Coronavirus Market News

Office market of the post-covid era

Bartłomiej Zagrodnik Walter Herz

Due to the pandemic, the office market has slowed down and there has been a widespread verification of office demand among tenants. Many companies will not return to the previous model of functioning and the system combining office and remote work will become more important.

The office market has slowed down, but its prospects are not bad

After the companies efficiently switched the mode of operation to remote work, today we can observe the following waves of returns to offices. Also, after a period of stagnation, the interest in office space is increasing. Tenants are willing to renegotiate lease terms, as well as rearrange the occupied space. One cannot fail to notice that the role of location in the selection of real estate has increased even more.

In general, the shape of the office market is most strongly influenced by two trends today, that is the pursuit of cost optimization to reduce financial risk and efforts to ensure the safety of people returning to the offices.

From the very beginning of the quarantine, we were dealing with high activity of tenants who asked landlords about rent reductions. When it comes to our clients, however, we rarely encountered a situation where companies would like to terminate lease agreements or drastically reduce office space in order to reduce expenses. Previously implemented liquidity solutions, such as the possibility of postponing payments and schedules or dividing payments into installments, as well as temporary lowering of rent, reductions and subletting space, were certainly helpful in this.

However, the lockdown did not interrupt the plans of a large number of companies. Not only did they not implement any procedures related to cost reduction, but they efficiently closed processes related to the relocation of their offices, or previously renegotiated lease agreements.

General review of the demand for offices

However, it has to be acknowledged that most tenants are now much more cautious in making decisions. Companies are carefully looking at all of their costs. They implement verification projects in terms of demand for space, based on assumptions about the new way of functioning and operation mode. What their real needs will be, however, remains to be seen in the next phase, when people return to the offices and new habits and expectations of employees are revealed. In addition, the situation is still dynamic. In the following months, many companies will suffer from the suspension of orders or purchases from customers.

We expect renegotiations and optimizations of expenses more than ever before, mostly related to searching for savings. This may bring more popularity to office buildings located outside the city centers and an increase in interest in flex offices, which have to change their model of functioning a bit due to the market collapse. However, moving out of the offices on a large-scale will not happen.

We were dealing with a threat that nobody expected. Currently, the way of thinking about work in office spaces is slowly changing, because a similar situation may repeat itself. Companies are considering remodeling, both  in terms of offices that need to ensure more space today, and predicting changes related to the new organization of work. In many cases space will most likely be redesigned, and special emphasis will be placed on safety and hygiene.

Offices necessary for interaction and teamwork

The requirements involving personal protection and maintaining the distance between workplaces mean that the offices will now operate in different hours and monthly cycles. Therefore, creating new business models in managing office space. Many companies will probably decide to disperse structures and the system combining office work with remote work will gain importance.

However, it should be acknowledged that COVID-19 did not bring anything new, it only accelerated the existing trends. After all, home office is nothing new to the companies operating in the IT sector. Other industries have also been working this way before to a large extent. However, depending on the company profile, remote work is more or less effective. Nevertheless, it is certain today that it will be practiced more widely. It has been indicted that about 30 per cent of people are to work permanently from home.

However, teams being present in the office allow for better information flow and interaction. This is especially important for timely projects and complex tasks. Traditional office as a place for spontaneous exchange of thoughts will therefore continue to play a main role. As a result, it seems more likely that the companies will maintain offices for their headquarters and smaller local branches, which will be accompanied with remote work positions.

Certainly, the current situation will contribute to accelerating the digitization of many processes, and thus, also changing the way services are provided. The use of advanced smart phone applications that help to improve office functionality and communication between employees will also become increasingly important in planning.

Inevitable decline in demand

As for the absorptive power of the market, in my opinion the demand for offices will decrease and the vacancy rate in Poland will increase. Due to that, many domestic office markets will gain balance and show reasonable indicators, which will only heal them. Until March 2020, the office segment was growing at an unprecedented rate. The market kept breaking records regarding demand and supply. The shopping centers and hotels were among the facilities that immediately experienced the effects of the crisis caused by COVID-19, while the offices did not suffer so severely.

In the long run, however, the office market will also face a large drop in demand. Tenants’ strategy in selecting location will also change significantly. At the moment, decisions related to leasing a new office or extending a lease contract are most often postponed by companies.

The recession will not skip our country, but in Poland and Central and Eastern Europe it may not be as strong as in the euro zone. Therefore, in the long run, the economic slowdown should not have a major impact on the investment appeal of our market. Poland will remain interesting for investors in the commercial real estate segment, which is all the more likely if we consider the high profitability of facilities located in our country.

Development depends on investment financing

Investment financing will be a big challenge for the entire sector. Projects implemented today have financial support and are advanced in terms of the level of commercialization. How difficult it will be to get financing for subsequent investments remains to be seen. The banks are tightening their lending policy and even withholding financing. This will probably affect the market results in the following quarters if the situation does not return to normal. Especially, because the commercial real estate sector, largely financed by loans, cannot count on alternative financial sources in Poland, such as projects initiated in other countries.

Therefore, I reckon this to be the main source of difficulties for the industry and the further development of the office market. If the banks block the inflow of capital for investments, its development will be stopped. However, there is no trouble with the implementation of current projects. Contrary to Italy or Spain, construction sites have not been closed in Poland. Construction works, although to a limited extent, are carried out continuously. Also because of the warm winter. On the other hand, the pace of construction was largely influenced by employees from outside the eastern border returning home and the limited scope of functioning of offices

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