Record may Fall, but Restrained Activity Prevails in the Office Market

Developers express confidence that tenants can be found and preleases concluded, although, with hybrid work practices now the norm, tenants could require smaller spaces. Even so, the office market could record an annual record supply.

Total supply in the Budapest office market has surpassed four million sqm, according to the Budapest Research Forum (BRF), which comprises CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL, and Robertson Hungary.

The overall vacancy rate for Budapest has increased and now stands at 11%. However, this varies considerably between 4.6% in North Buda and 36% in the periphery, reflecting the importance of location in the current market.

“Development activity remains strong in Budapest despite elevated inflation pressures and the weak forint,” comments Orsolya Hegedűs, head of advisory and research at Cushman & Wakefield Hungary. “While some developments have been delayed until the third quarter, the new pipeline in the second half of 2022 is estimated to exceed 240,000 sqm, 49% of which is already pre-let. New supply for 2022 will likely break the record set in 2009,” she adds.  

Gábor Borbély, director of research and market development at CBRE Hungary, puts office delivery for the year at a lower 200,000 sqm, as some projects are owner-occupied and, therefore, do not add to available stock. He expects 170,000 sqm for 2023 and even lower delivery for 2024.

Although working habits have changed during COVID and in the immediate post-pandemic period, the office is still regarded as having a central role in business life, with companies adopting a hybrid working model.

“As many as 60% of office workers want a hybrid work model, with 55% having previously worked in this manner. The pandemic has introduced revolutionary changes in the way we work, forcing companies to rapidly adapt to this shift in working patterns,” says consultancy JLL.

Tamás Ádány, business development director at Horizon Development, argues that there is a lot of uncertainty as not even tenants themselves know their own office space needs for the next five years.

“They want great flexibility (sometimes expansion and break options simultaneously), but the risks associated with providing this extent of flexibility are unrealistically high for developers and owners,” he said.

Year-long Negotiation

In one significant deal, Atenor has concluded a 16,000 sqm prelease with E.On at the now fully let first phase of its BakerStreet development, due for completion in the first quarter of 2024. Another 24,000 sqm phase is slated to be completed in late 2024. According to the director of leasing, Máté Galambos, the transaction took one year to negotiate.    

In its latest delivery, the prolific Hungarian and CEE developer, TriGranit has completed the first 21,600 sqm phase of the Millennium Gardens office project overlooking the Danube in District XI. The complex is more than 90% let, according to the firm.

“It is always a pleasure to open a new office building, but Millennium Gardens is unparalleled for us, as the building is the final element of Millennium City Center. The opening of Millennium Gardens, especially in these turbulent times, is an outstanding accomplishment from the TriGranit team,” said Tom Lisiecki, CEO of TriGranit, at the official handover.

The complex was designed by Hungary’s Finta Studio and was planned in accordance with Breeam “Excellent” and Access4You “Gold” accreditation. The Millennium City Center follows the concept of a “city within a city,” containing cultural institutions, offices, residential buildings, green areas, and a 1.5 km-long promenade surrounding the buildings. 

With regard to the quality of stock across Central Europe, regional and national developers such as Atenor, Codic, CPI, GTC, HB Reavis, Horizon Development, Skanska, and Wing have common sustainable development policies across their portfolios.

This results from a combination of market pressures, sustainability regulations, and tenant expectations exerting influence on developers and building owners. Developers are employing leading Hungarian and international architects and interior designers to deliver ever more imaginative projects.

Well, the human-centric accreditation system dedicated to interiors, is increasingly being utilized in the high-end office sector as developers must react to changing working practices, how space is used, and increasingly stringent sustainability regulations.

Dual Accreditation

Skanska, Futureal, and Horizon Development are committed to developing their projects in line with Well accreditation in addition to the more established Leed and Breeam systems. Advance Tower, built by Futureal and sold to the Erste Open-Ended Euro Real Estate Investment Fund, is the third office complex in Budapest to be awarded Well accreditation; both its 12,000 sqm and 8,000 sqm phases achieved “Gold” certification.

Futureal has also delivered the 38,000 sqm second and third phases of Budapest One in District XI. The occupancy rate already exceeds 70%, according to the builder. The complex is pre-certified with Well “Platinum” and Breeam accreditation.

Another developer, Skanska, has achieved Well and Breeam “Platinum” pre-accreditation for the recently topped-out first 26,000 sqm phase of its 67,000 sqm H2O complex in the Váci Corridor. The EUR 65 million project will consist of three interconnected buildings designed by the Danish Arrow Architects Studio.

An alternative development option is for the redevelopment and renovation of existing buildings, notably in the central business district, where there is a scarcity of building plots and many listed buildings in need of renovation.

Europa Capital has purchased the 12,500 sqm Academia office center in partnership with ConvergenCE as its asset manager and will undertake an extensive renovation.

“With our investor partners, we buy under-positioned buildings in great locations, which we renovate and refurbish with state-of-the-art technology and services, then reposition and re-let,” explains Csaba Zeley, managing director of ConvergenCE.

“We pay great attention to ensuring that all of our properties have the highest environmental ratings, so we are pleased that the CityZen Office Building was awarded the Breeam ‘Excellent’ rating, and the Kálvin Square Office Building received the same rating,” he adds.

In another redevelopment project, Horizon Development has just started renovating the former Henkel HQ building; by the end of the first quarter of 2023, it is due to open as Villányi Gardens.

This article was first published in the Budapest Business Journal print issue of October 21, 2022.