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Chicken and Egg: SSCs Need Offices, Offices Need SSCs

Could a functioning commercial office market develop in reaction to SSC/BPO demand in the likes of Debrecen, Pécs and Szeged, as has occurred in secondary cities across Czech Republic, Poland, and Romania?

Green2Day office building in Wrocław.

Experts agree the development of a functioning commercial office market could attract SSCs/BPOs, while demand for space could bring about development of an office market. These cities provide the infrastructure for a quality lifestyle for a workforce that does not need to migrate to the capital or Western Europe.

David Johnston, head of advisory and transactions at CBRE Hungary, comments that Debrecen already has a handful of established SSCs (for example British Telecom, Flowserve, IT Services Hungary, Merlin and National Instruments) that are committed to the city and looking to expand. Modern office buildings are also emerging in Szeged (BP has an operation here), which seems to be next in line for further operations. Pécs is lagging in comparison.

However, he further argues that it will take years until these cities build the critical mass of real estate needed for a properly functioning secondary market, as today their respective office stock can be counted in the tens of sqms only, versus the millions of sqms in Budapest.

There is progress, though. Nikolett Püschl, leasing manager of Atenor Hungary says: “Debrecen is a good example where more, new Category “A” office buildings were developed for such companies in the last few years, but Szeged and Pécs could also be similarly developed in the near future because these are big cities in the countryside and university cities, where a young, well-educated person’s salary is even lower than in the capital.”

The number of new SSC offices in the countryside is certainly growing, making Hungary less capital-centric. “Currently Debrecen hosts the second largest number of SSCs in Hungary; as a result there are an estimated 3,000 employees in the sector in the city. In the countryside, salaries are appealing, but still somewhat behind the wages in Budapest,” comments JLL.

Supportive Environment

At the recent MIPIM 2018, it was not only major projects in Budapest that were presented, but also investment and development opportunities in four university cities (Debrecen, Miskolc, Pécs and Szeged). City authority representatives from these Tier-2 cities emphasized the supportive environment, local job opportunities, highly qualified work force and the quality of life for employees.

Within the CEE region, cities where there are large graduate populations have been particularly successful at attracting SCC/BPOs and in this way commercial office markets have also been established by international developers who have been able to sell assets on to international investors. The northern European investor Niam, for example, has purchased the 18,000 sqm, LEED “Gold” accredited Green2Day office center in Wracław from Skanska for a reported EUR 51 million. A rare regional office investment deal for Hungary was the purchase by OTP RE Fund of the 6,800 sqm EPAM building in Szeged from Futureal.

But while Hungarian provincial city authorities in secondary cities with large university populations are adopting pro-active promotions, what has held them back to date is the lack of a supply of modern offices, with developers currently unwilling to build on a speculative basis as has occurred elsewhere in CEE.

Interest in the Polish regional city of Łódź, from foreign corporations over the last four years has caused quality office stock there to rise to close to 440,000 sqm, compared to an estimated 55,000 sqm in Debrecen. Secondary Polish cities such as Wrocław and Kraków are fertile recruiting grounds for BPO/SSC players.

“The BPO/SSC industry can be treated as a significant recruiter where it is taking on more than 5% of the graduate population and that is the case in every city in the CEE region we surveyed except for Budapest and Bratislava,” said Mark Robinson, CEE research specialist at Colliers International. “The total number of employees engaged with BPO/SSC companies in Kraków, for example, is equivalent to 7.3% of the city’s entire population. This compares to 1.3% for Debrecen and 2.3% for Budapest. The region’s climb up the tech ‘complexity’ scale is seen as an important driver.”

Strong Demand

There is also a strong demand for office space in secondary Romanian cities such as Cluj Napoca and Iasi where BPOs have chosen to locate outside of Bucharest. Commentators see the possible development of South East Europe markets by attracting outsourcing companies.

“Belgrade, without question, could become a dominant business center. Its position is not so dissimilar to where the likes of Budapest and Prague found themselves in the early 2000s,” comments Uros Grujic, head of investment properties SEE, CBRE.

The skilled labor force shortage is a general issue in Hungary and the region; however, there are good examples in Hungary of universities trying to serve the needs of the sector by launching courses and intern-programs with SSCs in both Budapest and in the countryside.

“There is no doubt that the current labor shortage is felt across Hungary – most businesses rank this as their top challenge in further expansion. The SSCs are seeking proximity to higher educational institutions in order to secure running access to fresh candidates – hence the focus on Budapest, Debrecen and Szeged,” notes CBRE’s Johnston.

“Talent base is a primary consideration for employers at the moment, therefore all secondary cities with universities and colleges are already targeted by occupiers and developers. New developments are already under completion and more expected to come in the next couple of years,” concludes Balázs Simonyi, leasing director at CPI.

Lion offices in Debrecen.