The growing costs of maintaining office properties mean higher service charges and rental rates for tenants. New office supply remains at its lowest level in a decade, and the prospects for new projects are modest. Developers' plans are effectively cooled down by high and unstable construction costs and high financing costs. However, the demand for attractive office space is very high. Employers, wanting to motivate teams to return to office, arrange increasingly interesting and friendly workspaces.
Demand on the Warsaw office market is already at a record level from before the pandemic.
These are briefly the main factors indicated by Avison Young that shape the current image of the office market in Poland and will have an impact on the situation in the sector in the near future.
Higher lease costs
The first months of 2023 will bring squaring accounts of this year's service charges. Next year’s operating costs will be calculated, followed by indexation of rental rates at the level of ca. 9%. Tenants must take into account the increase in costs, both in terms of contracting new space and renegotiating existing contracts. Higher rental rates, which are already visible in Warsaw, will be accompanied by increase in service charge by 30% or even 50%.
According to Avison Young, building owners can, however, influence their amount to some extent, by optimizing maintenance costs. In turn, companies can look at whether there is a plan to reduce maintenance fees in the building where they decide to locate their office. They can analyze the landlord's ideas for reducing services’ prices that make up operating costs. - This is a very important issue, for both owners and tenants, in the context of economic changes we are facing. Both parties should openly communicate on this issue, in order to be aware and convinced that all the expenses are economically justified – comments Maksymilian Sobczak, Associate Director, Office Agency at Avison Young.
Energy costs - how to fight them?
Energy is a significant part of operating costs, which is why energy-saving solutions that help reduce costs are now particularly appreciated. – The tenant can find out in a conversation with the landlord or their agent, what energy efficiency initiatives are planned, what benefits they will bring in the future and how much more efficiently they will manage energy consumption – suggests Maksymilian Sobczak.
Increase in energy prices can be largely offset by reducing its consumption. It can be brought by, for example, the use of LED lighting and infrared motion sensors (PIR) in office buildings. When tenants are less active, the level of efficiency of air handling units and air conditioning devices is automatically lowered. These seemingly small changes can bring very satisfactory results.
Consolidation of contracts and services
Both owners and tenants can also benefit from the analysis of contracts that were probably concluded with utilities and service providers separately, at different times. It is worth checking regularly that all service costs reflect value for money. Avison Young points out that the consolidation of service providers through Facility Management has recently brought savings to building owners, but so far, only few have taken advantage of this option. If it is possible to consolidate many services with one supplier, the negotiated cost may be more attractive, and the resulting savings may be significant. In addition, there are fewer contracts signed, and better-matched KPIs also save time and costs for the landlord and the tenant.
What about marketing costs?
The amount of service charge also includes costs related to real estate marketing. In office buildings, these expenses are currently mainly used to attract employees to return to their offices. Also various types of events or activities, organized in an office building can contribute to this, while influencing well the positioning the building and its location.
- Although tenants may benefit directly from such initiatives, it is worth checking how big impact marketing activities or initiated events have on the productivity of individual companies. From the landlord's point of view, it is good to ensure a high level of tenant satisfaction, because the costs of replacing the tenant are relatively high – says Maksymilian Sobczak.
Evaluate actual needs versus expenses
Staff costs are also rising due to inflation and salary adjustment, as well as low unemployment rates. In the case of office buildings, these increases translate into a raise in fees for maintaining the reception and security, or concierge and people involved in ongoing service in the building. It is worth checking whether the level of employment in the facility does not exceed the real demand necessary to maintain the appropriate quality of service, as well as health and safety standards.
Delayed renovations and new needs
The amount of service charge is also related to construction works, including repairs and modernization of external elements of buildings or common areas in office buildings, which have been frozen due to the pandemic to keep costs low. Avison Young is currently observing a significant increase in the dynamics of this type of activity. Which is additionally driven by another factor: energy crisis and environmental guidelines force the search for more energy-saving and ecological solutions.
In addition, the need to attract tenants, and in the case of tenants - employees, resulted in demand for modern, mixed-use office spaces, offering a wide range of services for clients. This pressure has forced landlords to implement renovation plans that are larger than those assumed beforehand.
The amount of expenses and their effectiveness
Avison Young encourages to analyze planned expenses and their effectiveness. It is worth taking a step back and considering whether the action is fully justified and the potential profit is not higher than the outlays. For example, placing solar panels on the roof can, of course, bring a profit, but the amount depends on many factors and the total cost of implementing such a solution. Agreeing on and implementing a new energy policy on lowering thermostats by 1 degree, can significantly reduce energy consumption, even more than solar panels, without the additional expense or carbon footprint.
Tenants should not accept all renovation costs just because they have already been approved by the building owner. This also applies to ecological initiatives, the benefits of which should exceed the costs of carbon dioxide emissions, and the financial outlays should bring real profits.
- With service charges rising, it is more important than ever to have a solid justification for expenses. The costs of utilities and personnel have increased significantly, so the situation will affect the entire market - comments Maksymilian Sobczak.
It is important to talk about costs and find mutually beneficial solutions. -We know the discussions will not be easy. Therefore, when we are asked about the forecasts for the office sector and how we see our role, we realize that we have a lot of work ahead to support our clients with knowledge and experience in these struggles - sums up Maksymilian Sobczak.
