Limited new Office Development in Budapest

The current financial environment and rising interest rates favor those developers able to use their own development finances or sell assets to investors. From a positive perspective, ever more sustainable office projects are being delivered in response to market pressures and environmental regulations.

“Tenants are prepared to relocate to sustainable office accommodation as developers increasingly need to secure substantial preleases. Tenant strategy is looking at carbon-neutral real estate, ‘green leases’ with sustainability accreditation, and renewable energy,” says Máté Galambos, director of leasing at Atenor Hungary.

Vacancy in the Budapest office market stands at 12.6% and is expected to rise to about 14% by 2024, according to CBRE. That said, there is a perceived demand for quality office space, and the higher vacancy rates tend to be in older stock that does not meet today’s more complex tenant requirements and increasingly stringent ESG and sustainability expectations.

Thus, it can be argued that there is a widening gap between modern, sustainability-accredited offices and older, outdated stock. In response, some landlords are upgrading earlier-generation buildings to meet the new requirements.

Total stock in the Budapest office market has reached 4.3 million sqm, 3.5 million sqm of which was developed on a speculative basis, according to the Budapest Research Forum, made up of CBRE, Colliers, Cushman & Wakefield, Eston International, iO Partners and Robertson Hungary.

Constricted Pipeline

CBRE estimates the total office completions for 2023 to be 180,000 sqm by year-end. Next year, it expects the delivery of 114,000 sqm, two-thirds of which is already preleased. For 2025, the delivery pipeline is believed to be 67,000 sqm of space.

Concerning projects under construction, CBRE has monitored 15 where building work has not started, but planning is at an advanced stage. These have a combined volume of 311,000 sqm and could be completed by 2027.

“The current economic and financial climate does not favor new commencements on a speculative basis; therefore, we expect these projects to kick off following a reasonable volume of preleases or owner-occupation,” comments CBRE.

In a recent project, the mixed-use office and hotel Liberty south wing by Wing in District IX has delivered 10,000 sqm of Breeam “Excellent” office space. Development of the north wing is underway, with a 20,000 sqm office area expected to open in the first half of 2024.

Wing is also due to deliver the new Liget Center Vitrum, which, with its all-glass façade, will be added to the renovated Liget Center Classic and Auditorium. Another leading office developer, Atenor, is set to deliver its latest office project, the 15,500 sqm Breeam “Excellent” RoseVille, located in Óbuda. The complex has been sold to an investor, a relatively rare Budapest investment deal in the current environment.

An alternative development option is the renovation of existing quality buildings, notably in the Central Business District, where there is a scarcity of building plots and a number of listed buildings in need of restoration. Europa Capital has just redeveloped the 12,500 sqm Academia office center in partnership with asset manager ConvergenCE. The project is in line for Breeam and Well accreditation.

“ESG requirements are mainly tenant-led, and we designed the Academia project based on ESG principles using the Hungarian Buildext architects,” comments Csaba Zeley, managing director of ConvergenCE.

“This is located in the CBD, where there are few developments for new build projects. We do not undertake development of new buildings from the ground but focus on value-added developments of existing buildings that require refurbishment,” he explains.

Portfolio-wide Sustainability

Multi-country developers such as Atenor, CPI, GTC, HB Reavis and Skanska have sustainable development policies across their portfolios. From a development and property and facility management perspective, accreditation to a third-party certification system (such as Breeam or Leed or, from an interior and staff well-being point of view, Well) is essentially a norm for class “A” offices.

Building owners need to react to changing demands from tenants and building users for space that enhances well-being. At the same time, developers need to anticipate EU taxonomy regulations that aim to reduce emissions.

“With regard to the interior dedicated Well accreditation system, human health is material to an organization’s bottom line, and the application of Well at scale makes that connection clear,” argues Regina Kurucz, an architect and WELL assessor.

“By applying Well at scale, organizations can measure and improve their health performance across multiple locations. With this data, they can measure their impact on people while also comparing their progress internally and against industry peers. Staff, tenants and visitors can use indoor spaces more effectively and safely,” she says.

Building owners must have stricter EGS-focused agreements for how they run the buildings. On the other hand, the carbon footprint of the operation can be decreased only in cooperation with the tenants: that is why the conclusion and regular execution of green lease agreements is becoming more important.

“This means setting up and operating a new layer of cooperation with the tenants that sets common ESG targets, decides on common behaviors, measures the fulfillment of them and gives feedback of the results,” says Attila Madler, chief asset management officer at CPI Hungary.

This article was first published in the Budapest Business Journal print issue of October 20, 2023.