Tenants Keep Requirements High in a Booming Office Market

Office Market

The office property sector has seen the vacancy rate dropping to record lows. Tenants are still, however, raising the bar high in their demands, as offering the best facilities for their employees is a game changer in the battle for attracting and then keeping the best talents in an ever tighter labor market.

White House by GTC in Budapest.

Last year saw an outstanding performance in the capital’s office market. With a record high annual volume of 385,787 sqm in supply, the total completion volume reached 230,575 sqm, according to figures Atenor sent the Budapest Business Journal.

An impressive 98% is already pre-leased and there is already an approximately 50% occupancy rate for those projects which are due to be delivered in 2019, Atenor adds. By the end of 2018, the Budapest office market vacancy rate had reached a record low level of 7.3%.  

The aforementioned figures would suggest that property developers have never seen an easier time. However, the devil is in the detail, and the office market has a handful of factors that cannot be ignored. The labor shortage is creating challenges Europe-wide in many sectors. The lack of talents translates to the office market simply: employers must offer state-of-the-facilities for their future employees to win them over, and to keep existing staff. This also has a knock-on effect for developers.

“Increasingly higher requirements are tightly linked to human resources,” Atenor tells the BBJ. The dropping unemployment rate and growing demand for talents result in a true challenge.  

“Occupiers need to attract and satisfy the new younger generation who have a very different attitude and value system. Therefore the location, the infrastructure, the services and amenities are the most important factors ever. This generation is searching for messages that we have to define carefully and that appear constantly,” Atenor adds.

Today, tenants require good-quality, green office buildings, which are becoming a standard on the market, Property Market tells the BBJ.  

More Focus

“The way they structure their offices, the layouts/space plans, are what has changed a lot in the last years. While earlier offices very more functional, nowadays, creating the work environment is receives more focus. This is a tool for recruiting or retaining employees. The pressure it puts on the market is not really in terms of technical requirement but regarding the timing,” says Bori Telekesi-Csuhay, sales and asset management director of Property Market. She says that tenants often are not aware of the lack of space, and do not make quick enough decisions for relocation or renting in time.

Tenants looking for office space need not only to focus on how quickly they can grab a vacant spot, but also have to factor in increasing rental prices.  

“In 2018, the vacancy rates continued to decline [… and] this trend has also been reflected in the office rental prices. As a result, the EUR 16 per sqm is an average rental price on the domestic market, while in downtown Budapest it can reach up to EUR 20.

This year, we expect a further drop in the vacancy rate,” Tibor Tatár, CEO of Futureal tells the BBJ.

However, and surprisingly, this might not necessarily spark fierce competition in the market. “We do not believe that increasing rental rates would result in enormous competition for office spaces,” says Atenor. “As mentioned earlier, we experience that our existing and future potential tenants now fully understand that being accommodated in a top-quality green environment and in an efficient building can result in long-term benefits for them and for their employees. For this, they are definitely ready to pay more,” Atenor explains.

Do tenants really need to pay gradually increasing rents? What are the factors driving this price hike? “In reality, the Budapest office market is characterized by significant tenant fluctuation paired with tenants’ higher demands. Although higher rental prices may suggest that there is huge competition, the increase can be caused by higher construction and fitting-out costs as well, due to creative and innovative solutions in the office,” TriGranit tells the BBJ.

Building Costs

It appears the dropping vacancy rate is not the only factor pushing rents higher. “The rents are not only increasing due to the fact that there is a very low vacancy on the market; it is mainly due to a huge lack of workforce in the construction market, therefore the cost of building an office building are significantly higher than it used to be. Even though yields are decreasing, the change in the yields does not compensate for this additional cost,” adds Telekesi-Csuhay of Property Market.

The past years have seen the emergence of a new type of office environment: coworking spaces and service hubs. Digital nomadism is the new black; grabbing a laptop and sitting down to work for a few hours wherever there is connectivity can look truly tempting. Does this pose a threat to the office market?  

“Digital nomads can work from anywhere, but they prefer working in a place that has proper infrastructure,” Atenor says. “That is how we finally end up again at the importance of a good and professional working environment,” Atenor adds.

“The popularity of serviced offices, coworking spaces and hubs is still unbroken in Budapest, but we cannot disregard the importance of location regarding these offices,” says TriGranit. “Flexible workplace covers an increasingly wide spectrum from traditional serviced office operators to coworking spaces, while embracing both managed and virtual offices,” TriGranit adds.

At the end of the day, coworking spaces occupy the very same office market, rather than stealing the industry’s momentum.  

“Generally, we have classic office buildings with flexible components for our tenants; we help when space requirements change by offering certain limited options for the uncomplicated reduction or expansion of space. Regarding coworking spaces, we are aware that demand is rising and we are working on further flexible solutions,” Viktor Nagy, country manager for operations at Immofinanz Hungary says.

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