Office market activity remained subdued in the first half of 2021, with limited signs of perking up to pre-pandemic levels, as companies continued to lack clarity on when most of their employees will return to the office, according to Colliers market report for the first semester of 2021. Gross demand for modern office spaces contracted by nearly 10%, to 112,000 square meters, compared to the same period last year, while new demand was around 38,000 square meters, down by 15% at the end of the first semester, but the decrease is about 22% compared to 2019. Colliers consultants noticed that organizations have already started strategizing, resizing and rebalancing their offices to suit the needs in a post-COVID world and the fact that the labor market is recovering rapidly should protect the office market to some extent and particularly the prime office buildings, which have solid blue-chip companies likely seeing good returns.
The first half of the year saw a delivery of only 36,000 square meters in new modern office spaces. The completion of Skanska’s Campus 6.2 (close to 19,800 square meters) and Tiriac Imobiliare’s Tiriac Tower (16,500 square meters) are the major additions and took Bucharest’s modern office stock above the 3 million square meters level. As the initial assessment for 2021 was around 260,000 square meters of new modern offices, quite a busy second half is setting up, though some of the upcoming deliveries may very well end up being finalized in the first part of 2022 rather than the final months of this year.
“Managers are still exploring their new post-pandemic way of working, with the mix between office and remote-work being decided from company to company. They are tackling their real estate needs with caution and some are seeing a need for a lower office footprint in the future due to the hybrid work model. The lower demand in the overall market can be explained by the fact that there are fresh concerns about a new coronavirus wave, particularly amid the fact that Romania could be hit harder than most countries in the region on account of a much lower vaccination rate. Consequently, in general, between 10 and 20% of employees are back in office on a constant basis and the long-awaited return to offices for at least 50% of employees will likely have to wait at least a couple of quarters. The current context is, however, a good moment for companies to transform their offices and adapt them to the future way of working”, explains Sebastian Dragomir, Partner and Head of Office 360° at Colliers.
Colliers innovates and responds to current challenges and future needs in the office market with Office 360°, a complete approach of the office with all its touchpoints, carried out in a unique and highly complex process that is tailored to the very last detail to fit the companies’ needs and strategic plans. Colliers’ approach to cost control at each stage of the office transformation delivers additional savings often in excess of 10-15%, when compared to the values obtained usually from contractors, in negotiations during the tender stage.
Regarding the vacancy rate, the end of the first semester saw it increase to a 7 year high of 15.75% from 11.25% in the previous year. But it is worth mentioning that the market is much more developed than when vacancy was at such levels, in 2014, as the modern office stock back then stood at roughly 1.7 million square meters versus just over 3 million square meters presently. Also, newer and more qualitative buildings tend to perform much better in terms of overall occupancy thanks to their appeal as well as rock-solid tenant companies, quite a lot of which continue to expand.
Colliers consultants appreciate that we are very clearly in a tenant market and as such, we have been noticing pressures on the aggregate rent level, though maybe on net effective levels rather than headline rents. They also note that while the average net effective rent for Bucharest is probably at some 10% lower than before the pandemic, this is mostly due to the case of older and less qualitative buildings, which have had to offer more incentives to attract or retain tenants. Also, the sublease stock, of at least 80,000 square meters by Colliers measurements, likely an underestimated figure, offer good fitted-out alternatives for very attractive rents, pressuring even more the less competitive office spaces. In the case of new buildings, up to par with modern standards in developed markets in Western Europe or the USA, things have not and will, most likely, not change too much rent-wise. IT&C remains the driver of the market, with nearly half of the reported transactions, but with quite a lot of input from industrial and other professional services in 2021.
The Bucharest office market is in a bit of a challenging spot and Colliers consultants appreciate that the effects have not been even. In fact, it is noteworthy that two of Bucharest’s newest additions – Skanska’s Campus 6.2 and 6.3 were sold to an investor for a post-2008 record yield of 6.75%. So, for some, the next few years will be business as usual, while others will suffer. The gap between old/less qualitative projects and new/up-to-par older buildings will likely widen on all fronts: rent, vacancy rate, investment return.
“Questions about the future remain and, as a purely empirical observation, our consultants noticed (including in concluded deals) that quite a few companies seem to be thinking that, after the pandemic, they may not have more than 50-60% of their employees in the office at a given moment in time. So, this, together with a usual buffer of 10-15% to account for potential future rises of staff, means that they would need to cut back their presently occupied office space by 20-30% at renewal. Still, this is far from a rule and as we stressed earlier, decisions are taken on a case-by-case basis, as companies which have been expanding quite a lot recently (like IT&C businesses) may very well end up keeping their presently occupied surface at contract renewal, as the reduced need for offices due to a hybrid work model would be balanced out by the higher employment”, says Sebastian Dragomir.
Eurostat’s surveys show near-term hiring intentions already above the historical average – so in expansion-mode – for most business service areas, with some employment indexes already at comparable levels to pre-pandemic highs. So, the labour market is, in fact, a fairly positive element in the office market equation.
On the flipside, this challenging market, plus the much higher construction costs, will likely dampen enthusiasm for new developments, while deliveries from 2022 onward are likely to remain below 100,000 square meters/year, which should quicken the eventual recovery of the local office market. Going further, Colliers consultants see the undersupply of modern offices in Bucharest as an insulating factor over the longer term and they would rather expect the modern office stock to start growing again in a few years; consequently, it could surpass 4 million square meters by the end of the new decade, and might even close in on the 5 million milestone, if no other (economic) crisis will show up on the radar.