opportunities for landlords and developers.

Moreover, foreign investment funds, which had exhibited caution in recent years due to macroeconomic and geopolitical uncertainties, are gradually re-entering the Polish real estate market. This resurgence reflects a growing confidence in Poland’s economic resilience and long-term growth prospects, as well as a recognition of the inherent value offered by the country’s real estate assets.

Reflecting on the market dynamics, Weronika Guerquin-Koryzma, partner at Baker McKenzie overseeing the real estate practice, emphasizes the resilience of the Polish office real estate market amidst prevailing challenges. “Before the onset of the pandemic, the Polish office real estate market was characterized by robust growth, emerging as one of the fastest-growing markets in Europe,” notes Guerquin-Koryzma. “The current phase represents a correction from that period of rapid expansion, as we gradually transition towards a new normalcy.”

Importantly, Guerquin-Koryzma underscores the fundamental strength of the Polish market, emphasizing that despite the slowdown, there has been no widespread sell-off of distressed assets. Instead, the market continues to demonstrate resilience and stability, with the ongoing adjustment representing a natural phase of maturation rather than a precipitous collapse.

In summary, the Polish office real estate market presents a compelling investment proposition amidst evolving economic dynamics and shifting market trends. With increasing interest from international investors, coupled with a burgeoning start-up ecosystem and a renewed sense of stability, Poland’s real estate sector is poised for resilience and growth in the years ahead. As stakeholders navigate the complexities of the market landscape, opportunities abound for strategic investment and value creation within this dynamic and evolving market.

Office Market in Warsaw: Insights and Trends

Analyses conducted by leading industry players such as JLL and Cushman & Wakefield shed light on the evolving dynamics of Warsaw’s office market, offering valuable insights into trends and developments shaping the sector. In 2023, the office stock in Warsaw experienced a notable decline, shrinking by 40,000 square meters to a total of 6.23 million square meters. This reduction can be attributed to a slowdown in development activity and the withdrawal of certain buildings from use, either for renovation purposes or conversion to alternative functions.

Moreover, the office investment market witnessed a marked deceleration, with the total value of transactions plummeting by 80 percent compared to the previous year, reaching a mere €427 million—the lowest level recorded in over a decade. This downturn reflects a confluence of factors, including economic uncertainties, shifting investor sentiment, and evolving market dynamics.

Experts at Baker McKenzie highlight several key factors that could potentially catalyze a recovery in the office property transaction market in the coming year. The initiation of a cycle of interest rate cuts by both the European Central Bank and the US Federal Reserve, coupled with a correction in valuations and a convergence in price expectations between sellers and buyers, are anticipated to stimulate activity and reignite investor confidence. Additionally, changes in bank policies, characterized by a greater willingness to finance real estate projects and explore alternative forms of lending such as syndication, are expected to further bolster market activity.

“The increasing prevalence of syndicated loans in real estate projects suggests that banks are actively seeking avenues to reengage in the market, despite prevailing levels of risk,” notes Weronika Guerquin-Koryzma. “Furthermore, there is a growing appetite for alternative forms of financing, with foreign funds entering the Polish market to offer such solutions.”

The rise of syndicated loans underscores a shift in the financing landscape, with banks adapting their strategies to navigate evolving market conditions and seize emerging opportunities. This trend reflects a broader trend towards diversification and innovation within the real estate financing ecosystem, as stakeholders seek to optimize capital structures and mitigate risk.

Looking ahead, the outlook for Warsaw’s office market remains cautiously optimistic, buoyed by potential catalysts for recovery and ongoing efforts to adapt to changing market dynamics. By embracing innovation, leveraging strategic partnerships, and navigating regulatory complexities, stakeholders can navigate the challenges and capitalize on opportunities presented by Warsaw’s dynamic office market.

Shifting Dynamics: Assessing Changes in the Polish Office Market Amidst External Pressures

The Polish office market is witnessing a notable shift in investor dynamics, attributed in part to the ongoing conflict in Ukraine. Investors from outside the Central and Eastern European (CEE) region have exhibited decreased activity in the market, while counterparts from neighboring countries such as the Czech Republic, Hungary, and the Baltic states—particularly Lithuania and Sweden—have emerged as predominant asset buyers in recent transactions.

Veronica Guerquin-Koryzma, a prominent figure in the real estate sector, remarked, “The market abhors a vacuum. In our view, the period of limbo we are now facing is coming to an end. Both buyers and sellers will want to increase activity, and this will encourage a recovery in the market.” Indeed, the market’s inherent flexibility enables it to adapt swiftly to changing conditions, fostering resilience and facilitating adaptation amidst evolving geopolitical landscapes.

An illustrative example of this adaptive capacity is the increasing allocation of office space to co-working environments—a response to shifting working models and the growing demand from smaller companies for flexible lease arrangements. Additionally, the emergence of mixed-use projects, integrating diverse functions within a single building, reflects a broader trend towards urban multifunctionality.

Moreover, there is a discernible trend across Europe towards repurposing buildings, particularly from office to residential use—an evolution that is also observable in Poland. This reflects shifting market preferences and underscores the imperative for real estate stakeholders to remain agile and responsive to evolving consumer demands.

The evolution of lease agreements further underscores the market’s adaptability, with tenants increasingly seeking shorter lease durations and rights to adjust office space allocations during the lease term—a reflection of the need for flexibility in navigating uncertain external conditions. Notably, there is a growing emphasis on controlling operating costs, particularly utility consumption, as both landlords and tenants prioritize Environmental, Social, and Governance (ESG) considerations.

The quest for sustainability and modernization is further underscored by the impending challenge posed by ageing office buildings, which risk falling short of zero-emission standards in the near future. This trend, prevalent in Western Europe, is beginning to reverberate in the Polish market, prompting stakeholders to confront the imperative of modernizing existing infrastructure and securing the necessary financial resources to do so.

Echoing these sentiments, legal experts at Baker McKenzie concur that modernizing buildings and navigating the financial complexities associated with such endeavors will emerge as critical challenges in the coming years. As stakeholders grapple with these multifaceted challenges, there exists a unique opportunity to foster innovation, drive sustainability, and shape the future trajectory of the Polish office market.

Through collaboration, creativity, and a commitment to adaptation, the industry stands poised to navigate the complexities of the evolving real estate landscape and emerge stronger and more resilient in the years ahead.