Office market: ready for tenants

Newsroom 30/08/2014 | 11:25

Demand for office space in the capital was up by approximately 25 percent in the first semester compared to the same period of last year, and the trend is expected to continue, say real estate pundits. Companies active in IT, outsourcing and telecom remain the main players driving up the local office market, according to industry representatives.

Simona Bazavan

Article selected from BR’s Property Supplement. Read the full supplement here.

Approximately 130,000 -135,000 sqm of new office space should be delivered in Bucharest this year. Demand has been going up but is it growing enough for developers to fill their new office buildings by yearend?
To begin with, this year’s new office stock is below the average volume over the last decade, Razvan Iorgu, managing director of the local CBRE office, told BR. Moreover, “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.

The net growth of demand for office space in the first semester spells optimism for the industry, agrees Oana Sirbu, associate within the office agency of Colliers International Romania.

“Basically, there were fewer requests for renegotiations or relocations within the same class of office space. Moreover, we’ve seen the entry of several large players and these trends are the first signs of a healthy market,” she told BR. New transactions are being signed or are currently in the negotiation phase, which means that some of the new office projects will post vacancy rates of less than 20 percent by the end of the year, she added.

According to Mihaela Galatanu, research specialist at DTZ Echinox, some 60 percent of this year’s new stock was already leased by the end of the first semester.

“Developers have mostly managed to attract tenants since the construction phase – for example Green Court, Green Gate and the second and third phases of AFI Business,” she told BR. And above all, demand for new office space – renegotiation transactions not included – was up by 25 percent in the first half of 2014 y-o-y, she stressed.

“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 second, new demand, 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,” said Galatanu, adding that the trend is expected to continue.

Given the high number of pre-leases in the first semester, the overall vacancy rate should not be affected, other market representatives agree. “The majority of the office buildings that were already delivered in 2014, or which will be delivered by the end of 2014, already have more than 80 percent of the space pre-leased. In some cases, the tenants are going to relocate from similar spaces, which means the vacancy rate will remain similar, but, in other cases, we have new tenants in Romania or net expansions, which, overall, will decrease the vacancy rate,” Marius Scuta, head of the office department and tenant representation at JLL Romania, told BR.

According to JLL data, gross take-up in Bucharest stood at approximately 128,000 sqm in the first semester. This was “slightly above the level registered in 2013 during the same period (123,000 sqm) and in 2012 (126,000 sqm). In general, gross take-up has remained stable over the past three years,” added Scuta. Out of the 128,000 sqm gross take-up, approximately 46,000 sqm represented new take-up or net growth/expansions and approximately 82,000 sqm comprised renewals or renegotiations.

Compared to 2011-2012 when demand was dominated by renegotiation and expansion transactions, this year there is more balance between the various types of contracts – pre-leases, expansions, relocations from non-competitive to competitive stock and new entries, said Iorgu. “We can expect a gradual increase of pre-lease contracts over the next few months which will give further momentum to the local office market,” he concluded.

The IT wave

Companies active in IT, outsourcing and telecom remain the main players driving up the local office market, according to both developers and real estate firms. Over one third of last year’s office transactions involved IT firms, as did about half of those sealed this year, went on Iorgu.

“In the first quarter, approximately 65 percent of the total demand for office space – renegotiation transactions not included – came from companies active in IT and telecommunications. In the second quarter the share stood at about 55 percent. So we can say that more than half of the demand for modern office space reported in the first semester came from these firms,” confirmed Galatanu.
And the trend is expected to continue, given that lower costs, a versatile labor force and overall improving economic performances continue to attract outsourcing and IT companies to the local market, say pundits. With Poland and the Czech Republic increasingly perceived as becoming saturated, over the coming period the local market should see more firms active in these industries set up local braches or expand their existing operations.

“Poland (Warsaw and Cracow), the Czech Republic (Prague) and Hungary (Budapest) are Romania’s main competitors. However, these markets are reaching a level of maturity, not necessarily from the perspective of their office space stock, but rather their labor force. As many centers have been set up in these markets, competition to get the right employees and labor costs likewise is increasing,” explained Sirbu. Romania offers both a well trained labor force with language skills plus a large office stock, and “a tenant’s market”, she went on.

Outside the capital the costs are even lower, and cities like Timisoara, Cluj-Napoca, Brasov and Iasi are increasingly on investors’ radar. Developers are taking notice.

“In big cities such as Timisoara, Cluj-Napoca and Iasi there is a large number of office projects being built or which have recently been delivered, most of which are extremely efficient class A office developments. They are also being delivered in cities where demand is increasing – demand for office space outside Bucharest was up by half in the first quarter y-o-y,” added Iorgu.

While real estate firms maintain an optimistic tone about the overall outlook, there are more measured views on the market as well. Liviu Tudor, president of Genesis Development, which owns the 150,000 sqm Novo Park and West Gate office projects in Bucharest, thinks it will be hard for the market to absorb this year’s stock, even in the context of IT companies expanding their local footprint.

“We should remember that in the first six months alone almost 100,000 sqm of office space was delivered and another 20,000-30,000 sqm is expected to be completed by yearend. I think it will be difficult for the market to absorb a 130,000 sqm stock, given that up to 15,000 employees can work on such a surface,” he told BR.

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 31,000 sqm Green Gate project from Czech real estate developer S Group is the biggest office scheme to be delivered so far in Bucharest this year. The office project required a EUR 57.5 million investment and is located in Chirigiu Square. 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 and, confident in the market’s potential for further growth, is looking to buy more land in Bucharest for another office project, said Vladimira Novakova, managing director of Green Gate Development, during the opening event.

Elsewhere, AFI Europe delivered 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 third building in the project, 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. AFI Park is located near the AFI Palace Cotroceni shopping mall, and when completed will feature five buildings totaling approximately 60,000 sqm. Construction of the last two buildings, which will comprise 32,000 sqm of GLA, started in April.
The end of the year will also see the delivery of the first phase of Skanska’s Green Court Bucharest project. It has a leasable area of some 19,500 sqm, of which 13,700 sqm has recently been pre-leased by Orange Romania. Schneider Electric Romania had previously pre-leased another 3,100 sqm. The entire project will feature three buildings totaling 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. In addition to developing Green Court Bucharest, 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.

Whereas Green Court Bucharest is located in the Floreasca-Barbu Vacarescu neighborhood, an area that remains the capital’s most dynamic office sub-market, Green Gate and AFI Park are in the south and center-west. Despite its smaller size, the latter in particular is rapidly emerging as a new key destination for business in the capital, due to its transport accessibility, proximity to the Polytechnic University, nearby student campuses and densely populated residential neighborhoods, according to JLL.

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