ESG Compliance Driving CEE Office Market

While the sector faces a number of challenges, experts express confidence in the future of offices

March 15, 2023Real Estate
On March 2nd, members from GRI Club CEE gathered in Warsaw for a collegial discussion on the future of CEE office markets in the region. Co-hosted by Wolf Theiss, the event was co-chaired by Adrian Karczewicz (Skanska Commercial Development Europe), Anna Tomowicz (Wolf Theiss), Antonio Pomes (Golden Star Estate - Poland), Artur Apostol (Globalworth), Dorota Latkowska-Diniejko (REINO Partners), Lisa Zettlin (CitySpace Poland), Noah Steinberg (WING), Piotr Bujak (PKO Bank), and Yotam Alroy (Mindspace). The attendees discussed the wide range of issues currently affecting the sector and how to achieve the best possible performance in the coming year.

Developing Momentum

The entire global office market was hit hard by the pandemic, and although the recovery process has been slow there have been a number of positive developments in the sector, including in CEE. Since January, the region has been seeing a steady increase which has given the participants in the event a degree of optimism for the future. However, global companies are still looking to save costs, which is affecting demand in some areas. Krakow, in particular, is facing a challenging situation, while Warsaw is still widely considered to be the heart of the region.

Despite the current market challenges, there is no evidence of a repricing happening yet. Lending is still available for office projects and refinancing for older schemes. Offices remain a strong asset in CEE, attracting liquidity and investors. There is also an asset value drop of maximum 5%, making it a good asset class to invest in. The attendees made it clear that investors are now highly focused on green buildings and ESG compliance.

Tenant demand is also evolving in a way that must be accounted for. While offices previously needed enough space to accommodate their full staff, clients are now increasingly looking for smaller office spaces for fewer personnel but with access cards for all. This trend is increasing, and real estate developers and investors need to adapt to meet the changing needs of clients.

Lending and Liquidity

The current economic climate presents a favourable opportunity for investing in office projects and refinancing older schemes. This trend has been observed in the Central and Eastern European (CEE) region, as last year's data showed a significant increase in investments in office assets. Although the market is now showing signs of cooling down, financial experts still believe that investing in office properties is a wise decision due to the strong asset value and the maximum drop in value of only 5%. Moreover, office assets are an established and widely understood asset class among investors, making it an attractive option for banks. The abundance of liquidity in the office market also ensures a positive environment for investors to access the necessary capital to initiate or expand their investments.

Around 95% of capital inflow to the region comes from international sources, with only 5% coming from within CEE. This influx of capital is creating exciting opportunities for real estate investors looking to profit from the region's burgeoning office market.

One of the areas where these opportunities are particularly evident is in rental properties, with increases being observed not only in Warsaw but also in Poznan and other regions of CEE. However, the attendees noted that investors looking to capitalise on this trend should be aware that the supply of available rental properties in regional cities is limited, creating a challenging situation when it comes to profiting from rental increases in these areas.

Growing tenant demand for environmentally sustainable and socially responsible properties is driving a surge in demand for ESG-certified properties in the region. This trend is further increasing the demand for available properties, especially those that meet the ESG criteria, making it challenging for investors to find profitable rental opportunities.

CEE GRI 2023

Greening Offices

ESG compliance is becoming a major driver of demand in the real estate industry, and many investors in the region are now exclusively interested in compliant buildings. This trend is also being spurred by banks, which are offering green loans that incentivize investors to prioritise environmentally friendly projects.

There is a wide variation between cities in this regard - while there is no visible development in Bucharest, Warsaw is currently experiencing a lot of growth in this sector. Meeting this demand will require developers and investors to consider transforming existing facilities into environmentally sustainable structures. This will necessitate significant investment and adjustments to existing infrastructure, but it is a major requirement for long-term sustainability.

In addition to environmental concerns, energy costs are also a crucial issue for developers and investors in the sector. Energy costs have risen steeply, and this trend is expected to continue in the future, with costs predicted to double by 2024-25. Developing buildings that can significantly reduce these costs is essential to the long-term profitability and success of such ventures.

One possible solution discussed by the members could be to incorporate Photovoltaic (PV) energy technology into building designs. However, banks may be hesitant to finance PV energy projects due to the potential impact on construction costs. Nonetheless, reducing energy consumption through the implementation of sustainable technologies could have notable cost-saving benefits.

Office Evolution

While the CEE office market has faced numerous challenges due to the pandemic and cost-saving measures by global companies, experts remain optimistic about its future. Office assets continue to attract liquidity and investors, with lending still available for projects and refinancing. However, the market is evolving, with a growing focus on ESG compliance and sustainable technologies. Meeting these demands will require significant investment and adjustments to existing infrastructure, but will be necessary for long-term sustainability and profitability. While the market is showing signs of cooling down, the region's burgeoning office market and influx of international capital continue to present exciting opportunities for real estate investors.

Sharing insights and strategies about future challenges is essential for success going forward, don’t miss out on the unique opportunity to join industry leaders from across the region at CEE GRI 2023 on May 10-11 in Warsaw, Poland.

Written by Rory Hickman