How IT is driving up the Romanian office market

More than half of the demand for office space in the first semester came from IT and telecom companies. The skilled labor force, lower operating costs, state aid and tax exemptions available to them are expected to further fuel this trend, according to real estate pundits.

Simona Bazavan, Otilia Haraga

Outsourcing company Luatel announced last week that it had signed a leasing contract for 860 sqm in the Cubic Center office project in Bucharest. This is only the latest such office transaction since the beginning of the year in Romania and more should follow, judging from what market representatives say.

The entire CEE region has been benefitting from a wave of outsourcing and IT companies arriving over the past few years, attracted by lower costs, a versatile labor force and overall improving economic performances. Of these, Romania can offer at least the first two and at more competitive costs than the region’s leaders, Poland and the Czech Republic. With a growing sense that these two markets are heading towards saturation and becoming too expensive, the local market emerges as an increasingly attractive destination.

Office market pins hopes on IT

Approximately 130,000 -135,000 sqm of new office space should be delivered this year in Bucharest. This is below the average volume over the last decade, Razvan Iorgu, managing director of the local CBRE office, told BR. “Given the solid and stable growth of demand over the last six-eight quarters, there is reason enough for there not to be a surplus in the market,” he added.

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Indeed, some 60 percent of the new stock was already leased at the end of the first semester, Mihaela Galatanu, research specialist at DTZ Echinox, told BR. Compared to the first semester of last year, demand for new office space – renegotiation transactions not included – was up by 25 percent in the first half of 2014, she added. “We’re seeing two new trends this year. First, relocations from class C office space to class A and B were up by 35 percent, and secondly, new demand, coming from new entrants on the market and expansions, reached a record level in H1. It represented about 30 percent of the total demand so far,” Galatanu said, stressing that the trend is expected to continue.

And IT companies are the main players fueling this new demand. Over one third of last year’s office transactions involved IT firms, as did about half of those closed this year, said Iorgu. “These companies represent an essential factor in the increasing interest in the local office market. What’s most important is that they have very thorough plans and are looking to expand their offices over the next three to five years.”

A good indicator that there is growing interest coming from such players is the fact that the office stock is going up not only in the capital, but in the other main cities too. “Bucharest, in particular, but more recently the main secondary cities as well, offer efficient office spaces, located in easily accessible areas and at a good quality/price ratio,” Liviu Tudor, president of Genesis Development, which owns the 150,000 sqm Novo Park and West Gate office projects in Bucharest, told BR.

Even if Bucharest continues to take the lion’s share of new companies entering the market and new office developments, things are moving in the rest of the country as well. For example, Cluj-Napoca, the second most dynamic office market after the capital, will see its stock of modern office space grow by half again this year and the next to a total of more than 150,000 sqm. And this is mirroring the growing demand, developers say.

International players home in on local market

Bucharest comes right behind leaders such as Prague, Budapest, Warsaw or Krakow in the preferences of intrnational IT and outsourcing players, offering obvious cost advantages. According to a 2013 McKinsey report entitled A New Dawn: Reigniting Growth in Central and Eastern Europe, the average hourly wage of core-CEE markets is 75 percent less than in the EU-15. In Bulgaria and Romania it is 90 percent lower, undercutting even China.

However, the expansion of the industry within the region is not entirely cost-driven.

Romania stands to gain a large slice of the O&O (outsourcing & offshoring) industry in the future, predicts the Colliers International report Outsourcing and Offshoring in CEE: A Rapidly Changing Landscape. “In time, we believe it is inevitable that certain lower-cost functions will either be made obsolete through new technology and automation or move to other emerging O&O lower-cost locations such as Romania, Bulgaria, Serbia and Ukraine.

All these locations offer large technical and language-skilled labor pools and attractive modern office space at much lower wages and overall costs than their more experienced peers,” states the Colliers report. Bucharest office rents range from EUR 16-18/sqm/month for class A+ office space located downtown to EUR 8-11 /sqm/month in office parks on the city’s outskirts, according to CBRE data.

A regional comparison found that in Warsaw a company pays EUR 14-15/sqm/month in a peripheral area, while in Bucharest it would only have to shell out around EUR 9-12/sqm/month, said Galatanu.

Outside the capital costs are even more competitive and the supply of class A office space is on the rise. “The many support businesses that are now entering Romania, as well as the growing operations of companies that already have a local presence, indicate a net growth in demand for the next half year. The bulk of transactions in the first half of 2014 were pre-leases, which are going up,” said Laura Berezitchei, associate in office & commercial at Crosspoint Real Estate.

Measures taken by the state to encourage the development of the IT and outsourcing sector will also fuel this development. Romania is the only country in which IT employees’ salaries qualify for income tax and social contribution exemptions, found Accace. Also, the government has recently approved state aid of EUR 67 million for 11 large firms in telecom, IT, customer relations and software production, which will create 3,000 jobs over the next three years.

Firms disclose their office preferences

A discussion with the companies that have recently taken up new space in Bucharest’s modern office buildings reveals that cost is not the only factor in the equation.

Vodafone, for instance, needed to start activity quickly, and planned its search accordingly. “We selected this location because it offered all conditions to begin activity at the center in record time of approximately three months, for the customer relations part. One key condition for us was that the building had connectivity to the Vodafone internal network,” operator officials told BR.

For the design of the new Vodafone Shared Services (VSS) center hosted in the Avrig Business Center in Bucharest, the company collaborated with various local partners, architects and designers.

Game developer King paid more attention to the size of the space. “We were first of all looking for a generous space, and the surface we occupy in Opera Center is 1,700 sqm. Second, we wanted an office located in Bucharest’s city center that was easily accessible, irrespective of the means of transportation preferred by our employees,” Mihai Sfrijan, head of studio at King Bucharest, told BR.

Designed by architect Ana-Maria Voinescu, the office provides communal interaction spaces, relaxation spaces, which include a green area with hammocks, swings and beanbags, gaming spaces including a ping-pong table, game consoles, a spacious kitchen, discussion spaces, personalized meeting rooms and a library. “We recreated the atmosphere specific to the King games,” said Sfrijan.

Xerox, which has relocated to the Hermes Business Campus, was looking for well-partitioned spaces that could host all the departments in the HQ, a new modern building, parking places, more showroom space and archive space.

Accessibility was also an issue. The company wanted a location that offered easy access for customers and employees, either using personal or public transportation, especially immediate access to the subway, Gabriel Pantelimon, country GM of Xerox Romania, told BR.

Deutsche Bank also wanted a site for its technology center in Upground Business Center, that was easily accessible, located in Bucharest’s IT hub, close to metro and bus stations, and with sufficient parking space, DB officials told BR. “The work rooms are designed to facilitate teamwork and collaboration between all employees, 400 sqm of scrum area offers creative possibilities everywhere, the media centers are a perfect place for sharing ideas, and the SmartBoards – among the few in the country – allow for local and international design and knowledge sharing,” say DB officials.

Upgraded facilities are a way for companies to increase team satisfaction. Orange, for instance, will move into an upgraded space in Green Court Bucharest which will also include dedicated spaces for individual calls, meeting rooms with audio-video systems as well as an informal communication area, on top of what the firm already had – the training center, meal hall and parking.

“Apart from the newly available technologies that ensure natural light for a longer time, the recirculation of water, air freshening and keeping an optimum temperature, other important factors were the proximity to a subway station, the space where the teams are hosted, as well as the additional space that serves their various needs,” Orange officials told BR.

“The market has developed a great deal over recent years and employers understand that, in order to be successful, the team needs to be satisfied and motivated, and new real estate projects include more and more benefits for employees,” they conclude.

What sort of offices do developers say IT players want?

Location, easy access to public transportation – the metro in particular – monthly costs, available surfaces, energy efficiency and the developer’s and property management supplier’s background are and will continue to be important factors for any company looking to rent office space. In order to increase employee productivity, firms are also paying increasing attention to factors such as the availability of natural light, noise levels and air quality, Sheila Giafer, commercial director of the recently delivered Green Gate office project in Bucharest, told BR.

But when it comes to firms active in outsourcing, telecom and IT in particular, their list of requirements is more specific, say developers and real estate agencies. “Their demands have always been high and have somehow set a standard for the market,” David Hay, CEO of AFI Europe Romania, told BR, stressing that in general, companies now have great expectations from the offices they work in.

Good technical infrastructure is vital, meaning that secure and high performing electrical and internet networks above everything else are a must. “Some mandatory requirements include a high capacity generator able to back up operations, high electrical capacity (50 watts/sqm, against usual consumption in an office building of approximately 30 watts/sqm) and new generation BMS (building management service) able to monitor and control the functionality of the building,” said Giafer. Another technical specification, given the high number of employees such offices usually accommodate, is the availability of the latest HVAC system technologies in order to provide proper ventilation and fresh air in the space, she added.

The surface of the space for rent and its flexibility are other specific requirements. “Multinational companies active in these industries are looking for generous and efficient spaces, of over 1,000/sqm per floor, which allow easy customization, including the creation of special areas for socializing (…). Because they expand rapidly, such companies prefer office parks where they can rent additional space as they grow their business,” added Tudor.

In addition to large surfaces which enable companies to bring all their employees under the same roof, flexibility in using the available space is important, other market representatives agree. Here, floor layout becomes crucial for space efficiency. “Usually these companies are looking for areas/floor of over 1,500 sqm. The floors should be designed in order to accommodate one person per 10 sqm, or even lower, one person per 8 sqm in some cases,” said Giafer.

And it is not all about partitions. “The space should be original, and its layout must reflect as well as possible the ‘agile’ working concept IT companies have,” Romanian businessman and real estate developer Ovidiu Sandor told BR, adding that one element that differentiates IT companies from the rest is the original, creative and playful dimension their offices have.

In addition to all this, IT firms are also more likely to opt for energy-efficient buildings. As the office market is maturing, increasing importance is being given to developing energy-efficient buildings with BREEAM or LEED certifications, added Tudor.

But even when leaving aside specific requirements, and looking at factors such as location, an important factor for any potential tenant, the demands of companies active in IT go beyond the standard easy accessibility. “There is fierce competition in this industry to attract skilled people and this makes IT companies very sensitive to projects that let them offer their employees the best available working conditions in terms of location, access to sports facilities and restaurants and even the office building’s prestige which is given by location, size or design,” said Sandor.

The proximity to university centers is another advantage, according to Hay. “Accessibility on public transportation is very important. But these companies have something in common – they recruit massively from the Polytechnic University; therefore they prefer a location that is close to it,” he outlined.

As demand from companies active in IT, outsourcing and telecom has a major share in the overall leasing activity both in Bucharest and outside the capital, their requirements are shaping the office market in more ways than the new stock volume.

Developers are customizing new office buildings to fit these requirements, but owners of older projects are investing in modernization as well. This trend developed especially after pre-leasing activity began to pick up in 2011-2012, according to Galatanu. “In general tenants are more and more informed when it comes to office buildings’ quality because they have started to understand the impact this has on occupancy cost efficiency,” she concluded.

Moves reflect company strategy

Relocation or the lease of additional space is a consequence of careful expansion plans that are delineated in the strategy of these companies.

Online retailer eMag, part of Naspers Group, announced a new investment project, the eMag IT research software development center, which will be located in north Bucharest. The project, set to create 203 jobs, is part of the retailer’s strategy to expand in Europe. eMag estimates that over 2014-2021, the center will contribute EUR 25.8 million to its regional development.

At the end of June, the company received state financing of EUR 6.65 million for the project.

“At the moment, we have approximately 800 employees, of whom 150 work in the IT department. By the end of the year, we aim to exceed 1,000 employees,” Tudor Manea, VP, HR and technology director at eMag, told BR.

Apart from its headquarters in the north of the city, which hosts employees in the IT, HR, development and call-center departments, eMag also has a showroom and two delivery points in Bucharest and nine showrooms across the country in Brasov, Cluj, Constanta, Craiova, Galati, Iasi, Oradea, Ploiesti and Timisoara, added Manea.

Just two weeks ago, telecom operator Vodafone Romania inaugurated its new shared services (VSS) center in the Avrig Business Center in Bucharest, which will cater for Vodafone operations in five countries, as well as for the group. “The VSS covers two floors. As the company headcount grows, we will extend the space we occupy. Of course, we are considering a second location for the center, if and when need be,” company officials told BR.

For the VSS center, Vodafone received EUR 8.2 million of state aid. “The design of the two floors and equipping them up with computers up to a 30 percent capacity, which corresponds to the current number of employees, has so far cost EUR 1 million. The total investment in the center will exceed EUR 6 million for the first three years for all 2,000 employees,” said Vodafone officials.

When it moves into a new HQ next year (ed. note: Bucharest One Office Tower, according to Ziarul Financiar), Vodafone intends to gather its Bucharest operations in one space, company officials said.

In May, Deutsche Bank officially inaugurated the DB Global Technology (DBGT) center in Bucharest, the bank’s first such center in South-Eastern Europe. The DBGT, which has been operational since January, develops software for the bank’s global operations. Its headcount is expected to reach 200 by the end of the year, and it will create an estimated 500 IT&C jobs by the end of 2016, DB representatives told BR.

DBGT is located in Upground Business Center in Pipera, occupying 6,000 sqm on two floors.

“Choosing Bucharest as the location for the DB Global Technology represents recognition of the significant talent resources our country has,” Marian V. Popa, head of DB Global Technology, told BR.

Also in May, technology company Oracle inaugurated its new green headquarters in Floreasca Park in Bucharest, which have the capacity to accommodate 2,500 employees. “Our expansion in Bucharest signals our success in the region,” said Safra Catz, president of Oracle Corporation, during the inauguration event.

The new headquarters consolidate two other Oracle locations in the area. The company also has offices in Nusco Tower.

Other players in the industry are relocating their headquarters to make room for larger teams or for efficiency purposes. Outsourcing company Luatel announced last week it was relocating its HQ to Bucharest. Via Crosspoint Real Estate the firm has rented 860 sqm in the Cubic Center building in Pipera, owned by Liberty Management.

The outsourcer has leased the space for five years and has the possibility to expand onto the second floor of the building.

“Luatel’s development plan over the next five years is to expand operations in Romania. The inauguration of a new headquarters in Cubic Center is the first step. Luatel also aims to expand its operational team from 500 employees globally to 3,000 over the next two years,” said Swen Philippe Moritz, CEO of Luatel.

Elsewhere, Xerox Romania announced it would be moving into a new headquarters close to Pipera subway station, in the Hermes Business Campus, developed by Properties Investment, on June 30. The company has rented the second floor of the building for the next seven years. “The new headquarters will host a team of 100 employees across all departments, from sales and customer relations to support operations,” Gabriel Pantelimon, country general manager at Xerox Romania, told BR.

Also in June, telecom operator Orange Romania announced that it would be relocating its Bucharest teams, numbering 1,500 employees, to a new HQ this fall. The operator has rented eight floors in the first building of Green Court Bucharest, the class A office project developed by Skanska.

“The new headquarters will host teams that until now were working in four different facilities,” Orange representatives told BR, adding that the new HQ will highlight the Orange organization culture.

Electronic games developer King also announced in June it had relocated its Bucharest headquarters to Opera Center.

“The relocation of the headquarters came as part of the strategy to expand the local headcount. At the moment, the King Studio in Bucharest numbers over 100 employees, and the old space was too small. We plan to grow the team to 130 employees in the coming years,” Mihai Sfrijan, head of studio at King Bucharest, told BR.

The lease contract was signed for five years, and can be prolonged. “The costs are in the range of hundreds of thousands of EUR, but we believe it is a long-term investment that is justified first of all by the positive feedback from employees and the working atmosphere,” Sfrijan added.

Other companies are sticking to their current workplace, but taking up additional space. Romanian app developer Zitec announced in June it was expanding its headquarters to the sixth floor in the Phoenix Tower office building, on top of the 920 sqm that it had had on the fifth floor since summer 2012. In total, the two floors will cover over 1,750 sqm. The working space per employee is above 10 sqm.

This fits Zitec’s plans to expand its team. The new space will also allow the company to take another 150 people onboard. “In 2013, the team grew by over 50 percent, to a total of over 90 software specialists, and this year we will continue recruitment to reach 120 people,” said Florentina Greger, HR manager at Zitec.

2014 office roundup

Some 95,000 sqm of office space was delivered in Bucharest in the first half of this year, approximately 15,000 sqm more than the figure reported in the same period of 2013.

The biggest office scheme to be delivered so far in Bucharest this year was the 31,000 sqm Green Gate project by Czech real estate developer S Group, following a EUR 57.5 million investment. It was delivered in May with an occupancy rate of about 60 percent. The project’s main tenant is local IT company Teamnet, which has leased around 10,000 sqm for its 600 employees for a seven-year period. Other tenants include Mapei Romania, Teaha Management Consulting and Fujitsu Siemens. The developer estimates that the building will be fully leased in about a year, but in the meantime it is looking to buy more land in Bucharest for another office project, said Vladimira Novakova, managing director of Green Gate Development. She is confident that Bucharest’s office market will further expand, with demand being mostly fueled by outsourcing, call center and IT companies.

And S Group is not the only developer to pin its hope on a growing wave of players from these industries entering the local market or expanding their local operations. AFI Europe completed the second building of its AFI Park office project in April after having pre-leased almost the entire 12,200 sqm GLA to American IT player Electronic Arts. The office scheme is located near the AFI Palace Cotroceni shopping mall and when completed it will feature five buildings totaling approximately 60,000 sqm. The third building, which will be delivered in December, will add another 12,200 sqm GLA out of which 40 percent has been pre-leased to British IT company Endava. Construction of the last two buildings, which will total 32,000 sqm of GLA, started in April.

Another office scheme to be delivered later this year is the first phase of Skanska’s Green Court Bucharest project. It has a leasable areas of some 19,500 sqm, of which 13,700 sqm have recently been pre-leased by Orange Romania. Schneider Electric Romania is the second tenant, having pre-leased another 3,100 sqm. Another two similar buildings will be raised as part of the same project and will add to total leasable are of 52,000 sqm.

The developer has invested EUR 46 million in the construction of the first building and the foundation of the second one, which should be completed by May next year. Confident in the growth potential of the local market, Skanska is also looking to buy more land for a new office project and “is likely” to close a land transaction by year-end, company representatives have previously stated.

Whether the developers’ optimism is justified and recently delivered office projects do indeed get fully leased within a reasonable period of time remains to be seen. Around 15,000 people can work in the 130,000 sqm of office space expected to be delivered this year in Bucharest, estimates Tudor. However, fully leasing this entire surface remains a challenging endeavor in the present climate, he warns. If it does happen, it will spell good news not only for the local real estate and IT industries, but for the entire economy.

simona.bazavan@business-review.ro

otilia.haraga@business-review.ro

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