Office Shortage Looms for Central and Eastern European Capitals in Next Two Years

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By the close of Q3 2023, the total area of modern offices in Bucharest increased to 3.42 million sqm. During this period, 32,500 sqm of office space was completed, and by year-end, the construction of one project with a total area of 8,000 sqm is expected to be completed. At the end of September, approximately 48,000 sqm of office space were under construction with planned completion in Q4 2023 and 2024-2026. No construction of any new office building was started in Bucharest during the period. The total demand almost doubled year-on-year, but renewals & renegotiations accounted for 62%. Compared to most of its CEE peers, at 14.5% Bucharest had a slightly higher vacancy at the end of Q3 2023. In terms of rent, Bucharest has some of the lowest prime rents across the region.

If we look at the CEE market more closely, in Q3 year-on-year, there was a decrease in gross take-up in Prague (by 34%) and Bratislava (by 23%), whereas it rose in Budapest (by 34.2%) and Bucharest (by 95%). The higher level of renegotiations is happening across the region. To some extent it is a cyclical development as the contracts from strong take-up in previous years come to end, which was the case in Bucharest and Budapest. Moreover, the combination of high relocation expenses and costly fit outs is compelling tenants to renegotiate their agreements within their current spaces more frequently, as experienced on the Prague market.

All four markets featuring modern office real estate experienced a year-on-year increase in vacancy rates, with Prague showing the lowest vacancy rate (7.4%), while Bucharest had the highest percentage of unoccupied offices at 14.5%. The vacancy rate in Bratislava and Budapest surpassed 13% in the third quarter of 2023.

Elevated construction costs and the unfavorable economic situation in Europe are impacting the future development of new offices across much of the region. More precisely, in Prague and Bratislava in 2025, there’s an anticipation of insufficient availability of new office space, with Prague office market witnessing no new office development launch in the last 15 months. This situation might result in demand overweighting the supply situation, leading to upward pressure on rental prices and heightened competition among tenants.

In Bratislava, the saturated office market is another factor that is influencing development pipeline. Based on the latest figures there is no new office building to be delivered in 2024 and for 2025 currently there is to date only 10,000 sqm under construction.

In Bucharest, low net take-up, subleases due to hybrid work adjustments and high vacancy rates are the main factors constraining new construction. Other factors valid across CEE include expensive construction, high interest rates, and overall economic uncertainty.

An outlier to this pattern is the Budapest office market which currently has nearly 300,000 sqm under construction out of which 270,000 sqm will be delivered in 2024 despite higher vacancy rate.

  

Capital Total stock Q3 (sqm) Gross-take up Q1-Q3 2023 (sqm) Renegotiations (%) Average vacancy rate Q3 (%) Prime rent (EUR/sqm/month)
Prague 3,910 mil. 372.900 50 7.4 27.0
Bratislava 2,069 mil. 89,200 37 13.8 17.5
Budapest  4,345 mil. 174,900 45 13.2 25.0
Bucharest 3,420 mil. 292,600 55 14.5 22.0

  

Maria Florea, Head of Office Agency, iO Partners Romania said: “It is a rare situation where, although rents increase, we have a tenant’s market, as most companies are adjusting their occupied areas to reflect current work requirements. Rents increased mostly due to indexations with the high inflation rate of the last two years”.   

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