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Business Services Central to Office Market Growth

In recent years the shared services sector/business process outsourcing has generated around 15-20% of the total annual demand in Budapest, making it one of the top occupier sectors in a city with a total quality office stock of circa 3.4 million sqm and an estimated pipeline of 270,000 sqm for 2018 and 140,000 sqm for 2019, according to JLL.

Aréna Business Campus, latest Budapest project by Atenor.

“The CEE region is a very popular destination for shared services centers with around 400,000 people working in this area these days,” says JLL.

“In Hungary, the sector is also a success story; most of the companies are continuously expanding their service portfolio, and employ more and more people. The SSC sector is especially important for Hungary: based on the data of the Hungarian Investment Promotion Agency, in 2017 the SSC sector was the second strongest in Hungary, following the automotive industry. With the growing number of employees and expanding SSCs, the sector has a boosting effect on the commercial real estate market,” JLL adds.

Hungary is proving attractive to employers based on its generally skilled workforce and recruitment pools they can tap into around the universities in the major cities. In 2017, there were approximately 110 business services centers across the country, employing some 42,000 people. The dominant hub for the sector is Budapest (with a 70% share), complemented by the country’s second largest city, Debrecen according to David Johnston, head of advisory and transactions at CBRE Hungary.

“Most SSC/BPO driven requirements are quite large, so even a relatively small number of deals can greatly skew the demand figures. Last year, six of the top ten take-up deals were signed for such operations and over the past two years 15-20% of all take-up came from the sector,” he comments.

With regard to location and infrastructure, business services centers have a preference for metropolitan locations with an advanced public transport system to attract and reach the available workforce.

Annual Fluctuation

As JLL explains, “Public safety is another factor which can play an important role, together with a good selection of amenities (fitness, ATM, post office, etc.). As there is a large 20-25% annual fluctuation in the workforce in the sector, there is a lot of competition among the companies regarding staff hiring. This has resulted in a new trend in choice of location: companies prefer locations where there are no direct competitors nearby. With regard to the working environment, SSCs usually need advanced IT networks and huge server rooms, adequate power supply with 0-24 internet access. To keep their employees, the companies put an emphasis on relax-rooms, social spaces and special, employee-friendly characteristics,” JLL adds.

“Approximately 30% of the occupiers of our existing office portfolio are SSCs/BPOs,” comments Balázs Simonyi, leasing director at CPI. SSCs and BPOs are widely regarded as the dominant CEE demand sector, along with IT/telecommunications. Business Services Sector is the general term covering all these types of activities, with SSCs and BPOs seen as sub-sets, according to Colliers International. In BPO, a third party provides specific services to a company on a contract basis. SSCs are not third-party service providers but service providers to their mother companies.

However, many BSS offices can be seen as a hybrid of both SSCs and BPOs. Multi-national companies and organizations are seeking to off-shore the operational elements of companies to countries such as Hungary, Czech Republic, Poland, Romania and Slovakia that are able to provide quality office accommodation, a skilled labor force and good business infrastructure (including an IT, telecommunication and transport infrastructure) at a price significantly lower than in Western Europe.

CEE countries are successfully promoting themselves as advanced but cost-effective business destinations for the BSS sector. From a real estate perspective, the basic requirement is that there is a stock of well-located class “A” office space. However, other factors aside from the cost of labor are at play, such as the capacity for the growth of SSCs/BPO operators in the CEE region.

“‘Quality of life’ in the cities where employees are located is becoming more important. Related infrastructure developments and government incentives and taxation initiatives remain in place. The business environment remains generally supportive, though more can be done on the regulation side,” Colliers International says of the CEE BPO/SSC sector in its “A Thoroughbred Racer” report.

More Than a Back Office

In Central Europe these offices have started to become more than a back-office division providing standard activities and are increasingly becoming strategic centers by extending their portfolio to more complex roles and to the core activities of the mother companies.

“In this way labor availability and the acquisition of technical knowledge through education and training looks critical to the continuation of the BPO/SSC racing in the CEE-6 countries,” Colliers adds.

As the Hungary office market matures, a growing number of companies are extending their activities to more technical roles than classic type administrative activities.

“BPO/SSC companies have played a significant role in the development of the CRE [commercial real estate] sector in Hungary, although their relative significance may be waning. While there is still a cost advantage to setting up operations in Hungary, the activities carried out by most recent market entrants have a higher value-add component than the traditional SSC, more often forming a part of the core business,” concludes CBRE’s Johnston.

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