Polish Real Estate Market: the Outlook is Still Good

Poland's principal office market is still Warsaw, where in 2022 the demand amounted to 860 thousand sqm, 33 per cent more than the year before, and almost the same as in the record-breaking 2019. In other major markets, such as Kraków, Wrocław, Tricity (Gdańsk, Gdynia, Sopot), Katowice, Poznań, Łódź, Lublin and Szczecin, over 623 thousand sqm was leased, almost 5 per cent more than in 2021. This situation, however, is not reflected in the activity of developers. Inflation-driven high construction costs, including prices of building materials, land, utilities and wages, as well as limited access to debt financing, mean that the scale of new investments is decreasing. As a result, current supply of new offices in Warsaw is at its lowest level in a decade. According to CBRE data, in the last year 236.8 thousand sqm of space was delivered to the market and only 179.7 thousand sqm remains under construction.

As for regional markets, by the end of 2022 there was approximately 583,000 sqm under construction, a year-on-year decrease of almost 21 per cent.

Cities outside the capital are currently seeing 40 per cent less construction than the average over the past five years. It should, however, be emphasised that last year was a very good year for the office market in these cities in terms of completed investments. Over 400,000 sqm of office space was delivered. This is 80 per cent more than in 2021. Thus, at the end of last year, the total stock of modern office space in the eight largest regional markets outside Warsaw exceeded 6.4 million sqm and was almost 3 per cent higher than in the capital.

Given the activity of developers, which is slowing down mostly in the capital, the regions will gradually increase their advantage over Warsaw. Currently, the largest office markets in Poland (after Warsaw) are Kraków with over 1.7 million sqm of space, followed by Wrocław (1.3 million sqm of space). Third place goes to the Tricity, with just over 1 million sqm of office space.

Besides foreign players such as Ghelamco, which has not slowed down and is making further investments in Warsaw, Kraków and Katowice, Polish companies are investing in office space. Those include, among others, developers such as Cavatina Holding, TDJ Estate, BBI Development, Echo Investment or Develia.

Commercial Property Market

The retail space market is also recovering from the hard times caused by the pandemic. In December 2022, the footfall rate reached a monthly average of almost 510,000 visitors per facility. This is over 5 per cent more than in 2019, and this is despite an increasingly competitive market in which almost 800,000 sqm of space has been added since 2019. Meanwhile, cumulative footfall figures for the whole of last year show a 4 per cent increase compared to 2019 and a 24 per cent increase compared to 2021. This proves that Polish consumers are keen to shop in person, which is a good sign for the future of this market.

Along with customers, developer activity has also bounced back, although it is at a much lower level than years ago. In 2022, the developers delivered over 400,000 sqm of retail space, almost 95,000 less than the year before. In practice, this translates into the construction of 33 new facilities, the extension of 12 and the redevelopment of five.

Investment slowdown in this market is primarily the result of its increasing saturation. At the end of 2022, over 12.7 million sqm of modern retail space was available. According to the report 'Retail parks and convenience centres in Poland', the total surface area of such facilities amounts to 84 sqm per 1,000 inhabitants, while in the case of shopping centres saturation levels are already only slightly below the average for Western Europe, at 258 sqm per 1,000 inhabitants. This indicates the direction of market development in the coming years; it will take place mainly in smaller cities, as the greatest saturation of facilities is found in large urban areas. Therefore, in 2022, over 60 per cent of new supply was delivered in cities with populations below 100,000 inhabitants. “Smaller urban centres continue to attract the interest of developers. Retail parks and shopping malls built in small towns, providing access to services, commerce and catering close to home, are still attractive to residents of such small towns and allow them to meet all their basic needs in one place”, says Magdalena Chruściel, Associate Director at the Retail Space Department at Colliers.

Moreover, brands previously available only in large centres are now opening up to customers from smaller towns. One such example is Deichmann.

This is, however, not the only thing that is driving developers to invest in smaller towns, especially in retail parks. In doing so, they respond to the needs of tenants, who are increasingly willing to be based in facilities of this kind. Their reasons include lower rents and operating costs. Prime rents for units of about 2,000 sqm in the most prosperous retail parks amount to EUR 8–12/sqm/month and service charges are at the level of EUR 1.5–2/sqm/month. In comparison, in shopping malls, rents range from EUR 17–108 depending on the location and service charges are up to EUR 20/sqm/month.

Approximately 280,000 sqm of retail space is currently under construction or in the process of modernisation, of which approximately 60 per cent is retail parks in towns with less than 100,000 inhabitants.

Not only will new centres be built, but the trend of modernising existing facilities, especially those over 10 years old, which account for as much as half of the current retail offer in Poland, will become increasingly prominent. As CBRE experts point out, existing retail centres often boast various advantages and crowds of loyal customers. Investors will not want to give this potential up, so they are willing to consider necessary renovations and upgrades, especially if they involve possible savings, e.g. in terms of operation or purchase of utilities.

The largest developments scheduled to open in 2023 include Bawełnianka in Bełchatów and Fort Wola in Warsaw (approximately 23,000 sqm each). As for investors, Mayland is still active – this year will see the redevelopment of Fort Wola in Warsaw. Besides that, new projects will be launched by Shopp City in Gorzów Wielkopolski, Interbud in Lublin, Panova in Kłodzko, Trei Re in Mielec, Saller in Dzierżoniów and LCP in Świdnik.

Warehouses Market

Despite some signs of a crisis, demand for warehouses has remained high. According to analysts at AXI IMMO, gross demand in 2022 reached approximately 6 million sqm, the second highest in the sector's history. It was partially driven by an influx of new tenants, due to the outbreak of war in Ukraine. Indeed, the Russian aggression resulted in increased interest in warehouses, coming from companies withdrawing their operations from the east of Europe (Russia, Belarus and Ukraine) as part of the so-called reshoring, as well as companies and organisations that were ready to provide humanitarian aid. The crisis also strengthened the perception of Poland as a mature warehousing market, ready to welcome new investors within the framework of the developing friendshoring trends. Friendshoring involves establishing logistics networks in countries that maintain economic, political and military cooperation. One example of production-related friendshoring is the relocation of MAN electrical wiring harnesses production from Ukraine to Poland. In addition, in terms of rental prices and labour costs, the Polish warehouse market still remains attractive compared to Western Europe, even despite rising inflation. It should be added, however, that in the last year, rental rates have risen by 20 to 30 per cent, depending on location. Besides the financial aspect, an important factor driving tenant interest is Poland's location – close to Western European sales markets – and its developing transport infrastructure.

Last year, investors delivered more than 4 million sqm of new warehouse space. Thus, the market already has 28 million sqm to offer. The largest centres in this market continue to be those of the so-called Big Five (Warsaw, Upper Silesia, Central Poland, Lower Silesia and Poznań), with Eastern Poland and Western Poland joining the group of regions with more than one million square metres.

A further 4 million sqm, less than in previous years, is currently under construction. A year ago, it was about 1 million sqm more.

Low availability of construction materials, their prices and the difficulties associated with financing warehouse facilities contribute to this situation. The matter of access to new land for construction is also not inconsequential.

As Anna Głowacz, Head of Industrial – Leasing Agency at AXI IMMO Group, explains, due to high geopolitical uncertainty and a more challenging macroeconomic situation, developers had to face increased requirements expected by the banks as early as 2022. The ratio of securing the investments with pre-let contracts rose from 30 per cent to 50 per cent.

Stabilisation of tenant demand is also possible in the coming months.

The most significant investors include the American Panattoni Development Company, Segro, which operates in the Central European market, Prologis, the international Goodman Poland group, Hillwood, P3 Logistic Parks Poland, or the MLP Group.

Poland is Still Attractive

It should be emphasised that Poland is a destination of choice not only for new projects. Investors are keen to invest their capital here by purchasing turnkey developments. This means that the real estate sector is still an excellent safeguard against inflation, boosted by rising rents, among other factors. By the end of September, the total volume of transactions in the Polish market exceeded EUR 4.3 billion (commercial and residential real estate). This represents an increase of over 20 per cent compared to 2021. In the fourth quarter, the value of investments amounted to EUR 1.5 billion. Thus, according to Avison Young, the entire year closed at over EUR 5.8 billion. Admittedly, this is an improvement on 2021, when total investments value amounted to EUR 5.7 billion. It is, however, also below forecasts from the beginning of last year, when experts were hoping for a figure of EUR 6.5–7 billion. Fewer deals were also completed, 122 versus 166 in 2021.

Michał Grabara, Director of Capital Markets at Knight Frank, points out that, on the one hand, investors want to invest in Poland because of its relatively attractive prices and stable development prospects; on the other hand, they are aware of global challenges that affect Poland. These mainly include rising interest rates which translate directly into higher financing costs and thus lower returns. This is compounded by energy prices, which have an impact on operating costs, as well as a lack of global macroeconomic stability.

These are not the only factors considered by potential investors, though. Things that still matter to them are location, quality of the property and, recently, the viability of tenants themselves has also become crucial.

If we take a broader look at the real estate market, the office space sector recaptured its leading position in 2022. The total value of transactions reached EUR 2.1 billion. Second place goes to warehouses, which sold a total of EUR 2 billion worth of property, and third place to retail property, with EUR 1.5 billion. As for rental flats, according to Avison Young's experts, there were 7 transactions for a total of EUR 150 million, which is the highest result ever recorded in Poland. Who invests? Invariably, Europe remains the main source of capital, including investors from the Czech Republic and Hungary. Besides those, there are investors from Poland, North America and Asia. In general, these are the entities who are already present in the region and continue to buy in Poland. They are the ones who, thanks to their experience and local savvy, decide to enter into transactions, as opposed to other groups of investors who take a wait-and-see approach. This does not mean, experts say, that there are no new investors coming to the market. Funds from Lithuania and Israeli capital are becoming increasingly active.

In turn, Victoria Ormond, Partner, Head of Capital Markets Research, notes that the office sector in Poland will be the main target of investment and capital management companies from the Czech Republic, Hungary and Austria, as well as German investors. American capital looking for bargains, on the other hand, will be interested in the warehouse market.

According to Avison Young experts, the slowdown in the investment market will last until the middle of the year. In the second half of the year, interest rates are expected to stabilise, affecting financing, which will also be reflected in prices. Poland was even ranked fifth, after the UK, Germany, France and Spain, among the countries to which real estate investors will turn this year, according to the CBRE report 'European Investor Intentions Survey 2023'. Poland managed to pull ahead of the Netherlands, Switzerland, Norway, Ireland and Portugal, among others. However, experts point to a new trend, manifested in a profusion of investments based on repurposing developed land. This is linked to the decreasing supply of empty plots, which are also of interest to investors. An example of this new trend is the purchase of the Land shopping centre in Warsaw's Służewiec district by Belgian developer Ghelamco. Once the existing building is demolished, a mixed-use project offering over 37,000 sqm of office and retail space is to be built on the site.

The real estate market responds to the needs of tenants. ©℗