Office Demand Undergoing Fundamental Changes

The speculative pipeline to the end of 2025 is put at around 200,000 sqm, a significant proportion of which is pre-leased. Further, there are concerns about the proportion of the 4.37 million sqm of Budapest space that is future-proof or, indeed, fit for purpose today.

Development in line with ESG criteria is central to attracting tenants and, in turn, meeting staff, lender, and investor expectations, not to mention national and EU environmental regulations.

Colliers estimated net annual take-up to be 230,000 sqm, with gross take-up at 480,000 sqm. The vacancy rate currently stands at around 13%, a year-on-year increase of 1.5%. Cushman & Wakefield sees office demand of 220,000 sqm, which aligns with the five-year average.

The Hungarian ultra-low-cost airline Wizz Air has recently relocated its headquarters to a 8,000 sqm space in the Breeam-accredited Millennium Tower by TriGranit, part of the Millennium City Center office park.

With limited supply and pipeline, large contiguous, quality and sustainable office spaces are becoming more challenging to source in the Budapest office market. The long-term lease was concluded with very flexible conditions, according to Valter Kalaus, managing director of Newmark VLK Hungary, which provided tenant representation on the transaction.

“New working habits have emerged, notably with the widespread adoption of the home office,” comments Cushman & Wakefield. “Companies have recently begun to consciously assess their options and revalue their real estate to create a place for returning employees to be productive. These spaces need to be highly functional and sustainable, offering a high-quality experience to encourage engagement while balancing costs.”

“In our experience, the most common setup is the ‘3-2’ approach, which means that employees get to spend [a minimum of] three days in the office and two days working from home,” says Máté Galambos, leasing manager at Atenor.

“Most of the leases that we have signed in the past years supported this way of working through the layout of the office and the number of workstations and, therefore, the average size of the office leases has started to shrink,” he adds.

Stricter Agreements

Successful building owners need stricter and more ESG-focused agreements for the operation of their buildings.

“On the other side, the carbon print of the operation can be decreased only in cooperation with the tenants: that is why the conclusion and then regular execution of green lease agreements becomes more important,” argues Attila Madler, chief asset management officer at CPI Hungary.

“This means setting up and operating a new layer of cooperation with the tenants that sets common ESG targets, decides on common measures/behaviors, measures their fulfillment, and gives feedback on the results,” he explains.

One concern with ESG and the tenants’ preference for newer, more sustainable office buildings is that only 30% of the office stock is less than five years old, according to Cushman & Wakefield. Approximately 37% of Budapest office stock lacks any green accreditation, although that is the norm for all new developments. 

Breeam is the most popular third-party accreditation system with developers; 77,000 sqm of the 102,000 sqm delivered in 2023 used the Building Research Establishment Environmental Assessment Method, according to CBRE.

Breeam is followed by Leed and, increasingly, Well, which deals with how a building impacts the wellness of its occupants, and Access4You, which aims to make buildings more inclusive and accessible to all.

Reflecting the growing concern with ESG-related issues, more building owners are opting for Breeam and Leed “In-Use” accreditations. Although the major priorities of office occupiers were traditionally viewed as location and rental fees, the recruitment and retention of the workforce has become a more critical issue in tight labor markets across Hungary and the broader CEE region.

Thus, providing a healthy and aesthetically appealing atmosphere has also become an important factor in the recruitment and retention of staff for companies. It doesn’t hurt that it also leads to improved productivity.

Well Certification

Currently, there are 180,000 sqm of office buildings in Budapest that are Well Core Certified in Budapest. By the end of the year, that number could reach 220,000 sqm.

“However, to reach this number, it is necessary for the first two Well office buildings in Budapest to be re-certified,” says Regina Kurucz, a sustainability consultant and Well assessor. “Corvin 5 Technology and Science Park and Nordic Light Trio gained Certification in 2021, and projects have to be re-certified every three years with on-site performance testing to prove that they are still operating in a way that supports human health and safety,” she explains.

“The National Bank of Hungary has enrolled its headquarters in Szabadság tér for Well Certification and celebrated pre-certification in April during the visit of the International Well Building Institute to Budapest,” Kurucz says. She believes that, in the next couple of years, people will become more conscious about the connection between the built environment and their personal health.

Leases are becoming more complex and take longer to negotiate; the average is now six to eight months.

“We have had clients who are very interested in the features of the building. We have leases where we take on the responsibility to attain a final Breeam “Excellent” accreditation, and others where we agree to provide almost 100% renewable energy for specific premises,” comments Galambos of Atenor Hungary.

“Breeam or Leed rating is essential for multi-national companies. But even the local companies, which have not always been sustainability conscious, are now catching up. It’s not just box-ticking; they care a lot about this, given the energy crisis,” he adds.

ESG is about a lot of data management, data collection and reporting; therefore, all stakeholders must act and work accordingly, according to Zsombor Barta, a sustainability consultant and ambassador to (and former president of) the Hungarian Green Building Council.

“Tenants and owners need to report about their ESG performances; therefore, they need reliable and transparent data. This needs to be collected and reported accordingly. This is for sure a challenge for everybody, but in the end, ESG is also not rocket science, and I am sure the market and the stakeholders can manage these new challenges and adapt to the new requirements soon,” Barta concludes.

This article was first published in the Budapest Business Journal print issue of May 17, 2024.