An optimistic scenario for EMEA assumes GDP growth close to zero in the second half of this year, following a steep decline recorded in Q2. A moderately optimistic scenario assumes real signs of economic recovery in the first quarter of 2021 at the earliest. However, conclusions concerning the market situation and the pandemic’s impact on the various real estate sectors can be better drawn after Q2 2020 – the first full quarter to feel the effects of the lockdown. It is difficult to identify a real estate sector that has not been pandemic-affected, even marginally.

The office sector is a case in point. Apart from some delay in the bringing of office buildings to the market, the pandemic’s effects were not visible in the first quarter of 2020. Asking rents remained stable and vacancy rates in major Polish cities did not increase. This market outlook will likely become clearer in the coming months. Many companies are struggling with the pandemic’s effects in terms of reduced revenues, thereby significantly weakening their willingness and ability to pay high rents. The coming quarters may see both reduced interest in leasing activity and, consequently, a reduction in rents. Moreover, in these uncertain times, tenants may opt for shorter leases, which in turn may affect the owner’s ability to pay liabilities in the longer term. There are several groups of closely related, interconnected participants in the office sector facing the impacts of the pandemic, however challenges for each of them are different. Knight Frank has reviewed the groups on an individual basis and identified the potential effects on each of them.

Tenants

After the initial shock caused by the sudden switch from ‘normal’ to remote operating, many tenants are beginning to develop survival strategies to cope with these difficult times. Cost optimisation has become a significant issue, resulting from the additional costs and obstacles generated by reorganised remote activity, as well as the decrease in income due to reduced order volumes. One of the highest costs is office-lease cost. Forecasts envisage tenants revising their needs for office space if their survival strategy results in workforce reduction. Some firms may decide to sublet office space in the short term, or renegotiate previously signed pre-let agreements (in terms of area and financial terms).

In the long run, properties with flexible lease conditions will attract a larger share of business. It’s possible that tenants will seek to adjust lease agreements in terms of their duration, so as to properly manage risks and costs; for example, part of the office space to be maintained in a traditional arrangement, with the rest in flexible offices, adjustable to changing needs. In the case of some companies we may well see, for example, strategies of workspace dispersion (i.e. the opposite of the gathering of employees in single locations). The current epidemic may induce some companies to consider utilising “spare” office space to give the possibility of separating work teams to ensure continuity of operations.

Restrictions implemented by the government, such as social distancing, may convince employers to introduce changes to office arrangement in the short term. Some of the alterations may be implemented to physically separate employees; for example the use of bigger desks, or the installation of taller separators between workstations. In the long term, especially in new office buildings, we may witness a new fit-out trend offering office spaces easily transformed into ‘activity-based workplaces’ (office spaces divided into several areas, of which employees choose the one which best matches their needs, such as team work, individual tasks, tele- or videoconferencing), or into agile workplaces (workspaces with infrastructure enabling work from any place, including from home).

The need to switch to remote working on a daily basis has proved to companies that a share of their business can be successfully carried out remotely. As a result, some tenants may realise that, when the situation normalises, outsourcing parts of their businesses will enable a reduction in occupied office space. From the point of view of the employees, the current shift towards home working may present the opportunity for implementing this kind of regime on a frequent basis. It seems that the option of remote working will be one of the desirable factors/conditions of new employment contracts. Such a situation does not necessarily entail negative effects for employers. Companies, after careful assessment of the costs and benefits related to the efficiency of staff working remotely, may decide to implement more remote working, or related solutions such as hot-desking.

A further aspect of cost optimisation concerns tenants’ rental obligations. Tenant requests to landlords for temporary reductions or agreed delays in rent payments are becoming more frequent.

Owners

The negative effects of the pandemic will affect office building owners in the short term. Many tenants are already approaching landlords asking about rent liability reductions or the granting of rent-free periods due to their reduced activity as a result of the pandemic. In this group, apart from office tenants, there are also tenants of retail and service premises, of which the vast majority have had to suspend their businesses. Building owners will therefore have to attempt to maintain their own liquidity, whilst also keeping tenants in their buildings. It is to be expected that the current market situation will force landlords to be more flexible in their approach to the duration of contracts, fit-out budgets, and rent-free periods for both new agreements and renegotiations. In addition to this, it is vital to conduct negotiations in a more precise manner, e.g. paying particular attention to cases of force majeure, or aspects related to possible sudden interruptions in company operation resulting from random events (insurance issues and conditions) – i.e. conditions previously often considered to be of a largely hypothetical nature.

Even before the epidemic, there was an ever-growing awareness among building owners regarding office space arrangements which promote employee well-being. The introduction of such ideas to office buildings by landlords was due in large part to the fact that they helped in obtaining and keeping tenants who care about valuable employees. It is to be expected that the current pandemic situation will reinforce landlords’ approaches to such solutions. It is very possible, for example, that the continuity of the company’s operations may well depend on the implementation of ideas that positively influence employee well-being (currently, this may include, for example, access to single-use masks, thermometers, and hand sanitiser). A case in point – furniture made from materials with antibacterial coatings may become increasingly popular in the medium- or even long term. And implementing a workplace culture that limits, and ultimately eliminates, employee presenteeism (presence at work despite illness, stemming from a fear of negative consequences from the employer) may prove very important in the near future. The introduction of improvements and changes in office buildings, together with office space rearrangement by single tenants, may gain importance in the medium- and long term. It is possible that landlords will be forced to have, for example, ‘health’ or ‘cleanliness’ certificates in the future. This will take on even greater importance if the idea of flexible offices (where each desk will be used by more than one person) becomes widespread. Special emphasis may also be placed on the air quality in office buildings. It is possible that owners will have to bear the additional costs of improving the efficiency of their ventilation and air conditioning systems.

Developers

There are no regulations in Poland that would impose any restrictions on the construction sector in connection with the Covid-19 pandemic, therefore most of the construction sites are continuing as before. That said, due to a slowdown in authorisation processes, deliveries of some office projects in the coming months will be delayed. At the same time, the planned commencement of most of the construction sites due before the end Q1 2020 have been delayed. Both the commencement and the completion of new development projects (including office buildings) will further depend on the availability of building materials – something also adversely affected by the current situation. Furthermore, developers are facing problems with sufficient numbers of employees – problems which have recently begun to deepen.

Fears of restrictions caused by border closures in connection with the epidemic have meant that some Ukrainian workers have returned home, while others have been unable to enter Poland. Additionally, the absence of employees has become more prevalent due to school closures related childcare issues. The condition of the construction sector will depend to some extent on the duration of the pandemic, but also on government policies and assistance directly affecting the financial liquidity of companies.