The shortage of class ‘A’ offices and the limited development of new space means it’s getting harder to lease a good office in this town.
The Budapest office market suffers from a limited supply of well-located quality product to meet growing demand as sentiment towards Hungary is showing signs of improvement. This lack of available class “A” product is a major obstacle to development of the office market. However, it is positive that pipeline projects are attracting preleases for projects that are well specified and of a quality comparable to that found in Western Europe in the view of many analysts. New office projects are accredited to international sustainability standards such as LEED and BREEAM. Further, green accreditation is now the norm for high quality office developments from the perspective of developers, tenants and investors.
“Although the vacancy rate is above 15%, the availability of large modern contiguous office space is decreasing; only a handful of projects can offer more than 3,000 sqm of modern office space,” said Balázs Simay, head of office agency at DTZ Hungary. Limited development due to economic and political concerns, high vacancy and the difficulty of sourcing debt finance has restricted the supply of new office developments in recent years. This has brought down vacancy rates and put pressure on rentals. Only established European developers and those with the ability to source funds have been able to develop in a market where debt finance is expensive and difficult to source and loan-to-development (LTD) ratios are low. In addition building owners are upgrading older assets in their portfolios to meet growing demand.
The Budapest office development pipeline remains low with a resulting limited availability of well located, large class “A” floorplates. Developers such as Skanska, Futureal, Horizon Development, Atenor, HB Reavis and Wing have undertaken speculative development strategies, often based on a significant proportion of preleases in what has been a difficult economic environment in recent years. Significantly, these developers have the required equity to build or meet strict LTD equity requirements from banks.
Delivery pipeline for this year is limited to the 18,200 sqm second phase (Building C) and the 23,000 sqm third phase (Building B) of Váci Greens by the Belgium Atenor Group and designed by TIBA Architect Studio. Building C will be delivered in July, and Building B in November. The only other delivery will be the 6,000 sqm Erzsébet office center, 100% pre-let to Groupama.
David Johnston, head of office agency at Cushman & Wakefield (C&W), the letting agents for Váci Greens, commented that it is involved in advanced negotiations for both phases. A 6,500 sqm prelease has been signed for Building C with GE Healthcare. Atenor will soon break ground on the 15,500 sqm Building D, which is due to be delivered at the end of 2016 or beginning of 2017. The 16,000 sqm Building A was completed at the end of 2013 and was fully let six months after completion. This gave Atenor the confidence to go ahead with further speculative phases of the complex, financed by its own resources, in what was a challenging market
According to the Budapest Research Forum (comprising CBRE, Colliers International, C&W, DTZ, Eston International, JLL and Robertson Hungary), total modern office stock consists of 2,588,000 sqm of modern class “A” and “B” speculative space, in addition to 642,000 sqm of owner-occupied space. This compares to around three million sqm of space in Prague, a city and country of a comparative size, and 4.4 million for Warsaw, now the dominant business center for CEE.
Budapest office vacancy has fallen towards 15% in a market where vacancy has traditionally been high. This is the lowest rate since 2009. “The South Buda submarket continues to lead the way in terms of having the lowest vacancy rate in the city, now standing at circa 10%, compared to the Budapest wide vacancy rate of 15.7%. This figure is more impressive given that the Budapest vacancy rate has never been below 10%,” added Johnston.
Many analysts argue that this is not a true reflection of real vacancy and recorded stock should be further rationalized, as there are a number of outdated first generation buildings from the 1990s that should be taken out of the equation. Further, there is a wide variation in vacancy between the different sub-districts. For example the lowest rate is 10% in South Buda while the Váci út corridor has a higher rate at 18.7%. With regard to deals, 165 were closed in the first quarter with an average size of 388 sqm; 43% of these were new lettings. Total demand for the quarter is put at 64,000 sqm with a total absorption of 14,000 sqm.
“Vacancy is falling due to continuing demand and the lack of new delivery. Demand for shared service centers is driving the market due to the location and the relatively low costs of skilled labor,”
said Gergely Padós, managing director of C&W Hungary. He expects vacancy to fall to below 15% for this year. DTZ put prime rents at €14-16 per sqm per month for prime buildings. “Budapest is one of the most affordable office locations in Europe,” said DTZ.
Vacancy is also a concern in the Prague and Warsaw office markets. This stands at more than 15% for Prague and above 13% for Warsaw. Tewfik Sabonyui, managing director of JLL in Czech Republic puts 2015 office supply for Prague at 180,000 sqm, although some of these could be postponed as concerns have been raised of possible oversupply. Savills estimates office supply at 758,000 sqm for Warsaw up to 2017. JLL research records 1.4 million sqm of office space under construction in Poland at the end of 2014; more than 50% of this is in Warsaw.
The latest significant Budapest office delivery was the 21,000 sqm Váci Corner office complex by HB Reavis in the ever popular Váci út corridor. The Slovak-based developer expects the complex to be fully let by summer (the latest letting was a 1,200 sqm deal with General Motors for use as a shared service center). The project, designed by Studio 100, has been awarded a BREEAM “Excellent” certification.
In another letting CBRE Global Investors on behalf of the CBRE Property Fund Central Europe (PFCE) has signed a 1,800 sqm long-term lease agreement at the 7,000 sqm Liget Center, facing Városliget, with Heineken. The company has established its Hungarian headquarters in the center, which has undergone an intensive fit-out. The Liget Center is a former trade union headquarters built in 1948 and later refurbished by the Dutch architect Erick van Egeraat.
The Warsaw office market provides some comparisons as a record-breaking agreement for the lease of 22,000 sqm office space at the Warsaw Spire skyscraper by Ghelamco has been signed. In another deal outside the capital, Skanska Property Poland has leased 16,400 sqm for the HP Global Business Center at its Dominikanski office complex in Wroclaw.
DTZ estimates that there is 95,000 sqm of office space in the pipeline for the next two years. Almost 80% of this is on Váci út. Colliers’ research indicates that four projects are currently under construction with a total of around 80,000 sqm. With regard to pipeline, having concluded a 8,500 sqm prelease at its V17 office project in Váci út, Hungary’s Wing is due to deliver the 12,000 sqm development in mid-2016. According to Noah Steinberg, chairman and CEO of Wing the company has 70% preleased the project. This goes beyond the 50% prelease requirement from lenders that is the current norm.
Another prolific Budapest office developer, Skanska Property, has commenced construction of the first 6,600 sqm phase of Nordic Light, its seventh Budapest office project, due to complete in March 2016. The two-phased 26,000 sqm development in the Váci út business district has been given LEED Gold pre-certification and was designed by the Hungarian Mérték Architect Studio. The second 19,000 sqm phase is due to complete in summer 2017. “We are in serious negotiations with possible tenants and have some significant enquiries,” said Andrea Csibi, leasing negotiator at Skanska Property Hungary.
Elsewhere, Hungary-based Futureal is seeking preleases for the 70,000 sqm Budapest One business park adjacent to the terminus of the recently completed Metro 4 line on the western edge of Budapest. “We require at least a 10,000-15,000 sqm prelease before going ahead,” said Gábor Futó, founder and co-owner of Futureal. Futureal has a policy of going ahead with a phase of a development only once a substantial prelease has been concluded.
With regard to supply, office owners are undertaking refurbishments of second generation buildings. Convergence has acquired a 30,000 sqm office portfolio consisting of three buildings on behalf of the investor, Europa Capital, and is undertaking a complete rehabilitation of the Duna Office Center in Váci út. S IMMO Hungary, the Hungarian subsidiary of the Vienna-based S IMMO AG, has acquired a portfolio of seven Budapest office centers with a total leasable area of around 100,000 sqm that are being upgraded and asset managed to meet the changing specifications and expectations of tenants in Class “A” office centers.
The question remains as to when office supply will increase and more developers will enter the Hungarian office market in response to improving economic conditions, growing tenant demand and increased access to development debt finance, as lenders are expected to take a more favorable view with regard to financing projects in Hungary.