However, some large projects are ongoing and the current market is favorable for those developers that can self-finance. As demand has fallen overall, the vacancy rate has risen to 14%, albeit with a wide variation range of 7.7% and 33%, reflecting the popularity of central and suburban locations instead of those on the periphery.
As the number of developments in the pipeline is falling, there are concerns over the future availability of larger contiguous, quality, well-located and ESG-compliant spaces in the longer to medium term.
“Financing is crucial, and most banks require a 45-50% prelease for an office development. Securing sufficient preleases for each phase is crucial to avoid financial strain,” comments Valter Kalaus, managing director of Newmark VLK Hungary.
Colliers has traced 213,000 sqm of speculative office space under construction in Budapest, representing 15 projects with a possible handover date of the end of 2025. Total Budapest stock stands at around 4.3 million sqm, according to the Budapest Research Forum, which comprises CBRE, Colliers, Cushman & Wakefield, Eston International, iO Partners and Robertson Hungary. Around 3.5 million sqm of this was developed on a speculative basis, the BRF says.
CBRE puts the total Budapest office delivery at 160,000 sqm for 2024 (representing a 30% year-on-year increase), with a total of 520,000 sqm under construction, of which 18,000 sqm is refurbishment of existing buildings.
The consultancy has traced about 100,000 sqm due to be delivered in 2025 with a significant prelease ratio. A further 256,000 is scheduled for 2026 with a very high prelease ratio (in large part due to public sector authority take-up). An additional 213,000 sqm is at an advanced planning stage and could be completed by 2027. Office demand is expected to rise with the beginning of a fall in vacancy rates, according to CBRE.
“The current economic and financial climate is not conducive to new starts on a speculative basis, so we expect these projects to commence after a reasonable level of pre-letting or owner-occupation,” says the consultancy.
A few new development projects are being initiated. Futureal is developing phase II of the Corvin Innovation Campus. Longer-term phased developments can be seen as a viable development option in the current environment, with phases going ahead based on preleases. Skanska, for example, is in a position to undertake phase II of H2Offices and phase III of the Hold utca office project if preleases are concluded.
“They are a good way to mitigate leasing risk, although the currently soft investment market conditions in the CEE make it difficult to put together profitable schemes, even with prelease tenants and careful phasing,” comments Norbert Schőmer, country manager at Atenor Hungary.
Importantly for market development, a meager percentage, probably not more than 30-35% of the stock, is EU Taxonomy and ESG-compliant in the view of Kalaus of Newmark VLK.
“In the Hungarian office market, integrating ESG and EU Taxonomy features into office development projects is increasingly important for attracting tenants, securing financing, and ensuring long-term profitability while properly operating the building in an efficient way. Both ESG and the EU Taxonomy emphasize sustainability, resource efficiency, and social responsibility, aligning developments with broader EU climate and social goals,” he says.
Regarding demand, the hybrid model is here to stay, with three or four days per week in the office seen as well-balanced for team members. This encourages loyalty, brand awareness and teamwork, Kalaus says.
In addition to EU Taxonomy considerations, leading companies increasingly seek high-quality, ESG-compliant offices. Developers who can guarantee modern, sustainable spaces are better positioned to secure preleases.
Concerning sustainability, only 3% of the Breeam-certified office stock in Budapest reaches the highest level of “Outstanding,” according to CBRE. Just 10% of the Leed-certified stock achieved “Platinum,” the highest level in the other primary third-party sustainability accreditation system.
“Creating spaces that prioritize occupant health, including good air quality, natural lighting, and biophilic design (for example, indoor plants and green spaces) is increasingly important,” Kalaus insists.
“Well certification could be pursued to demonstrate commitment to employee well-being. Office developments must ensure that ESG-related efforts are transparent and measurable. Regular reporting on energy usage, carbon emissions, water consumption, and waste management should be integrated into the project’s governance framework. This aligns with the EU’s focus on improving corporate sustainability reporting,” he adds.
Analysts believe that the office sector in Hungary and Central Europe will continue to be considered a leading development option and a prime investment destination.
“New developers could certainly enter the market, especially if they have the capital and innovative approaches to meet the current demands of the office sector, such as sustainability and ESG compliance,” Kalaus argues.
“It would definitely benefit the entire industry, as some well-known developers are leaving the market. The number of key players is decreasing; therefore, competition is not as fierce as it should be. Given the established presence and expertise of CEE and Hungarian developers, they will likely remain dominant players in the short-to-medium term. These experienced developers have a deep understanding of the market and strong networks, which gives them an edge,” he says.
The office has been an investment benchmark for the past 50 years. Nowadays, the sector has lost some of its appeal, but companies tend to employ a more educated workforce that works in teams. For their accommodation, “the obvious solution is still a centrally located, flexibly usable closed space, called an office building. Consequently, I think the office sector will still be a benchmark in the future,” concludes Atenor’s Schőmer.
This article was first published in the Budapest Business Journal print issue of October 18, 2024.
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