CONTENTS
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Bucharest Office Market
Supply
The first half of the year saw nearly 105,000 sqm in new modern office buildings, with the bulk coming online rather in the first quarter of the year (two thirds of the total surface resulted from Ana Tower and the third phase of Globalworth’s Campus project). We want to emphasize that building activity continued almost normally during the coronavirus lockdown of spring and we see no major delays for buildings due in 2020 (potential pipeline at c.230,000 sqm) as these are either fully pre-let or have seen significant pre-leases until now.
Demand
To start with the big numbers, overall market activity in Bucharest plunged in the first semester of 2020: gross demand was down by nearly 28%, to a bit over 124,000 sqm, while new demand halved after an exceptional year, to under 45,000 sqm. There are different ways to view the situation: glass half full, looking at figures with a 4-quarter rolling average, we don’t see too big of a drop, with the gross demand figure still roughly in line with the average for this cycle (plus 2019 was indeed exceptional). Glass half empty, the drop in new demand is just now starting to be felt, with the second quarter of the year printing one of the lowest figures this cycle – just 16,000 sqm.
Bucharest new demand cooling up as total deals also decrease sharply
Take-up by location (sqm)
Source: Colliers International
Overall, we do not expect to see too much in terms of new contracts other than from companies that are actually pressured to relocate/expand. This is because companies have no clarity on how work processes will take place in the future, how their own business will evolve and so on. Most will likely remain in wait-and-see mode until they have a grasp on the new reality.
Another aspect likely to press new demand in the future should be the rise of sublease alternatives. This is because quite a few companies that had relocated in recent years had also leased a large buffer space in case they continued to hire people and expand; now that those plans are out of the window, this may free up quite a bit of space. Furthermore, work from home, a few days a week on a permanent arrangement, should also free up space going forward (but likely to be felt in a few years).
On this note, as of mid-2020, at most, one in ten employees returned to their offices in Bucharest, meaning that companies may not come back too soon to the offices during the summer holiday period, with decision afterwards to hinge on how things are going on the coronavirus front. That being said, the overhead expenditures related to COVID-19 are not exaggerated (around 30 Euro/month/person, based on the experience of our property management department, an increase of below 10% of the service charge).
Bucharest Office Market Indicators - June 2020
Source: Colliers International
Rents & Vacancy
Nothing big has changed on the rents front until now, but we are likely to see moves. There are quite a few factors over the near term: 1) as most tenants may not feel inclined to move now (incurring new costs), their current landlords may not be as flexible with offering lower rents at renegotiations; 2) companies willing to take on new spaces (via a relocation or pure new demand) will likely lead to landlords being sensibly more generous (especially via incentives rather than lower headline rents); 3) there are quite a few major spaces, fully fitted, available for sublease at competitive rents. Overall, pressures on rents even in the short run seem tilted to the downside. Meanwhile, vacancy has continued to increase in the first half of 2020, ending June at 11.25%, a full percentage point higher than end-2019, with most major submarkets seeing an increase in vacancy, except for Center West (modest decrease) and Dimitrie Pompeiu (flat). At this point, it is important to note that except class B buildings and the Pipera submarket, rent is still in single digit territory in Bucharest.
Outlook
While the next year or so may not bring too much changes, as companies will not expand, but neither will they take any short-term decisions, the office market will never be the same after this. Work-from-home on a wide scale is here to stay and a few days a week offered to employees, together with an optimization of space leased by companies, should lead to a smaller office footprint in the future.
That being said, the death of the more “traditional” work medium of offices is overly exaggerated, in our view. There are quite a few arguments that could counter partially the expected downward trend in demand in the future: 1) tools that allow for colleagues to collaborate virtually cannot fully replace face to face meetings and also, they cannot create team spirit and corporate culture; 2) some employees cannot be nearly as productive from home because they either lack the equipment or may face too many distractions; 3) companies wanting to hedge the risk of a future pandemic where they may want employees in the office will need to lease more, not less; 4) companies offering work from home solely as a cost-saving measure may not find it too efficient as states may decide that employers should need to cover part of the rent and utility costs of employees working from home (a decision by a court in Switzerland hints in this direction).
Where does this leave us then? We must admit that there are no major certainties to be had at this time and cannot clearly say how things will look in the next couple of years with more short-term volatility likely; new data may appear at any point to abruptly change the paradigm. Still, as things stand now, we will likely see lower demand going forward as well as quite significant pressures on rents. Vacancy is also likely to climb towards 13-14% by year-end (even higher in 2021), with demand for 2020 likely to cool down to a more mellow figure around the 200,000 sqm region, almost half the level seen in 2019 and below the 300,000 sqm average seen this cycle. Because of time needed to negotiate deals as well as uncertainties likely to linger into next year, but we would not rule out a fairly good rebound of activity in 2021.
That said, we remain optimistic that the reasons for Romania to outperform a lot of other countries remain valid and this should bode well for the local office market as well (for instance, Bucharest was ranked 7th in Europe in FDI Intelligence’s 2020 Tech Cities of the Future report, flanked by Munich and Barcelona, outpacing all CEE cities, with Cluj-Napoca and Iasi listed as the best in the cost-effectiveness ranking).
Regional Cities Update
Regional cities continue to remain a step ahead of Bucharest thanks to less tight labour markets and though most continue to score lower vacancies than Bucharest, the occupancy rate increased in almost all cities compared to end-2019. Cluj-Napoca was the exception, where the vacancy was flat at around 7%. Timisoara and Iasi shot up the most, amid some new deliveries, as well as slower rental scene. While some deliveries have been bumped to 2021, this should also be the time that the four biggest regional office markets surpass the 1 million sqm threshold for modern office stock, a roughly 25% increase on current levels. While vacancy could remain even more elevated amid the heavy pipeline, it is worthy to underscore that the new modern office buildings tend to see better results in terms of occupancy in these submarkets than the Capital. With robust job creation outside of Bucharest in recent years and good inflow of people settling in these cities, we would expect the office market in regional cities to continue delivering solid results.
Source: Colliers International
BOMA Measurements
At a time when the future of rents carries great uncertainties, we also want to mention that there are some helping hands that can be offered to landlords. The Building Owners and Managers Association (BOMA) and International Property Measurement Standard (IPMS) measurement standards can offer a professional way of looking at the actual leasable surface of a property and generally tend to include significant portions that were omitted from the initial architectural layouts. Based on our own experience, these have increase the total GLA of office buildings by up to 10%. These measurements offer a win-win for both landlords (ethical/transparent approach that may help maximize profits in the long run by including some spaces that incurred development costs) and for tenants (offering a comparable metric between buildings, including for common and technical areas). We estimate that up to 50% of modern office buildings in Bucharest have either BOMA or IPMS measurements.