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Uncertainty Seen Across Central European Markets

Office Market

Artist’s rendering of the first phase of the Bakerstreet office project in Budapest.

Total supply in the Budapest office market has reached 4.3 million sqm, 3.5 million sqm of which is speculative space. Vacancy stands at 12.5%, according to Cushman & Wakefield. Seven office projects are expected to deliver in the next 12 months, including the 29,500 sqm Liberty by Wing, the 16,600 sqm first phase of Bakerstreet, the 15,000 sqm RoseVille by Atenor, the 11,000 sqm BudaPart Downtown by Property Market, the 14,000 sqm Madarász IV, and the 12,800 sqm F99 by Proform.

That stock level means the Budapest office market is now the second largest in the CEE region after Warsaw. Development is subdued across the major Central European markets as developers are reluctant to undertake new projects given the background of more expensive debt finance, rising PM and maintenance costs, and uncertainty over demand levels. There is a growing gap between ESG-compliant and non-ESG-compliant space in all markets, with markedly increasing demand for the former.

Prices will be much higher, and there will be a supply gap in the office market in Warsaw, according to many analysts. This will be most visible in 2023 and 2024. Last year, there was only 160,000 sqm of office space under construction on the Warsaw market, compared to more than 800,000 sqm in 2019.

In 2023, Warsaw office space will increase by only circa 65,000 sqm, according to Avison Young Warsaw. Total modern office stock in Warsaw has reached 6.4 million sqm, according to the Polish Chamber of Commercial Real Estate (Pink). Vacancy in Warsaw currently stands at 11.6%.

“After the project supply gap over the next two years, there could be a significant increase in activity from developers who have prepared large pipelines for 2025-2026. There may be a risk of a transition from undersupply to oversupply,” Pink says.

Thriving Provincial Markets

A notable feature of the Polish office scene are the thriving markets away from the capital. The size of modern office stock in the eight major cities combined has now surpassed that of Warsaw, with Krakow and Wroclaw seen as the core provincial markets. There is currently 600,000 sqm of space under construction away from the Polish capital, according to JLL

Total supply in the Prague office market has reached 3.85 million sqm, according to the Prague Research Forum, consisting of CBRE, Colliers, Cushman & Wakefield, Frank Knight, JLL, and Savills. From this stock, 74% is class “A” and 17% is “AAA”-rated.

The market has seen a significant fall in new supply compared to the pre-pandemic era, with only one or two projects expected to commence in 2023, according to Cushman & Wakefield. Vacancy stands at 7.5%. As of Q1 of this year, 145,000 sqm was under construction, with 90,000 sqm of space in nine office projects expected to deliver during the year.

In all Central European office markets, the challenge for the year ahead is seen as the wider economic environment, hybrid working habits, development costs, and the demand for ever more highly specified ESG standard space from tenants.

This article was first published in the Budapest Business Journal print issue of May 5, 2023.

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