Envisioning the future of the office market

Newsroom 29/08/2023 | 12:18

The office sector is constantly changing, adopting new standards designed to improve the lives of employees and lower environmental impact. ESG standards are now being implemented across all new buildings, while older offices are undergoing modernization. High-quality offices have continued to see strong demand in the local market, leading to a high number of development or refurbishment projects being carried out, despite overall demand falling, according to data from CBRE.

By Aurel Constantin

Companies are still in search of qualitative upgrades in Bucharest, despite the slowdown in deliveries, which has also been impacted by the development of hybrid working. While 60% of companies in Europe have downsized their offices, their share in the CEE region, including Romania, was at 42%, according to CBRE’s 2023 European Occupier Survey.

“We can see that the showup rate in offices is higher in CEE compared to the rest of Europe—and Bucharest makes no exception. Continued strong demand for the best quality spaces will determine demand for development or refurbishment to remain high, despite overall levels of demand dropping. As the importance of sustainability credentials for occupiers and landlords grows, it will lead to a larger split in rents and values across different categories of office stock. Hybrid work and office utilisation will remain in focus. Companies will work to find an optimal balance between office operations and the space they need for each employee,” said Tudor Ionescu, Head of A&T Services | Office at CBRE.

The same conclusion was reached at Realty Forum 2023, hosted by Business Review, where industry experts talked about office trends to look for in 2023.

“The office market has been constantly evolving in recent years because the paradigm is also changing. The health crisis that we went through three years ago only accelerated the change and acted as a catalyst. It was not an easy journey, and it is not easy now; we face challenges every day, but what is important is that we have always managed to find solutions and adapt quickly,” said Andreea Cotiga, Head of Leasing Office at CPI Property Group Romania.

According to the CBRE survey, the registered vacancy value in Bucharest is 15.1%, which is 1 percentage point higher than vacancy rate recorded at the end of Q4 2022, and also the highest since 2013, while the take-up of office space is expected to be lower in 2023 than it was in 2022, according to market data. Companies in CEE are still shaping their post-pandemic office policies: half of the companies surveyed stated that their office usage had not yet settled and was expected to increase over time.

The vast majority of companies in CEE (76%) expect their new office strategy to be finalised within the next 12 months, distinctively earlier than companies in the rest of Europe. Poorer quality or poorly located office space will underperform in 2023. Also, buildings that do not match the environmental goals of large occupiers will be the most difficult to let and are likely to experience long void periods.

“Tenants’ decisions obviously take into account location and accessibility, and we as market professionals adapt to all market changes. If we’re talking about the crowding of certain office areas, until a few years ago we could not offer a residential component in those areas, whereas now residential areas have grown, especially around Pipera road, so there is no need to travel from the other end of the city and have a very long commute. The first half of the year was abundant for us: we rented over 110,000 square metres, including new leases as well as contract extensions. As others on the panel have also pointed out, there is an opportunity for companies to access space in premium locations and buildings,” said Andrei Boca, Senior Leasing Manager at Globalworth Romania, at Realty Forum 2023.

Stable Vacancy Rates

On the local market, the vacancy rate is expected to remain relatively stable, primarily because of the delays experienced by new office projects as a result of high construction costs, labour shortages, supply chain issues, and permitting problems in Bucharest. There is growing emphasis on tech-enabled and wellness-capable buildings, to foster a sense of community among employees.

“The office market is under a lot of pressure. We are in very murky waters because as developers, we have an idea about how to make an office building better, while our tenants do not know what the future will be like. We used to see big spaces—four, six or eight thousand square metres—but this is no longer happening on the market. Today they will take 500 or 600 metres and see what happens,” said Jan Demeyere, Co-Founder & Partner at Speedwell, at Realty Forum.

As companies are embracing flexible work, the workspace often gets packed into a smaller footprint, but with an increased investment in its social role, as employee preferences have also impacted building selection criteria.

Mihai Păduroiu - CEO Office Division One United Properties

“The dynamic of companies’ footprint also has positive effects, in the sense that companies that in the past may not have had access to class A or ultraprime offices, in very new buildings with excellent specifications and locations have access to them today thanks to the hybrid working model. And they can give people the opportunity to work in a special environment that’s designed to generate performance,” said Mihai Paduroiu, CEO of the Office Division at One United Properties.

 

“Office buildings evolve, just as companies do. During periods of economic growth, many companies tend to hire on a conveyor belt, taking more office space than they need. Now things are settling down. We have extended contracts with most clients in our portfolio. Some have downsized, but continue to operate very well, and the spaces they vacated were immediately rented out. It takes longer because there are tenants who are hesitant, who don’t know what to do,” said Antoniu Panait, Managing Director at VASTINT Romania.

According to the CBRE study, when selecting locations, access to public transport ranks as a top priority in most markets—slightly more so in CEE. While car parking is still dominant in location selection, “ease of commute” factors such as electric vehicle (EV) charging points (52%) and bike or scooter storage (38%) are also becoming more relevant. Among other important considerations are sustainability (58%), availability of on-site food & beverage (60%), but also access to various amenities including shared meeting space, fitness and wellness facilities, and flexible space.

”It’s clear that things revolve around ESG these days and we are very happy about this emergence of these standards. What I think the impact of ESG has been on premium buildings is that it has unequivocally removed silo mentality. There was always debate about what kind of technological equipment the building had and how much the developer should invest in the building, because that involves certain costs, and how much the tenant is willing to pay for those kinds of facilities. Now, ESG puts positive pressure on all players in the market, be they tenants, developers or owners, and it also helps us in the administration area, because all buildings are starting to be equipped to meet the requirements of today, but also those of tomorrow,” said Valeriu Toma, Head of Property Management at CBRE Romania.

“The office market is certainly moving towards more flexible solutions. Some occupiers are prepared to consider higher allocations of flex space than in the past and they also have different expectations from the standard office. Companies are striving to provide more fluid seating arrangements, which is part of the evolution of hybrid work strategies, plus devoting more space to collaborative functions. Higher desk sharing ratios are worth evaluating, as are the technologies needed to support the transition towards new workstyles,” added David M Johnston MRICS, Senior Director and Head of CEE Office Occupier Business Development at CBRE.

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