Take-up rose to pre-crisis levels in 2013
Take-up in the CEE region exceeded all previous levels and hit a new record high of 1.4 million sq m office space being transacted in 2013, according to Cushman & Wakefield (C&W) the world’s largest privately held commercial real estate services firm in their latest Central European office market update. The market report analyses Bratislava, Budapest, Prague and Warsaw where the total combined office stock equates to nearly 12 million sq m, tempered by limited new supply being released in the region (circa 436,000 sq m).
Demand and supply
According to Cushman & Wakefield’s review of the office markets in the capital cities of Central Europe, the ranking of office markets by total office stock remains unchanged with Warsaw retaining the largest office stock equating to 4,1 million sq m, followed by Budapest with 3,2 million sq m, Prague in third place with nearly 3 million sq m and Bratislava in fourth position with 1,5 million sq m existing supply.
Newly released supply in the Central European region equated to 436,000 sq m for 2013, which can be viewed as stable, and was generally delivered equally in H1 and H2 of the year, down slightly on the new supply released in 2012 (nearly 460,000 sq m). The highest amount of new space was delivered in Warsaw (nearly 300,000 sq m), then Prague (nearly 80,000 sq m), followed by Budapest (33,000 sq m) and Bratislava (26,000 sq m).
Jonathan Hallett, Managing Partner of Cushman & Wakefield’s Central European Region, said: “The effects of the recession have clearly reduced the level of supply being released to the region, albeit on a disproportionate basis. However, as the market continues to recover we would expect these levels to increase over the next two years or so as occupiers become more expansionist in their occupational strategies and developers find it easier to access funding for speculative schemes.’’
Currently there is close to 600,000 sq m office space under construction in the CE Region which is planned to be delivered in 2014. This equates to a 27% increase in new supply compared to 2013.
“The CE office market shows a clear revival particularly in Poland with take up continuing to grow in both Warsaw and regional cities. Despite this rents are still relatively subdued due to increasing vacancy levels, especially in Warsaw where vacancy rates are expected to grow to around 14% by the end of 2014,” said Richard Aboo, Partner, Head of CEE Office Agency, Cushman & Wakefield.
In Budapest just over 66,000 sq m will be delivered in 2014 – however – 45% of this space is already pre-let meaning the actual available space released will extend to circa 37,000 sq m. David Johnston – Head of Office Agency at C&W Hungary said ‘’Budapest is slowly evolving into more of a pre-let market. In 2009 310,000 sq m of new space was delivered to the market, reflecting nearly 10% of total stock. Bring this forward to 2013 and the actual space released equated to under 0.5%. This is due to the recession and restrictions on financing; however prudent occupiers are now looking at their lease expiries 2 or 3 years in advance in order to secure new Grade A pre-let offices. Although the market is showing good signs of a recovery – it remains tenant favourable for the meantime.’’
According to Cushman & Wakefield H2 2013 leasing volumes in the four Central European capitals totalled nearly 730,000 sq m which is a 6% increase compared to H1. The total take-up in the region amounted to 1,4 million sq m which is more than 127,000 sq m increase when compared to 2012.
The largest new lease in Central Europe in 2013 was in Harmony Konstruktorska in Warsaw, where Polkomtel prelet the whole building (22,680 sq m).The largest re-negotiation was in Budapest, where a Public body renewed in the non-Central Pest submarket. Warsaw continues to record the largest number of pre-let deals across the Central European capitals with more than 154,000 sq m in 2013.
Expansions, however, were most active in Budapest where circa 66,000 sq m were transacted on this basis.
In 2013 renewals accounted for the highest proportion of all transaction types, equating to 37% of the total Central European take-up. New leases were second, at 33%, followed by pre-leases at 14%, then expansions at 10% and lastly owner occupied transactions at 4%.
Prime rents in the Central Business Districts of the four Central European capital cities remained stable, with the exception of Warsaw and Prague where they fell slightly this year and currently stand at EUR 25.00/sq m/month and EUR 20.25/sq m/month respectively. Prime rents in Budapest CBD have remained unchanged at EUR 21/sq m/month since 2010 whilst Bratislava’s headline rent of EUR 15/sq m/month remained unchanged since the end of 2012.
In comparison, prime CBD rents in many Western European markets are considerably higher and improving – as opposed to CEE where rents over 2013 have remained under noticeable pressure. By the end of 2013, London Westend has seen prime rents rise to €85/sq m/month and those in Munich CBD improved to €32/sq m/month. Nevertheless, Paris CBD accounted for a slight easing of prime rental levels, with the 2013 year-end value shifting to €56/sq m/month.
Note: The above stipulated rents are quoted on the basis of gross internal area.
The CE vacancy rate of 14.1% in H1 2013 was a five-year high, however by year end this figure increased even more by a few basis points to 14.3%. The Vacancy rate outlook is forecast to rise further across the region as new speculative space is delivered to the market. Warsaw still has the lowest Vacancy in the region (11.7%), followed by Prague (13.2%). Bratislava takes third place (15.2%) and finally Budapest (18.4%). Budapest’s vacancy may seem high when compared to the other cities, however, it has reduced significantly since the high of 21% Q3 2012, and it is forecast to reduce further as 2014 progresses.
The one-year moving average absorption level, albeit increasing along 2013, remained relatively moderate despite the rising levels of occupier activity in the CE region over the last three years. The prevalent high proportion of renewal and renegotiation driven demand continues to signify the predominance of consolidation-led strategies in the region, where ongoing austerity remains a deterrent to larger absorption volumes. Nevertheless, a shift towards expansions was clearly seen in 2013, and with this trend expected to continue this should provoke healthier absorption levels in the foreseeable future.
The successes within the occupational demand show that there are some clear winners in the CE office sector. This is reflected in the investment market with high demand for iconic, landmark buildings such as Rondo 1 and Prague City Center as well as boutique buildings that are outperforming the market.
“The weight of new core international and domestic capital is spreading to Polish regional cities for best-in-class assets and Budapest has come back onto the radar in the search for strong value characteristics. We are also experiencing growing investor demand for first or second generation offices that are in excellent locations within Prague and Warsaw and have the opportunity to be repositioned. This will be a strong trend for the next 24 months. We can say that the office sector continues to be the dominant sector for investment activity in 2014.” said James Chapman Partner, Head of Capital Markets for CE region at Cushman & Wakefield.