Constrained Pipeline Meets Strong Demand

Arena Business Campus Building A

With strong demand fundamentals, office developers have been able to go forward with office projects with the confidence that tenants can be found and preleases concluded and this is thus regarded as one of the sectors that will be least adversely impacted by the coronavirus crisis.

By Gary J. Morrell

Budapest office supply has continued to boom, with vacancy falling to some of the lowest levels on record. At the same time, supply has been relatively constrained in comparison with past cycles. Preleases now constitute a significant part of the market; companies looking for quality, well-located contiguous office spaces have to plan ahead as there are few opportunities in the Budapest market.

Developers have sustainable development policies and this can be seen as market pressures exerting influence on developers and buildingowners to meet the changing and ever more complex demands of tenants. Developers and investors are employing international and leading Hungarian architects and interior designers to deliver ever more imaginative projects to meet these sophisticated demands from building users.

With regard to the impact of the COVID-19 virus, Cushman & Wakefield say ongoing development schemes

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“Clients seem to be advancing new lease plans, the only limiting factor is the lack of office viewings. However coworking/serviced offices could be put to the test with the current use of home offices. If companies and workers explore this approach, then it could change not only coworking but the traditional office approach.”

are proceeding with no delays reported, although the permitting processes have slowed down. Office is seen as one of the least negatively affected market sectors, if the traditional long-term leases are taken into consideration, according to Adorján Salamon, CEO of Eston International, an international associate of Savills.

“Clients seem to be advancing new lease plans, the only limiting factor is the lack of office viewings. However coworking/serviced offices could be put to the test with the current use of home offices. If companies and workers explore this approach, then it could change not only coworking but the traditional office approach,” he argues.

Total modern office stock in Budapest now stands at around 3.7 million sqm, 3.1 million of which is leasable class “A” and “B” complexes according to the Budapest Research Forum (consisting of CBRE, Cushman & Wakefield, JLL, Colliers International, Eston International and Robertson Hungary). The overall vacancy rate stood at 6% as of the first quarter of the year. Total leasing demand for 2019 amounted to 637,00 sqm, which is the highest annual volume on record; annual take-up has been rising since 2016.

POTENTIAL PIPELINE

The Budapest office market has a potential pipeline of more than 570,000 sqm and development of largescale, phased speculative projects by developers such as Atenor, HB Reavis and CPI reflects both the positive indicators in the capital and the longterm market confidence in the ability to let and sell a project onto investors.

Cushman & Wakefield have traced an increased pipeline of 230,000 sqm for 2020, although a large proportion of this space is prelet or will be absorbed by the time of delivery. Around 55,000 sqm of office space was delivered in the first quarter of the year: the first 27,000 sqm phase of the Budapest ONE Business Park by Futureal (which will form part of the Kelenföld urban redevelopment project) and the 18,000 sqm BudaPart Gate (the first office phase of BudaPart by Property Market), on the southern Buda bank of the Danube.

JLL has traced 14 office projects that were due to be delivered this year as of the first quarter, the largest of which is the 34,500 sqm Agora Hub and the 34,000 sqm Agora Tower, representing the first phase of the 136,000 sqm Agora Budapest project. In one of the largest lettings in the Budapest office market, BP has taken 22,000 sqm of space at the complex. As of the first

quarter, the consultancy has traced a pipeline of 185,00 sqm for this year.

“In my view it is too early to state how the current situation will impact the office market,” cautions Peter Würsching, head of leasing at JLL Hungary. “We see the recent trend that large occupiers are reconsidering their real estate strategies. Some say they have positive experiences with home office and therefore might need less space in the future (20-30%), others state that, learning from the current

Aréna Business Campus by Atenor.

situation, they are planning to relocate functions from the Far East, so actually will need more office space,” he continues.

“It is also an interesting question in the short- and mid-term as to how social distancing can be achieved in the current office spaces; to keep the necessary distance between the existing number of work stations would obviously require more space. However, most probably this will be solved with work shifts (for example

only half of employees will be in the office at a time). In a nutshell, it is hard to predict how will the current situation will impact office developments as it is highly dependent upon the currently shaping tenant requirements,” Würsching says.

LONG-TERM PROJECT

In an ongoing long-term project, Belgium’s Atenor is developing the BREEAM “Excellent” accredited, 130,000 sqm Váci Greens office in Váci út. “Our Belgium ownership and management is focused significantly on Hungary and, therefore, out of the 1.2 million sqm portfolio across Europe, 240,000 sqm is in Hungary and this will further expand,” comments Nikolett Püschl, leasing and development director at Atenor Hungary.

In parallel with development of the final phases, the developer has started the speculative, phased 85,000 sqm Aréna Business Campus on Budapest’s Hungária körút outer

“We see a significant slow-down in the processes and new demand is somewhat unpredictable, at least in the short-term, as companies are in the process of reviewing their real estate strategies. What we assume is that there will be a continuous demand for high quality modern buildings [...] but the flexibility of any lease will be a key issue.”

boulevard. The first, 20,000 sqm phase of the project is due to be handed over in summer and groundwork has already started on a second, 14,000 sqm phase. Essentially, one of the four phases of the development is due to complete every year for four years. In parallel with these developments, Atenor has also undertaken two projects in Buda.

BudaPart Gate by Property Market.

“Our development model is that we purchase, develop, lease and sell and then start over again with new projects. Our ongoing developments, Váci Greens F and E as well as Aréna Business Campus A, are progressing as per the original plan. We do not have any delay as of today,” adds Püschl.

CBRE puts the supply expectation for the year at 265,000 sqm, which would represent a new high in this cycle. “However, further development delays are likely and, hence, some of the 2020 pipeline is expected to shift later. In terms of leasing status, the volume currently scheduled for handover in 2020 is 70% committed,” says Anikó Kovács, head of office advisory and transactions at CBRE Hungary. For 2021, JLL have traced 280,000 sqm of new

Balance Hall by CPI .

“Further development delays are likely and, hence, some of the 2020 pipeline is expected to shift later. In terms of leasing status, the volume currently scheduled for handover in 2020 is 70% committed.”

supply or space under construction, of which 160,000 sqm is prelet.

The long-established Swedish-based CEE office developer Skanska AB is due to deliver the 13,000 sqm Nordic Light Trio. The complex was designed by Budapest-based architectural firm Paulinyi & Partners and could be one of the first WELL-certified buildings in Hungary, in addition to receiving LEED “Gold” certification.

The company says it has secured sites for further projects, reflecting a long-term commitment to the Budapest office market.

WELL-CERTIFIED

“Skanska Hungary will complete the Nordic Light Trio office building, our first project to be WELL-certified and sold to a South Korean investor in 2019 and in which 100% of space has been already preleased,” the company says. “As for upcoming projects, our plan is to soon start the development of H2Offices on the corner of Dózsa György út and Váci út,” the company adds.