BBJ: How would you characterize the real estate market in Hungary today?

Kata Mazsaroff: The two most significant commercial real estate market segments, offices and industrial properties, face different trends. In the office market, the amount of new construction overall in the CEE region is on a downward trend, which will lead to a shortage of new supply. The increasing vacancy rates and more restrained demand compared to pre-pandemic times are also reflected in the expected speculative deliveries: 25% fewer deliveries in Budapest this year than in 2023 and approximately 50% fewer than in 2022.

Although vacancy rates are rising, the tenant market hasn’t dried up. The overall occupier demand in Budapest increased by 21%, while net demand showed a 7% growth year-on-year. However, this is notably lower than the pre-pandemic level, primarily due to hybrid working and the use of AI for automation, leading occupiers to rationalize their footprint. The occupier market is still active, but we lack new entrants. Tenants already present are looking for ESG-compliant, energy-efficient office buildings in central locations with a variety of services, as employee well-being and productivity are clearly in focus for occupiers. The vacancy rates in new builds and existing office buildings converted to meet ESG expectations reflect this demand: it is lower in these assets than in the market average.

Concerning the industrial market, in recent years, there have been significant investments and announcements mainly in the northwest and northeast regions of Hungary, primarily related to the automotive industry, especially battery manufacturing. We have experienced continuous growth in FDI here over the past four years. In 2023, the announced FDI value doubled compared to 2022, reaching EUR 13 billion; the total for the past four years amounted to nearly EUR 30 bln. Among the 2023 FDI announcements, the investment of the Chinese electric car manufacturer BYD in Szeged stands out, with a value of almost EUR 5 bln. In the coming years, we expect growth in the south region primarily attributed to the available infrastructure (electricity, water, sewage supply) and governmental intentions.

Regarding Budapest and its surroundings, there were minimal new deliveries, with only one property handed over in H1 2024. Net demand grew by 29% year-on-year, reflected in the decreasing vacancy rate. The industrial real estate in Greater Budapest amounts to 3.564 million sqm, of which 87.7% are “Big Box” facilities. Overall, the volume of speculative developments is more restrained, with 16% fewer deliveries expected this year than in 2023 in Hungary. However, by the end of 2025, 700,000 sqm are confirmed to be delivered in Hungary, of which approximately 400,000 sqm will be in Greater Budapest. These figures may increase subject to demand. Tenants are seeking energy-efficient and sustainably operated industrial properties, and major developers are responding to this by committing to ESG compliance and minimizing their carbon footprint.

BBJ: How are ESG and green issues influencing the market, and is this equally so across all sectors?

KM: The number of certified buildings varies by sector, but to this point, office and industrial real estate have the most certifications; however, there is a growing trend in the hotel and retail sectors. In the case of offices, not only the “E” (Environmental) aspects are becoming more important, but also the “S” (Social) factor, as demonstrated by certifications like Acces4You and Well. These buildings have greater tenant appeal, as their speculative vacancy rates are lower than the market average. They are also more sought after from an investment perspective because they offer higher rental income, leading to better cash flow and a more favorable position for financing. In the industrial real estate market, certifications focus primarily on energy efficiency, sustainability, and environmentally conscious operations, emphasizing the “E” aspect, typically in the form of Breeam and Leed certifications. A significant portion of certified properties are linked to a few more prominent developers, such as CTP, Futureal/HelloParks, and Prologis.

BBJ: For years, office and industrial/logistics have led the way regarding green certification. Are hotel, retail and residential catching up?

KM: In the hotel sector, few buildings have certifications; however, market demand is growing. Beyond the financing requirements, the rise in energy prices over recent years has highlighted the importance of sustainable and energy-efficient operations in the hotel industry. This is also an international trend, where owners and an increasing segment of investors and guests prioritize hotels that focus on sustainability. A good example is Melea: The Health Concept Hotel, which recently received Leed “Gold” certification with the assistance of Colliers. In the retail sector, some shopping centers, such as Allee and Etele Plaza, already have certifications. A motivating factor is the increasingly environmentally conscious policies of shoppers and certain tenants, elevating the importance of malls adhering to ESG-compliant operational principles. The residential sector has lagged behind, though it should be noted that newly built homes must already meet strict regulations, such as energy efficiency standards.

BBJ: Is Hungary suffering compared to other CEE markets, or is the picture similar?

KM: Regarding the overall office occupier demand and supply trends, including ESG certifications, the situation is quite similar across the CEE market. The ESG policies of major international developers are not confined to just one country but extend across borders. In every market, properties that fail to meet the principles of environmentally conscious and sustainable operations face lower tenant and investor demand.

BBJ: When might investors return to the Hungarian market in large numbers?

KM: We experienced minor changes in Europe’s environment for commercial real estate investments in the first half of this year. Interest rate decreases, particularly for euro loans, are essential for market recovery, investments to be realized on a larger scale, and for demand in the market to grow. While some shifts are visible, more significant changes are not expected until 2025.

BBJ: In the meantime, are there good deals to be done given the lack of competition, or is the market subdued for a good reason, and everyone simply playing “wait and see?”

KM: Although investment volume is indeed low, considering that in the first half of this year, we had the lowest investment volume in recent years when compared annually, there are still some positive examples. For instance, in the first half of this year, the Faedra 22 industrial logistics property was sold to an international investor. It is well-located and ESG-compliant, and there has always been (and will continue to be) demand for such properties.

This article was first published in the Budapest Business Journal print issue of September 6, 2024.