Demand Expected to Remain a Constant in Changing Office Market

Office Market

Green Court Office by CODIC.

The Budapest office market faces potential challenges regarding demand and preleasing, tenant specification, staff requirements, and working habits for the aftermath of the COVID-19 crisis. Despite the pandemic and lockdown, developers are in general reporting that their projects are going ahead as a bounce-back in the economy and therefore in the office market is expected.

The relatively small pool of Hungarian and regional office developers operating in the Budapest market have generally carried out restrained development policies and oversupply is not predicted. Further, changes in office design and PM will reflect changes in office use and needs of occupants and leasing.

Regarding pipeline, 470,000 sqm of space is under construction, out of which 160,000 sqm could be delivered by the end of the year, according to Eston International. CBRE estimates that 180,000 sqm is due to be delivered this year, with the remaining 290,000 sqm currently scheduled for 2022. Part of the latter volume is likely to shift back, however, as some speculative projects have not secured the required preleases. Cushman & Wakefield expect 157,000 sqm of new supply to be delivered by the end of the year.

Total modern office stock in Budapest now stands at approaching four million sqm of class “A” assets according to the Budapest Research Forum (consisting of CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL, and Robertson Hungary). The overall vacancy rate has remained at a constant 9%.

“The first quarter statistics continue to reflect the uncertainty and economic slowdown triggered by the COVID-19 pandemic. While quarterly demand remained somewhat weaker than in previous years, the gap narrowed as the number of transactions showed recovery,” says the forum.

Highly Specified

The largest delivery thus far this year is the 22,000 sqm Univerzum by Wing, the built-to-suit (BTS) headquarters of Evosoft Hungary, part of the Siemens Group, in South Buda. The LEED “Gold” complex has been leased on a long-term basis. This follows a strategy Wing has developed of the construction of highly specified BTS R&D complexes for tech companies such as the 21,000 sqm Ericsson headquarters. Both buildings have been sold on to investors.  

Cushman & Wakefield says that 45% of new supply for 2021-2022 is already pre-let, with demand for the first quarter of this year dominated by net take-up amounting the 37,000 sqm. Take-up for Q1 was close to the pre-COVID five-year average.

Prime headline rents have remained firm but incentive packages are expected to further increase. The largest deal in the first quarter was a 7,000 sqm signing by Huawei at Agora Budapest. The largest prelease was a 1,400 sqm deal at Green Court by Randstad.

Immofinanz has signed several lease agreements and extensions amounting to around 21,000 sqm. Thus, most of the company’s Budapest office buildings are currently fully leased, according to the regional office owner and developer.

“Myhive Haller Gardens was chosen as a headquarters by several new tenants. Most (a pharmaceutical, a food packaging, a vehicle manufacturer, and a development company)  chose the office building thanks to the visual design of the completely renovated building and the new myhive services adapted to the needs of the tenants,” says Viktor Nagy, Immofinanz country manager for operations in Hungary.

“We have seen some rising demand in our modern and highly flexible office concept, not only due to our latest renovation but especially for our unique services. It allows existing or new tenants to decide monthly whether they want to increase or decrease the rented office space. In addition, the rental period is more flexible; they can rent a single office or table for only a day or a month,” he explains.

“With these solutions, both start-ups and freelancers can find their ideal office, while also getting all the services that only larger companies have been able to enjoy in office buildings so far,” Nagy adds.

More Flexible

In the view of Valter Kalaus, managing director of Cresa Hungary, a more flexible approach will be needed from landlords and tenants, mainly in lease length and leasing terms.

“The post-pandemic recovery will take a while and, therefore, in the next few years uncertainty will dominate. Tenants will force shorter lease terms, and we will see fewer preleases from SMEs.” 

New Work Offices, a provider of flexible office space, now has seven units in Budapest representing 15,000 sqm of space. Hubert Abt, CEO and founder, sees a growing need for flexible office space and the increasing influence of technology in the current environment.

“Companies will need to adjust to remote work policies and accommodate more flexible work routines that allow workers to choose where they work from,” he says.

Skanska argues that it is wrong to write off physical offices from a Central European perspective. “Skanska’s studies have shown that employees miss their offices and that face-to-face relationships with others are extremely important to them. Therefore, offices will remain the primary workplace, although in the future we will certainly spend slightly less time there than before the pandemic,” explains Arkadiusz Rudzki, executive vice president for leasing and sales at the Skanska commercial development business unit in CEE.

“Additionally, employees appreciate the physical aspects of the office: workplace ergonomics, spaces for group meetings, or equipment. Our survey shows that although 64% of office workers in CEE have good conditions for working from home, as many as 50% of the respondents go to the office every day,” Rudzki says

Tamás Ádány, business development director at Horizon Development, agrees. “The post-pandemic office environment will encourage not only the undertaking of new office projects but the refurbishment of existing office buildings, as well. How we look at our offices and how we work have changed, and this is going to be reflected in the role of our offices. New projects can drive, and at the same time inspire these changes,” he concludes.

This article was first published in the Budapest Business Journal print issue of  May 7, 2021.

Balance Hall atrium by CPI.

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