With vacancies at a record low and few immediate deliveries anticipated, the office construction market seems to be warming up, as both foreign and domestic investors are expecting more completions in the next two-to-three years.
New office construction is expected, but for the near future it will be hard to find quality office space in the Hungarian capital that does not already have a tenant.
The supply to meet rising demand is low, with vacancy rates expected to continue to fall in the immediate future. Office pipeline in Budapest for 2016-17 is put at roughly 90,000 sqm, representing an improvement on post-crisis delivery levels, but still low in relation to the rising demand, and much of this is expected to be pre-let. Since the financial crisis, only equity rich developers and those with the ability to conclude substantial pre-leases have been able to develop in a market where debt finance has been expensive and difficult to source. However, in the more positive market environment a combination of established foreign and Hungarian office developers are planning construction that could be delivered in the next two-three years. From a positive perspective, the quality of office product is rising in terms of interior and exterior design and sustainability. This is now a basic requirement from tenants and potential investors with regard to an exit strategy.
The recent handover of Váci Greens B has further increased quality Budapest office stock by 26,600 sqm to a total of around 3.3 million sqm. This consists of 2,600,000 sqm of class “A” and “B” speculative offices, in addition to 665,000 sqm of owner-occupied buildings according to the Budapest Research Forum (comprising CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL and Robertson Hungary). This compares to Warsaw, for example, where total stock is expected to surpass the five million sqm mark by summer, although with a large pipeline there are concerns about the rising vacancy rate that is now at more than 14%.
Demand is strong and there is a low availability of class ‘A’ stock,” said David Johnston, head of office agency at Cushman & Wakefield Hungary. “Vacancy has fallen to 12%; this represents 7% for class ‘A’ and 15-16% for class ‘B’. Vacancy in the Budapest office market has never been below 10%. With this low availability, tenants are considering class ‘B’ or ‘A-’ office product and decisions to relocate are being made two or three years ahead. However, 2018 could see more deliveries, according to the pipeline.”
With strong market fundamentals, headline rents are put at €13-14 per sqm per month as there is upward pressure on rents and less tenant incentives are required.
Demand for office space in 2015 reached an all-time peak with take-up totaling 364,800 sqm, according to CBRE. The overall office vacancy rate now stands at 11%. The lowest vacancy of 6% is in the South Buda submarket, while in the Váci corridor it is expected to fall to below 10%, whilst at the periphery it stands at 30%.
Speculative development for the year is limited to four further projects. These low delivery figures compare to 2009, for example, when 300,000 sqm of office space was delivered representing 10% of modern Budapest office stock. With regard to the longer-term pipeline, Cushman & Wakefield estimate that around 200,000 sqm of space will be delivered between 2016 and 2018, although a high proportion of this could be pre-let.
In the latest delivery, Belgium’s Atenor Group has handed over Building B, the third phase of Váci Greens, the biggest office project in Budapest, which was 60% pre-let on delivery.
Atenor plans to go ahead with construction of the 15,400 Building D (the fourth phase) of the same project this year, as there is more than enough demand to fill the space, according to Atenor. Upon final completion, the project will consist of six buildings with around 135,000 sqm of office space. Executive Officer Olivier Ralet emphasizes that Atenor undertook Váci Greens when Budapest was generally perceived to be a very difficult development market. The company is also developing the phased 75,000 sqm Hermes Business Campus in Bucharest; this was also regarded as an adventurous move for similar reasons.
One of the most established developers in the Budapest and CEE market, Skanska is set to complete the two-phased 26,200 sqm LEED “Gold” accredited Nordic Light on Váci út in May and September respectively. Skanska expects to have the project 60-70% let by the year’s end.
A further Váci út pipeline project by Hungary’s Wing will deliver the 12,000 sqm V17 office center in summer. An 8,500 sqm pre-lease with E-On has been concluded on the project, which is financed by K&H Bank. V17 is currently 85% let. “Obviously, we see very positive trends in the market in terms of enhanced or increased occupier demand and, while there is vacancy in the market, there is also a lack of large, vacant, contiguous modern space,” said Noah Steinberg, CEO & chairman of Wing. The developer is now preparing the groundwork for the 55,000 sqm Magyar Telekom headquarters in the out-of-center ninth district.
In a rare office development in the central fifth district, Horizon Development is set to deliver 5,700 sqm of office space in Vörösmarty tér at Váci 1, a classic Central European heritage building. The project reflects Horizon’s strategy of developing high-end office space in historic buildings in central Budapest.
Futureal is constructing the 25,000 sqm Nokia Tower that forms the latest office development at the Corvin Promenade project. The BREEAM accredited development, designed by Zoboki-Demeter & Associates, will provide Nokia with an IT and telecommunications R&D center. This is regarded as one of the largest deals in the post-economic crisis period. The tower is located adjacent to the 15,000 sqm Corvin Technology & Science Park that will form the fifth office phase of the Corvin Promenade.
With regard to further pipeline, Futureal plans to develop the Budapest One business park adjacent to the terminus of Metro 4, located on the western edge of Budapest. The 45,000 sqm project is seen as part of the redevelopment of a road, metro and rail transport hub. The first phase is planned at around 23,000 sqm, although and a substantial pre-lease needs to be concluded for construction to commence, according to Futureal. In Váci út, the same company is planning the Advance Tower, which will deliver 11,000 sqm of BREEAM accredited space designed by Mérték architects studio.
Further ahead, the Hungarian GRT Group is planning the third 18,000 sqm phase of Office Gardens in the 11th district next year. The project envisages office space in five buildings in a park environment. Also in the 11th district, Hungary’s Info Group is planning a further 23,000 sqm phase of the Bartók Udvar complex, to be completed in the first quarter of 2018.
In southern Buda Property Market, a subsidiary of the general contractor Market Épitő, is planning the Buda Park office development on a site opposite Infopark. The project could deliver as much as 300,000 sqm of office space.
A sign of growing confidence in the Budapest market is that HB Reavis is planning a 136,000 sqm project close to Árpád Híd, the first phase of which is due to be delivered in Q1 2018. The London-based Make architects are the concept designers, and the Hungarian Finta Studio has also worked on the design.
“This is a large-scale project with 126,000 sqm of office space and an additional 10,000 sqm of service space,” commented Zoltán Radnóty, CEO of HB Reavis Hungary. “Obviously we will phase it – it will probably consist of five phases – and we believe there will be demand for this type of quality space.” The development is being financed through a combination of the company’s own equity and debt finance, with delivery of a first phase scheduled for the first quarter of 2018.
Another established Budapest developer, GTC is expanding its Budapest office portfolio with the development of the 23,000 sqm Renaissance Plaza close to Arpád Híd.
HB Reavis competed the sale of its first Budapest project, the 21,000 sqm Váci Corner office complex in Váci út last year to Zeus Capital Management. The deal is seen as strengthening the position of Budapest as an investment destination and is expected to be the first of many investment transactions, according to Tim O’Sullivan, head of capital markets at CBRE Hungary, who acted on the transaction. The transaction was concluded at an estimated €55 million, making it the biggest single office transaction for some time. Currently, prime Budapest office yields stand at around 7% and could soon fall below that.
All the recent deliveries and projects under construction are attracting the attention of investors, with sentiment towards Hungary improving and strong fundamentals such as falling vacancy and rising rents in the office market. What is more, debt financing is increasingly available with banks competing to finance development projects and acquisitions.