Real Estate Review 2024 Sample

DEVELOPERS MUST EVOLVE TO MEET CHANGED CIRCUMSTANCES

Building in the Budapest office market is limited as developers exercise caution in their strategies. New projects are not being initiated in an uncertain environment. This is against the background of the growing cost of funding, concerns over tenant demand, and the ability to conclude substantial pre-leases that meet debt finance terms, as well as the costs of construction and securing a suitably sized plot.

By Gary J. Morrell

However, despite the negative impact of the geopolitical and economic environment, uncertainty around office working practices and the time spent in the office, and increasing maintenance and energy costs, developers are pushing ahead with their ongoing projects, be they single buildings, phased developments or reconstructions and refurbishments, an increasingly popular option.

The current financial environment obviously favors those developers who can use their own development finances rather than rely on bank financing and who can sell off assets to investors at a time of their choosing in the development and exit cycle. However, with a lull in the investment market, an exit strategy for a developer at the desired point in the cycle and at a favorable price is more difficult to conclude.

BakerStreet by Atenor

OFFICE INTERIORS NOW A CRITICAL ELEMENT TO A SUCCESSFUL BUILDING

Interior issues are an intrinsic part of the development cycle of an office project from conception, design, leasing strategy and project and facility management. This is in reaction to tenants’ and, in turn, staff demands and increasingly stringent ESG expectations and regulations from lenders, investors and national and EU authorities. All participants are increasingly impacted as stakeholders, from developers to tenants to investors.

By Gary J. Morrell

Indeed, as developers strive to deliver more engaging, highly-specified and sustainable office complexes, the interior and exterior design have become part of the same process as a combination of market pressures, sustainability regulations and tenant expectations exert their influence on developers and building owners. Developers are employing leading Hungarian and international

architects and interior designers to deliver ever more imaginative projects.

Sustainability accreditation from independent, third-party sustainability organizations such as Breeam, Leed and, increasingly, Well have a range of requirements regarding interiors that are now the norm for office development, as well as a basic expectation from tenants, staff and investors at the higher end of the Hungarian office market. The design, development and property management

of offices in line with sustainability and ESG requirements while also responding to tenant and staff demands brings issues affecting the office environment, layout and design, provision of amenities and the internal atmosphere for the well-being and increased productivity and staff retention.

“New working habits have emerged, notably with the widespread adaption of the home office. Companies have recently begun to consciously assess their options and revalue their real estate to create

The BP office in Árbóc utca, in Budapest’s District XIII. Europa Design worked on the project.

HUNGARY’S INDUSTRIAL AND LOGISTICS BOOM CONTINUES UNABATED

The industrial market is booming, with leading CEE regional industrial park developers and operators and Hungarian players participating in an increasingly active market. That has grown on the back of increasing logistics demand in the pandemic and post-COVID-19 environment and greater requirements for industrial space to meet the significant FDI arrivals, notably in the electric vehicle and EV-related industries.

By Gary J. Morrell

The industrial market was initially centered on the orbital motorway around the Greater Budapest area but has now also moved out to various industrial hubs across the country, providing badly needed economic development outside the capital. Industrial stock in Hungary is still relatively small compared to the major Central European markets such as Poland, the Czech Republic and, increasingly, Romania, where development is moving apace.

A regional cross-country logistics and light industrial network has finally emerged in Hungary, as has long been the model in Poland and the Czech Republic. With both rising development activity and vacancy rates, albeit from record low levels, developers are increasingly pursuing the more secure built-to-suit option rather than following the more ambitious (and potentially riskier) speculative model. This also enables developers to meet more specific tenant demands, not least around sustainability, from the initial design and construction phases to property and facility management.

It is against this background of market demands and increasingly stringent EU Taxonomy regulations that developers are delivering increasingly ESG-compliant facilities.

As of the turn of the year, there was 5 million-plus sqm of modern logistics and light industrial space in Hungary, with 3.5 million sqm of that in the Greater Budapest area and 1.6 million sqm in regional centers, according to the Budapest Research Forum (consisting of CBRE, Colliers, Cushman & Wakefield, Eston International, iO Partners and Robertson Hungary). Vacancy rates have risen to about 8% following a period of widespread speculative development but still stand below the 10% CEE regional vacancy threshold. Cushman & Wakefield has traced 518,000 sqm of industrial space under construction, the majority of which (358,000 sqm) is still in the Greater Budapest area.

“CEE countries, such as Hungary, have emerged as favored destinations for nearshoring due to several strategic advantages. These include lower labor costs compared to Western Europe, proximity to major Western European markets and resilient support chains,” comments Cushman & Wakefield.

“Hungary stands out among its major CEE competitors due to its

East Gate Pro Business Park by Wing

CONSTRAINED RETAIL DEVELOPMENT CONTINUES, WITH HOPES FOR REVIVAL IN CONSUMER CONFIDENCE

PINNED ON RISING REAL WAGES

Retail and shopping center development remains constrained against a background of concerns about spending power and the increasing use of e-commerce; no major shopping center projects are in the pipeline. Center owners are essentially redeveloping and upgrading the shopping, leisure and service offerings of existing malls to meet ever more sophisticated demands from consumers and looking to enhance the retail experience.

By Gary J. Morrell

Perceived tenant (and therefore consumer) demands include an improved F&B offering, a more varied tenant mix and imaginative designs. Retail demand has been under considerable pressure, with e-commerce and high inflation impacting spending. Operational costs present continuing problems for retailers as center owners have passed on increased energy prices, for example, to tenants. The limited ongoing retail development is, in the main, part of larger mixed-use projects and regional retail parks.

Despite the developmental concerns concerning the retail market, the evidence is there that Hungarians have a preference for the bricks-andmortar retail experience, shopping and carrying out other leisure activities in a shopping mall, retail park or high street stores. According to Cushman & Wakefield, brick-and-mortar stores maintain their dominance in the retail landscape, accounting for more than 90% of retail sales.

“We anticipate the pace of online growth to revert to pre-pandemic levels, projecting that online sales will capture approximately 14.8% of total retail sales by the end of 2026, aligning with levels seen in Germany and the Czech Republic,” says the consultancy.

Reduced purchasing power due to rapidly rising inflation was the primary concern of 83% of surveyed retailers in 2023 in the CEE region, according to CBRE. It has recorded 7.5% for e-commerce penetration into retail sales, again indicating a majority preference for the physical shopping experience. Despite concerns over demand, retailers are expanding in the market, with F&B and sports brands expected to expand their presence. That is despite retailers facing worries over consumer spending and rising operational and energy costs. One of the most prominent new entrants to Budapest is the fashion store Primark, with a 4,300 sqm flagship store due to open in Arena Mall (the former Aréna Plaza) this year.

SMALLER REGIONAL FORMATS

As elsewhere in the Central and Eastern European region, retail developers are currently opting to build smaller regional retail formats, such as retail parks and strip malls, that provide more flexibility for retailers. That also means developers do not need to commit to the higher critical mass of developing a shopping center in the current uncertain environment. The shopping center stock in Budapest is low by European standards, and there is little prospect of oversupply with low or zero vacancy, notably for the top-tier centers.

As noted above, new retail development tends to be part of mixed-use schemes. One ongoing project in Budapest is the suburban Zugló Mall in District XIV by the residential constructor and developer Bayer Property Hungary. It will provide around 11,000 sqm of retail space as part of a mixed-use project that also includes office and residential elements. The developers aim to create what they term a new city quarter consisting of residential, office and commercial space; the project is due to be delivered in late 2004.

INVESTMENT MARKETS IN HUNGARY, CEE AWAIT UPTURN

Hungary is seen as having a strong pipeline of asset-grade commercial real estate products to meet both tenant and investor demand, particularly in the office, industrial and hotel sectors. Further, Hungary has provided a yield premium on both Western Europe and Poland and the Czech Republic for international institutional investors seeking high-quality, sustainable assets.

By Gary J. Morrell

The Hungarian market is also characterized by a high number of domestic funds and private investors. However, it remains a question when investment activity in Hungary will pick up after a subdued period due to concerns over the cost of finance, demand in the various sectors and the uncertain economic and geopolitical environment. Once investment activity does begin to accelerate, investors and vendors

will have to adhere to more stringent ESG demands and regulations.

“We shall see more transactions in the second half / last quarter of the year and even more next year),” comments Péter Számely, head of real estate finance for the Vienna-based Hypo Noe Lanesbank. “The obstacles to further activity in the investment market are uncertainty about interest rates, occupational behavior and the business outlook in general, including political expectations (votes for MEPs, local municipalities, etc.),” he adds.

The view of many analysts is that there will not be a recovery in the Hungary investment market until at least next year, as the market needs to undergo a re-pricing process. Asset owners in the Hungarian markets need to reassess pricing in relation to Western Europe to become an attractive investment destination again.

Central Europe’s real estate investment trends are at least 12 months behind Western Europe, and there is a further time lag between Hungary and the more established Central European markets. Therefore, a bounce back in Western European markets by the end of 2024 would make a recovery in the Hungary investment market possible in 2025, according to Mike Edwards, head of capital markets at Cushman & Wakefield Hungary.

Views of when there will be an upturn in the investment markets in the region do differ, though. There is a spread for when analysts expect to see a recovery that ranges from the beginning of 2024 to at least 2026. The general consensus is that an upturn in activity in Western Europe would be followed first by Poland, then the Czech Republic, with Hungary coming after that.

“The second half of 2024 should see new deals across multiple jurisdictions, with CEE probably taking the lead due to more restricted yield movements in 2023 than elsewhere in Europe,”

Atenor has sold the 15,500 sqm Breeam “Excellent” certified RoseVille office complex in Budapest to BXR, a London-based fund that, for the first time, has a presence in Hungary.

ESG ‘HERE TO STAY’ AS CENTRAL PART OF BUILDING LIFECYCLE

ESG-compliant features and processes and sustainability accreditations are increasingly the norm in high-end real estate as an essential requirement from tenants, lenders and investors and as a regulatory expectation from the EU and national governments. This applies throughout all stages of the development process, from planning, permitting and financing through to construction, leasing, property and facility management and an exit strategy with a sale to an investor.

By Gary J. Morrell

All market actors are now impacted by environmental, social, and governance issues to varying degrees at a time when rising costs have been a significant concern for the real estate industries;

ESG could have further pricing implications for the markets, according to analysts. However, successful development projects must be ever more sustainable and ESG-compliant, and older buildings are being renovated to similar standards. Essentially, the real

estate industry and related industries, such as construction, architecture, investment and FM and PM, will need to adapt to the growing emphasis on ESG.

“The term and definition of ESG is likely to evolve and adapt in response to changing societal, economic, and regulatory landscapes,” says Zsombor Barta, an ambassador for (and former president of) the Hungarian Green Build Council (HuGBC) and a Breeam assessor. “Overall, the evolution of ESG will likely be driven by a combination of market forces, regulatory developments, and societal expectations for corporate responsibility and sustainability. Companies and investors that can adapt to these changes and demonstrate genuine commitment to ESG principles are likely to be better positioned for long-term success.”

Barta argues that the definition of ESG may expand to include additional factors beyond the traditional environmental, social, and governance metrics. This could consist of climate change resilience, diversity and inclusion, data privacy, supply chain ethics, and human rights. As ESG investing grows,

The initial 25,000 sqm phase of Futureal’s Budapest ONE project became the first building in Hungary to receive Well “Platinum” certification, the top rating available from the third-party sustainability accreditation organization.

BUDAPEST MUST BALANCE COMPETING NEEDS AS DEVELOPMENT CONTINUES

Budapest faces the challenges of preserving its classic Central European look and atmosphere while developing its role as a business center and tourist destination and improving the city as a modern and pleasant place to live and work.

By Gary J. Morrell

With regard to development or redevelopment, any project in the historic center has to be undertaken in line with the extremely strict historic building regulations in accordance with a UNESCO World Heritage site. However, in a competitive CEE and wider European business environment, the Hungarian capital must also maintain a modern stock of class “A” office offices that will attract companies looking to establish their headquarters or business centers. Shared Service Centers have been a significant source of FDI for the city, helped facilitate the development of international office infrastructure and contributed to the development of Budapest.

A newer element that has had to be added to the equation is the concept of environmental, social, and governance as stakeholders face the need to evolve and adapt in response to changing societal, economic, and regulatory landscapes. Overall, the evolution of ESG will be driven by a combination of market forces, regulatory developments, and societal expectations for corporate responsibility and sustainability. Those companies and investors that can adapt to these changes will be better positioned for long-term success.

“In my view, it is vital to find a balance between the preservation of the architectural heritage and new, innovative trends that apply to both the interior and

exterior design of the buildings,” says Noah Steinberg, chairman and CEO of Wing, one of the leading developers. “Our mission is to preserve the Hungarian architectural heritage that defines Budapest, and we believe it is essential that new developments are integrated into the fabric of the city. New buildings should be in line with the urban development plans and should be adjusted to the local environment and residents’ needs. At Wing, we put these principles at the forefront of all our developments, as it is important for us to create environmentally friendly properties,” he explains.

A notable redevelopment of a classic historic building project that is near completion, creating 4,600 sqm of modern office space, is the modernization of Krausz Palota (also known as the Andrássy 12 Office Building) on Andrássy út in District VI in the historic center. Originally constructed in 1885 as per the designs of the renowned architect Zsigmond Quittner, the classic listed building was acquired in 2019 by the investment manager AEW on behalf of its clients. The project could be seen as a continuation of a development strategy initiated by the Hungarian firm Horizon Development for investors and developers purchasing such buildings and renovating them as top-end office and street-front retail complexes and boutique hotels. The Eiffel Palace redevelopment by Horizon at BajcsyZsilinszky út 78 in District V, for example, is recognized as an excellent modern,

The 28-story, 120-meter, approximately 86,000 sqm MOL Campus building is the tallest in Budapest, and its first skyscraper.