Uncertainty Hallmarks Today’s Budapest Office Market

Substantial preleases are required in this market environment before the construction of a project is undertaken. Many companies have only partially returned to the office, and questions remain over requirements and future demand.

Developers are undertaking more sustainable and imaginative office designs to meet the demands of office occupants and ever-stricter sustainability regulations. As reported on page 29, total modern office stock in Budapest has surpassed four million sqm of class assets, according to the Budapest Research Forum. The overall vacancy rate has increased to 9% and is expected to increase further. However, oversupply is not anticipated.

Colliers has traced 19 Budapest office projects due to be completed this year and a further 11 in 2023. These consist of phased developments with the creation of business hubs, stand-alone and regeneration projects.

Developer Wing, for example, is due to deliver the 29,000 sqm mixed-use office and hotel Liberty project in District XI on Könyves Kálmán körút, close to Üllöi út, the road into the city from the airport. In the Váci Corridor, GTC has completed the fully preleased 27,500 sqm Pillar, and in South Buda, Futureal will deliver close to 40,000 sqm of space at Budapest One. Budapest will see its first office skyscraper with the completion of the 50,000 sqm MOL campus headquarters at BudaPart in District XI.

Developments are ongoing across Budapest, but construction is being disturbed by supply chain issues and the continuous re-pricing of construction materials. Office pipeline for this year is around 326,000 sqm, although preleases mean only a third of that will be available to new tenants.

Further, there is about 190,000 sqm of space under construction with a later completion date, according to CBRE. One problem is that the Budapest office market has significant exposure to multinational companies with shared service centers, for example. Many of these have still not returned to the office and, therefore, large deals are missing from take-up.

Scope for Development

Analysts see room for development as only 45,000 sqm of space in three projects was delivered last year. Crucially, the vacancy has remained below the 10% threshold.

“This was one of the lowest levels on record as ongoing office developments planned for delivery in the second half-year were all delayed. The lack of supply since 2020 means that Budapest has a disproportionate stock of first-generation offices,” says Cushman & Wakefield. The consultancy argues that Budapest remains atractive to international companies offshoring and benefiting from cost-cutting initiatives in uncertain economic times.

Belgium-based developer Atenor is due to deliver two buildings: RoseVille in Buda and Aréna Business Campus B, a phased 85,000 sqm development project on Hungária körút, the outer boulevard of the city, in District VIII.

“For large prelease tenants, the development has to be as tailor-made as possible. This depends largely on the stage of development when the tenant ‘joins in’ and the prelease is signed,” says Melinda Kovács, development and leasing manager at Atenor Hungary, on the leasing process.

“Location, services, and a good financial package are still essential, but flexibilities in terms of lease length and space (i.e., extension, expansion, and contraction possibilities) are also gaining more and more importance in today’s turbulent circumstances,” she explains.

Despite some concerns over demand, the office sector continues to be the leading investment sector, representing 74% of the EUR 1.14 billion of investment market activity for 2021, according to Cushman & Wakefield.

Yield Premium

Colliers, meanwhile, puts prime office yields for Budapest at 5.25% and stable, which is a significant premium on Prague and Warsaw for high-quality office products; very premium assets can trade at sub-5%. Despite the strong pipeline, the Budapest office market suffers from a low supply of available investment-grade assets.

Environmental, social, and governance issues are now seen as central to a developer’s letting and exit strategy.

“ESG and sustainability are already one of the main topics on the development and other markets. International tenants’ and investors’ internal guidelines, in particular, will make it increasingly difficult even to consider properties that do not have sustainability features to assist them in reaching their ESG goals. So, sustainability accreditation is now a ‘must,’ and ESG compliance will be taken very seriously in the future,” comments Kovács.

“ESG-compliance should not remain solely a marketing slogan. An interconnected, intelligent building management system enables PM and FM experts to reduce CO2 emissions and achieve sustainability targets faster,” says Valter Kalaus, managing director of Newmark VLK Hungary.

“Social aspects have become more important than ever before. A proven ESG record will support an exit strategery and may add to the price. ESG aspects should be included in staff education, and issuers of green bonds, mainly developers, will be responsible for ESG compliance as well,” he adds.

It will be interesting to see how demand and development strategies develop in the near future in the Budapest office market in response to the economic and political environment. Developers will need to improve their offers to meet the changing climate around tenant specification, sustainability, and ESG and meet the challenge of upward pricing pressure.

This article was first published in the Budapest Business Journal print issue of May 6, 2022.