Short-term problems before longer-term gain

Valter Kalaus, managing partner, VLK Cresa.

“We are living in a very exciting and interesting period for real estate,” says Valter Kalaus, managing partner, VLK Cresa, the tenant representation specialists.

“In the last four to six years, we have not seen much activity at all. Approximately one year ago, that changed dramatically. We have seen a lot of development activity, and we now have a dozen new office buildings under way, mostly in the Váci corridor and the south Buda sub-markets. They will bring 300,000-400,000 sqm of new office space, adding approximately 10% to the existing stock of 3.3 million sqm, of which 2.6-2.7 million sqm is speculative class “A” and class “B” offices, and the remaining 700,000 is owner-occupied.”

These new office buildings will come on to the market in late 2017 or early-to-mid-2018, but that is of little comfort if you are looking for office space now.

“Next year, tenants who are up for lease renewal will have a very difficult situation,” warns Kalaus. “Right now the market is very tight for space. Vacancy rates are very low, below 5% in south Buda. Rental rates are going up, incentives are decreasing. It is definitely a landlord’s market.”

The investment market has also seen a sudden reawakening. “Up to 2014, we have not seen much investment, mainly because banks weren’t lending. A few people were selling, or trying to, but they were asking very high prices, and with no financing on offer, no one was buying. That all changed with the sale of the Green House by developer Skanska Property Hungary to Diófa Fund Management two years ago. In the last 24 months we have seen 25 investment transactions in the office market alone. Of those, 12 have taken place in 2016.”

Options 

Tenants need to understand their options, Kalaus says. With a limited amount of new supply for the next 18 months, the best advice would be to try and get a short-term lease extension, but that can be very difficult, as landlords of existing buildings are also trying to take advantage of the current situation.

“It is extremely important to have representation, a good advisor who knows what can be done and what should be done. On the Váci corridor there will be four or five new office buildings that, superficially, appear to be very similar. A tenant representative can help you understand the differences and which will work best for your business. And even if you are on good terms with your landlord and are able to secure a rent reduction or lease extension, that doesn’t mean it is the best deal available on the market. You will need outside, specialist help to attain that.”

Cyclical business 

Real estate is a very cyclical business. If today’s market is a landlord’s, it won’t always be so, Kalaus counsels. “Two years from now we can expect increased supply, and demand will not be able to keep up with this. We will see rental rates stop rising and incentives come back as vacancies rise. Some new companies might come to the Budapest market, but almost all the major players are already here, so there is unlikely to be a large influx of new businesses to take up space. There is potential for more buildings beyond those we already know about, and some developers are talking now, in the marketing phase, about coming to market. But most still want to secure an anchor tenant before committing to actual construction. The braver ones started a year ago and will complete in the next three-to-six months. They will definitely have a competitive advantage, but we are not at the stage where we can expect many purely speculative projects to go ahead.”