Uncertainty marks the current office market in Budapest

Although limited deliveries in recent years mean there is little risk of oversupply in the Budapest office market, a reshaping of working habits and wider economic considerations caused by the international economic and political environment now raise the question of whether demand will meet supply, writes real estate editor Gary J. Morell.

Substantial pre-releases are required in this market environment before construction of a project is undertaken. Many businesses have only partially returned to the office and questions remain about future needs and demand.

Developers are undertaking more sustainable and imaginative office designs to meet the demands of office occupants and increasingly stringent sustainability regulations. As shown on page 29, the total stock of modern offices in Budapest has exceeded four million m² of class assets, according to the Budapest Research Forum. The overall vacancy rate has risen to 9% and is expected to rise further. However, an oversupply is not expected.

Colliers has identified 19 office projects in Budapest to be completed this year and another 11 in 2023. These are incremental developments with the creation of business centers, stand-alone and regeneration projects.

Developer Wing, for example, is to deliver the 29,000 m² Liberty mixed-use office and hotel project in Könyves Kálmán körút district XI, near Üllöi út, the road to the city from the airport. In the Váci Corridor, GTC has completed the fully pre-released 27,500 m² pillar, and in Buda South, Futureal will deliver almost 40,000 m² of space at Budapest One. Budapest will see its first office skyscraper with the completion of the 50,000 m² MOL campus headquarters at BudaPart in District XI.

Developments are underway in Budapest, but construction is being disrupted by supply chain issues and the continued repricing of building materials. The office pipeline for this year is around 326,000m², although pre-lettings mean only a third of this will be available to new tenants.

Additionally, there is approximately 190,000 square meters of space under construction with a later completion date, according to CBRE. One of the problems is that the Budapest office market is heavily exposed to multinational companies with shared service centers, for example. Many of them have still not returned to the office and as a result important transactions are missing.

Development scope

Analysts see room for development as only 45,000 m² of space in three projects were delivered last year. Above all, the vacancy remained below the 10% threshold.

“This is one of the lowest levels on record, as ongoing office developments scheduled for delivery in the second half of the year have all been delayed. The lack of supply since 2020 means that Budapest has a disproportionate stock of first-generation offices,” says Cushman & Wakefield. The consultancy says Budapest remains attractive to international companies relocating and benefiting from cost-cutting initiatives in times of economic uncertainty.

Belgian developer Atenor is to deliver two buildings: RoseVille in Buda and Aréna Business Campus B, an 85,000 m² staggered development project on Hungária körút, the city’s outer boulevard, in District VIII.

“For large tenants, development should be as bespoke as possible. It largely depends on the stage of development when the tenant “joins” and the pre-letting is signed,” says Melinda Kovács, Head of Development and Leasing at Atenor Hungary, about the leasing process.

“Location, services and a good financial package are still key, but flexibilities in terms of lease term and space (i.e. scope for expansion, expansion and contraction) are also gaining more and more importance in today’s turbulent circumstances,” she explains.

Despite some demand concerns, the office sector remains the top investment sector, accounting for 74% of the €1.14 billion investment market activity for 2021, according to Cushman & Wakefield.

Performance bonus

Colliers, meanwhile, estimates prime office yields for Budapest at 5.25% and stable, representing a significant premium over Prague and Warsaw for high-quality office products; very premium assets can trade below 5%. Despite the strong pipeline, the Budapest office market suffers from a low supply of available investment-grade assets.

Environmental, social and governance issues are now seen as central to a developer’s lease and exit strategy.

“ESG and sustainability is already one of the top topics on development and other markets. Internal guidelines from tenants and international investors, in particular, will make it increasingly difficult to even consider properties which do not have sustainability characteristics to help them achieve their ESG goals, so sustainability accreditation is now a ‘must’ and ESG compliance will be taken very seriously in the future,” comments Kovács .

“ESG compliance should not remain just a marketing slogan. A smart, interconnected building management system enables PM and FM experts to reduce CO2 emissions and achieve sustainability goals faster,” says Valter Kalaus, Managing Director of Newmark VLK Hungary.

“The social aspects have become more important than ever. A proven ESG record will support an exit strategy and may increase the price. ESG aspects should be included in staff training, and green bond issuers, mainly developers, will also be responsible for ESG compliance,” he adds.

It will be interesting to see how demand and development strategies develop in the near future in the Budapest office market in response to the economic and political environment. Developers will need to improve their offers to meet the changing climate around tenant specifications, sustainability and ESG and meet the challenge of upward pressure on prices.

This article first appeared in the May 6, 2022 print issue of the Budapest Business Journal.

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