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“We expect a further rise in underutilization”
The rather moderate office market demand is reminiscent of the beginning of the 2010s, which can be explained by the weakening performance of the domestic economy, but mostly we have to look for global reasons behind it. The entire European panorama is fairly uniform, in the region Prague and Belgrade stand out, in the former the new developments starting, and in the latter the activation of Russian business life, pulled the demand up – he believes Gábor Borbély MRICS, research director of CBRE Hungary.
At home, we expect a further rise in underutilization, which is mainly due to the rationalization of the office portfolio of large tenants: tenants want better and more efficient offices, preferably smaller, but more thoughtfully.
– said the expert, and then added that this is precisely why they see that the demand for centrally located, high-positioned, energy-efficient and well-designed offices is growing, even in these tighter times.
“In Warsaw and Western Europe, the split in the market is already clearly visible, this is true both geographically and technically: the demand for truly ‘A’ category offices in the city center is increasing, but elsewhere it is decreasing. We do not yet see this in the domestic vacancy rate, since it is approx. the same (12.0-12.5%), but while the level of new handovers in category ‘A’ was the cause of the increase in category ‘B’, moving out was the cause. category, vacancies start to decrease sooner.
Rent is an increasingly sensitive issue as the tenant looks at the total operating cost. As a result, where efficient operation can save the tenant on operating costs, the owner has room to play in terms of rent, but this is not true for the majority of the stock. In the coming quarters, we expect a growing tenant movement from lower-quality buildings to new (or at least efficient) offices, which will also result in a divergence in rents. And this will also affect the evaluation levels in the longer term. Today they are still “hitting everything”, which is office, but soon the two segments will separate and a premium category will emerge – as always happens when tenant and investor demand decreases.”
“Demand for the best locations, modern and energy-efficient office buildings remains stable”
From the point of view of the office market processes in Q1 2023, it is important to distinguish between the categories, since in the first quarter of this year the ‘B’ category buildings contributed significantly to the increase in vacancies and the low volume of demand. This partly reflects the jump in energy costs and, on the other hand, the peculiarity of the tenant mix typical of these buildings. In the case of smaller tenants and SMEs, the worsening macroeconomic conditions and increased energy costs caused serious liquidity problems, which affected the vacancy, he told our question. Kristóf Tóth, Head of Research, Colliers Hungary.
At the same time, the rate also decreased in the case of the CBD, North Buda and Buda Center, the net absorption moved in a positive range, and the Váci corridor was characterized by stagnant vacancies compared to the previous quarter.
All of this confirms that there is still stable demand for the best locations and modern, green, energy-efficient office buildings.
– explained the expert, and then added that: “Overall, we do not expect a significant change in terms of vacancies this year, especially in the case of lower-category houses; next year, with the expected acceleration of economic dynamics and more favorable macroeconomic conditions, vacancies may also move in a more favorable direction .
In addition, in our view, the office market will remain tenant-driven during the year 2023, and flexibility in contracts will continue to be of fundamental importance. The role of the fit-out contribution remains decisive due to the high construction costs and vacancy, which may cause a decrease in the effective rents. At the same time, in the current financing and interest rate environment, we do not expect a serious correction of headline rent levels in the medium term.”
Portfolio Property X 2023
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“The gap between new-generation office buildings and those older than 10-15 years is growing”
The Budapest office market still has stable fundamentals, the volume of lettings and the slight increase in the vacancy rate are the result of the organic processes of the current market environment. The rental data for the first quarter of 2023 are fully in line with the average of the previous ten years. However, a shift can be seen in the structure of rentals, with one exception, large pre-letting transactions have already disappeared in 2022, and the rate of contract extensions is increasing – he summarized the situation Orsolya Hegedűs, Valuation Associate at Cushman & Wakefield’s Budapest office and head of the consulting and market research department.
We see a decrease in the number of tenants entering the new market, the absolute value of expansions remained below the five-year average. These processes are expected to continue this year, i.e. we expect renegotiations this year, but there is also the possibility of moving.
– pointed out the leader, and then also reported that similar processes are also taking place in the capitals of the region: the vacancy rate in Warsaw and Bratislava describes a similar trajectory, only Prague has a lower vacancy rate, while in Bucharest the proportion of vacant land has stabilized at a higher level than in Budapest.
“The office market in Budapest is diverse, the activity of the individual submarkets shows significant differences. The leasing activity is traditionally strongest on Váci út, Dél-Buda and Pest Központ, as this is where the most modern developments are concentrated, or large-scale repossessions as a result of previous relocations. The spectrum is divided into two end North Buda and the Agglomeration. Quality office space has been sold out in North Buda for quite some time, so the vacancy rate is extremely low, even though there is a demand for new, quality office space. This is clearly shown by the special interest in RoseVille, the owner of the soon-to-be-handover building already has several signed a pre-lease contract with a tenant.
Based on vacancy and rental data, we see that the gap between new-generation office buildings and office buildings older than 10-15 years is increasing.
In the case of modern offices, we also experienced a decrease in underutilization last year, while in the case of the second generation, there are apparently fewer people interested and they are weighed down by higher underutilization due to previous moves out. In our opinion, these houses also have potential, but it has now become obvious that they need renovation, repositioning, or even a change of function. The ratio of new developments and handovers is gradually decreasing, so we do not expect a rapid underutilization.”
Tomorrow we will present the next article in our two-part series on changes in the office market, in which experts from Robertson Hungary, JLL and Eston will speak.
ATENOR – RoseVille15503 m220-20 €
Information park (E)674 m213–14 €
Victor Hugo Office Building265 m23480-3600 Ft
myhive Greenpoint 70 m216-16 €
myhive Thirteen | Xenter1830 m213.5–14.5 €
Óbuda Gate2350 m211–13.5 €
Cover image: Getty Images
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