Since the crisis, pre-lease contracts have become a precondition for office developers wishing to launch construction. They are seen as a guarantee for banks financing office developments; however, from the viewpoint of developers and tenants, they are not so warmly welcome.
Banks require developers to have between 40% and 50% of the future office space pre-let before financing any construction projects. This could be regarded as a positive term if the volume of large tenants, those mainly concerned by new office developments, was higher.
“Banks’ 40% pre-let expectations are not realistic,” claims Adrienn Lovro, managing director of Ablon Group Kft. “Securing 20% is not enough as, even if the deal is signed, no inauguration date can be specified, which makes it really hard to find new tenants.” Still, Ablon can be considered lucky: due to its prestigious and diversified development pipeline, even current bank practices are not setting back its developments.
Large tenants with more than 5,000 sqm of required space need to adjust. The vacancy rate is still relatively high, but most offices currently on the market are unlikely to be able to accommodate them. According to the data of the Budapest Research Forum, the vacancy rate on Budapest’s office market was 21% in Q1, practically unchanged from the previous quarter.
The high vacancy rate can be misleading, however, as much of the vacant office space is segmented, thus unsuitable for major tenants. Since the pace of new developments has slowed down, the big-block market has tightened up and big tenants are compelled to plan ahead. “Earlier, large tenants started to look for a new office 4–6 months prior to the expiry of their existing contract,” Tibor Tatár, managing director of Futureal, told the Budapest Business Journal. “Now they need to secure office space approximately three years ahead.”
Gergely Pados, Head of Office Agency with Cushman & Wakefield, has noted the change as well. “Tenants begin to negotiate the terms of a contract two and a half years earlier, as this is - how long (at least) - it takes to construct a building. Also, 24 months in advance they have sufficient grounds to negotiate a contract competitive one or two years from now, later they don’t.”
Although they restrict mobility, the upside of pre-lease agreements is that they enable a tenant to have a say in the final condition of premises that are under construction or renovation. “Special needs, such as finishes and furnishing adjusted to the company’s color code or individual interiors, are gaining more ground,” Tatár said. If a company is about to dominate a block and has expressed its willingness years ahead, it expects the building to reflect that, he added.
Recreation and relaxation are activities that one would not necessarily tie to workplaces. Ideally, however, both should take place within the office. At ever more firms, giving employees the opportunity and space to chat, read or play during working hours is becoming a practice. Perks can range from common options such as an in-house gym, cafeterias and infant day care to less usual attractions like an in-house swimming pool, farmers’ market and elderly care. All of the services mentioned above are offered to the workers of software company SAS at its campus in Cary, North Carolina. Beyond these amenities, employees are entitled to get subsidized massages, use dry-cleaning or snack from the fruit, trail mix and chocolate bars stored in pantries. Little wonder that, according to Bloomberg data, the company had only a 2.6% employee turnover rate in 2010, as opposed to the 22% industry average.Providing such services is still considered a costly option at most Hungarian companies. Building slides to connect two floors or incorporate a beer-tap have not yet been listed among developers’ orders. “We plan buildings to accommodate a variety of clients, so extremities such as a slide are not among the considered options,” said Gergely Árendás, vice president of developer Wing. “All of these take up useful space, for which rent must be paid, so companies are careful,” said Adrienn Erdélyi, leasing and marketing manager at Hochtief Development Hungary. “In Capital Square, two of our clients have ordered foosball, but I would not call it a trend.” According to Erdélyi, the most sought-after “extras” these days are bicycle racks and showers. At least, employers care about the environment and hygiene.
That may give tenants some comfort for long-time commitments but will not ease the job of developers. “We expect a slow recovery,” said Gergely Árendás, managing director of property developer Wing. Tatár also expressed a similar opinion: “I don’t see many signs of returning to fully speculative building in the near future.”
However, in regional terms at least, companies’ outlook may not be so grim. “We received the permit to start a project in Warsaw without having to produce pre-leases,” Lovro said.