“In the next two to three years, various state and governmental organizations will vacate several buildings in the downtown, creating a new situation in the office market at a time when office use has fundamentally changed,” comments Newmark VLK Hungary.
“Property owners will need to address the hundreds of thousands of square meters of office space that will be vacated. While this will require financial investment, it also offers an opportunity to enhance the development of these properties,” the consultancy adds.
The report emphasizes that the first step is a thorough technical survey and an assessment of the property’s best future use. While it could remain as office space, market conditions might prompt consideration of converting it into apartments or hotels. Both types of conversion are already common in Western Europe and the United States. Budapest has seen a few office buildings successfully converted into hotels.
“These unoccupied buildings cannot remain unused as they are typically in prime business locations. Many were not initially constructed as office spaces, but if the owner opts to keep them as offices, significant investment will be needed to meet the latest technical and environmental standards, including ESG requirements,” argues Valter Kalaus, managing principal of Newmark VLK Hungary.
“The question is whether the owner is willing to carry out the necessary renovations and modernizations within the building and whether this can be done while tenants are still residing there,” he says.
“If the renovations are carried out, the next question is whether the tenant is willing to pay the increased rent or if they will move to another, newer building instead. However, since there are very few new buildings available, this fact could be a catalyst for the office market and may result in new building developments that will be able to accommodate these multinational tenants in 3-4 years,” Kalaus adds.
The view is that uncertainties in the office market might prompt owners to consider new functions for their properties, given the strong demand, particularly in the hotel market and the residential sector. It is technically easier to create smaller room units in buildings currently used as offices in downtown areas compared to newly built office buildings in outer districts due to differing technical parameters.
Róbert Székely, hotel market expert at Newmark VLK Hungary, argues that professional surveys indicate increasing demand for accommodation, and this trend is expected to continue in the coming years.
According to the May hotel industry forecasts by Smith Travel Research, a 5.1% increase in revenue per available room is expected in European markets this year, with an additional 2.8% growth in 2025. The forecasts predict that growth will continue in the following years, although with variations in each local market.
These trends support the demand for three- and four-star hotels. With limited greenfield development opportunities or vacant lots in downtown areas, hotel developers have shifted their focus to repositioning buildings with different original functions, such as office or residential buildings. By converting these structures, they can and are increasingly likely to create new value.
As a new trend, Székely sees that, unlike in previous years when operational contracts were more common, long-term lease agreements have now emerged, providing greater security for the owners.
“In the office market, tenants typically sign contracts for three, five, or maybe seven years. In hotels, we can talk about 20-30 years, and the building will have a single tenant, which is much easier to manage than having many tenants with different lease terms if it remains as an office,” the expert notes.
“Although banks consider it riskier for such a property to operate with a single tenant, they are beginning to accept that long-term revenue generation is more secure, as the owner or landlord does not always have to find new tenants when the current tenant’s lease expires or if the tenant does not want to stay,” Székely added.
He further believes that the Budapest hotel market benefits from the broader supply created through building conversions. More hotel brands, more hotel market products, and, of course, more visitors can give new momentum to tourism and infrastructure development.
Four-star hotels are the most popular category for business travelers and individual tourists, and they are generally profitable in the inner districts where Budapest tourism is concentrated.
IWG, the leading international workplace provider with brands including Spaces and Regus, is opening two new units in Budapest and Miskolc.
“As the adoption of hybrid working rapidly accelerates across Hungary, the number of inquiries for space in International Workplace Group locations has risen sharply, and this new opening helps meet rising demand,” said the company.
The new Regus Madarász location in the Váci office corridor is part of a drive by the International Workplace Group to meet the sharply rising demand for top-class flexible working space in the capital. Opening in early 2025, Regus Madarász will offer co-working spaces, private offices, meeting rooms and creative spaces, according to IWG.
Regus Miskolc aims to provide high-quality flexible workspace in northeast Hungary. This will be in the multifunctional Macropolis building comprising a hotel, restaurant, residential apartments, office space, shopping mall and entertainment center. With this new addition to the network, which will also open in early 2025, IWG will operate in almost every major city across Hungary, the company says.
“We are establishing stronger and much-needed footprints in Budapest and Miskolc with these openings. As important business hubs, both Budapest and Miskolc are fantastic places for us to boost our expansion plans. The need for high-quality flexible workspaces continues to soar as hybrid working becomes the new normal,” IWG says.
“We are very pleased to work in partnership with Proform Ingatlan befektetési in Budapest and Nemzetközi Befektetési Holding in Miskolc to develop the Regus brand under management agreements that will add a cutting-edge workspace to their building,” the company concludes.
This article was first published in the Budapest Business Journal print issue of July 12, 2024.
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