Bucharest's office market saw a record number of leasing deals in 2023, but deliveries were at their lowest since 2015

Uncertain times call for caution and that was evident in all aspects of the office market in 2023, a year characterized by mixed activity. Overall, total demand saw an increase of some 44% versus 2022, to around 400,000 square meters, easily surpassing the previous record of 365,000 square meters set in 2019, according to the 2023 Annual Report released by Colliers. Still, in terms of deliveries, 2023 marks the lowest level since 2015 and also a 42% decline compared to the average for the previous 5 years. But the near-term outlook remains favorable for parts of the market and Colliers consultants estimate that, for good quality buildings in terms of energy efficiency, which are also quite well connected to the city’s infrastructure, the occupancy rate will continue improving. This will tilt the balance further in favor of a landlord market in isolated submarkets, increasing the gap between ESG-compliant and well-positioned offices and older office buildings.

Last year saw a delivery of only 110,000 square meters in new modern office spaces in Bucharest, taking the overall stock to nearly 3.4 million square meters. The major additions were One United’s second phase of the One Cotroceni Park (34,500 square meters), the second phase of Forte Partners’ U-Center (32,500 square meters) and the second phase of Atenor’s @Expo (28,000 square meters). Two other projects below 10,000 square meters were also finalized, namely Strabag’s Arghezi 4 and Primavera Development’s Muse. This soft result in terms of deliveries will become even softer as construction activity slows down and only one major project is expected in Bucharest in 2024 – AFI Loft (about 16,000 square meters).

“The slowdown in deliveries was accompanied by a slowdown in new demand, down by some 6%, to 115,000 square meters. This figure is more or less in line with the yearly average seen in the past cycle. It is noteworthy, on the other hand, that leasing deals generated by new demand, namely the type of contracts that improve the general occupancy of the market, so excluding relocations from competitive stock or renewals, made up less than 30% of total leasing deals versus 40-50% in the years before the pandemic. We would normally expect to see such a growing prevalence of renewals over new demand in mature markets, not in emerging ones like Bucharest’s”, explains Victor Coșconel, Head of Leasing | Office & Industrial Agencies at Colliers.

The most significant transaction of the year involved Oracle, known as one of the largest tenants in Bucharest, which reduced its total office space by about half, i.e. 26,000 square meters, distributed in two separate projects in the Floreasca Barbu Văcărescu submarket. Colliers’ consultants point out that the size of some tenants can lead to significant changes, as the spaces vacated by Oracle alone add up to a quarter of a percentage point to the vacancy rate of the whole Bucharest office market.

But the market can’t be reduced to a single transaction. One example is the year’s biggest leasing transaction, where Honeywell renewed its lease for 24,000 square meters without making any changes to it. In another notable case, Adobe doubled its previously occupied surface to reach 17,500 square meters.

“One of the notable trends in the real estate market in 2023 is the preference of smaller tenants for modern Class A office space. A few years ago, this demand would have been for villas or very old office buildings, but now this trend is evolving. Another notable observation relates to state-owned enterprises, which, although still limited at present, are expected to increase their demand, particularly in line with the ESG targets supported by the EU. Another notable deal is that of Infineon, an IT company, for a build-to-suit (BTS) project with One United on a 15-year lease. This deal is unique, as most leases are for 5-7 years, and occasionally up to 10 years. This development signals a positive shift, indicating both the growing confidence some companies have in the local market and the maturing of the office market”, adds Victor Coșconel.

In terms of rents, Colliers consultants estimate that prices in the Bucharest office market remained broadly stable over the past decade. Things changed quite significantly for a part of the market last year, as Colliers consultants noticed a c.16% increase in prime CBD asking rents, reaching 22 euros per square meter. This type of increase was seen, in general, by good quality buildings in terms of their energy efficiency, which are also quite well connected to the city’s infrastructure. Meanwhile, older buildings or those in less attractive locations are losing tenants and therefore cannot justify higher rents, thus contributing to the significant gap between ESG-compliant and well-located offices and older buildings.

As for the vacancy rate, it nudged up a bit to 15.5%, with most of the upward move potentially caused by the single transaction mentioned earlier – Oracle halving their occupied office area. The top buildings have a much lower vacancy rate than the overall market average, reaching even below single digits compared to the average of around 15% for Bucharest as a whole.

With around 3.4 million square meters of leasable areas in modern office buildings, Bucharest seems to be in a favorable position in case of a downturn in the global economy. The stock per capita is relatively low compared to Western European levels. Additionally, the city’s growth as a service center has become more prominent in recent years. Coupled with EU directives, this trend is expected to generate substantial leasing demand in the future, particularly from government or other state-affiliated institutions, including state-owned enterprises, which have been relatively absent from the office scene.

“We are experiencing a pivotal moment in market dynamics. On the one hand, the influx of new demand has been relatively subdued compared to the pre-pandemic period. The fear of working remotely has caused many developers to put many new projects on hold. On the other hand, it is important to recognize that hybrid work is here to stay, and while there is no one-size-fits-all approach, it is increasingly clear that offices are still important even if people are working remotely for part of the week or most of the time. Our survey at the end of last year is consistent with this view, showing that a significant majority of respondents still consider the office to be a critical element of corporate culture, while respondents’ opinions on perceived productivity gains varied”, points out Victor Coșconel, Head of Leasing | Office & Industrial Agencies at Colliers.

Colliers innovates and responds to current challenges and future needs of the office market through Office 360°, a holistic approach to the workspace and its impact on people. Starting with identifying the needs of each company, it goes on to define the available solutions and the implications of implementing the design to meet the needs and strategic plans of the companies. Colliers’ cost control mechanism at each stage of the office transformation generates additional savings which often exceed 10-15% over the values typically obtained from contractors during tender stage negotiations.

Going further, with just a handful of office projects on the horizon for 2024 – the pipeline for this year in Bucharest is just around 16,000 square meters and only some 33,000 square meters might be delivered in 2025, plus an already subdued vacancy in good buildings in some submarkets – the market looks poised to shift to a landlord’s market over the medium term, if leasing activity picks up a bit, although in the short term we may see possible accents of a tenant’s market in some areas where large occupiers may free a substantial GLA of offices.

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