Company Headquarters may save developers – Is now the time to move

Build-to-suit company headquarter office developments are picking up pace and this could mean a short-term rescue operation for the ailing office development market. For instance, the top office market transactions in the past few months were all connected to the sale, agreement, and long-term rental contract of this kind of development.

For the largest domestic companies and fiscal institutions, this modern concept of headquarter office development is not simply going to be just a question of prestige but, in most cases, a potentially serious element of their efficient operation.

Early birds

Developing the headquarter offices for banks, insurance companies, and larger public firms is not a newfangled idea at all. In the past 10 years we witnessed the inauguration of several headquarter-type office buildings. With no pretense to completeness, we will attempt to list here the most important, timely headquarter developments currently making news in Budapest.

Budapest Bank and its four subsidiaries were among the first to move into a modern office building and now they are ready to move again in just a few months. According to sources at the bank, they plan to move into 17,000 square meters (sqm) of office space in the GTC Metro office building on Váci út in the next district over. ING’s headquarters is the next item on the list: It was finished in 2004 and, architecturally, it is still one of the most significant modern buildings in the capital. In the second part of last year, Pannon found a new home in Törökbálint, where they built a central office equipped with unique technological and technical solutions and designed a built-to-suit space to match their new type of working culture. Since then, several banks and insurance companies, all major players in the domestic market, have moved to new and modern central offices. Some of the new movers are: Uniqa insurance company, whose new office space is 18,000 sqm in the Vital Business Centre. Erste Bank, who moved to Europe Tower on the Pest side of Árpád híd. They are joined by several of the banking group’s subsidiaries, since the bank’s property fund bought the building. Földhitel- és Jelzálogbank (FHB) recently found its new headquarters in the Ü48 office building developed by BIF. Citibank and Raiffeisen are also renting a significant amount of office space on Váci út and the latter is also considering building a high-rise on the Pest side of Árpád híd, along what is known as the office corridor.

The trend remains popular, as the two largest transactions on the office market are both connected to the development of company headquarters. One of them is the new central office for the Allianz group in the K3 office building, constructed by WING, and the other is K&H Bank’s new headquarters in the Millennium City Centre, developed by TriGranit.

Besides privately held buildings, there is an increasing number of public companies that are migrating to modern office buildings, on account of their better efficiency. The buildings left behind, can once again provide development opportunities for other segments of the property market. Palace-like buildings like the HQs of the Hungarian State Television (MTV) and the the Hungarian Post Office (Magyar Posta) are both good examples. However, in almost every case, these moves come with scandals, too, since all transactions involve the use of public funds – be it for the actual move or for the payment of rental fees. MÁV, Magyar Posta, and MTV, as large state-owned firms have already moved into modern headquarters and the future will be the same for all the other public companies that currently reside in inefficiently run buildings or offices. One thing is certain: Recently built offices, and those buildings eventually connected to them, can be operated more efficiently and economically than those offices or apartment blocks in lower categories.

Now is the time for change

The most important factor in relocation, beside maximum efficiency in operation, is, of course, the financial rate of return. It is almost impossible to develop a general formula that would describe the returns on a headquarter rental or development precisely, since each current and future rental and/or trading transaction contains different cost-influencing factors.

So, although generalization in respect to transactions is not possible, certain conclusions can be drawn by analyzing the market. One of the most important factors in the present market situation is that prices have now dropped to levels that parallel 2004 levels. In addition to rising yield levels, the recent drastic drop in rental fees is another outstanding factor; here, renters have been forced to cut fees due to decreasing demand. Under such market conditions, any and all companies with a stable financial background have an excellent opportunity to sign a short- or mid-term contract that guarantees them office space at the current, depressed prices for another two to three years.

Another cardinal point of relocation, whether it be the plan to concentrate several business units or simply to get out of a dated building, is considering the appropriate size of available office space necessary for efficient operation. Under a certain size, moving simply makes no sense. Though it’s good news for tenants, but not for developers, supply has significantly increased in the past couple of years, thanks to both the crisis and those office developments launched earlier.

The policy of a given company also largely influences whether it is chooses headquarter rental or acquisition. Companies with their own property investment funds primarily regard acquisition as a good decision. This way they can include their own company headquarters in the fund. Then, there are those companies that follow an international strategy and choose not to centralize their separately located units.

The first part of this article revealed that a significant proportion of headquarter buildings are rented by or bought by banks or insurance companies. The main reason for this lies in the finance, as these are the companies that have a priori interest in financing other developments, thus, have no problems in raising the necessary funds for their own projects.

Banks certainly have to consider keeping their current tenements, even if they are planning to move. However, market trends indicate the dominance of the decision to relocate, deriving from the particular situation occurring on the Budapest office market and with the finance industry, in particular. The greatly oversupplied Budapest office market offers opportunities, never before seen, to cut costs and/or to improve quality. Moving to a new tenement, therefore, seems like the obvious choice for a bank. In addition, due to uncertainties surrounding the financial sector, the coming years will presumably bring dynamic changes to the personnel, too: We can expect a decrease in rental requirements as a result of layoffs and austerity measures, followed later by an expansion as the effects of the crisis begin to weaken. New rental contracts allow the size of a rented space to be newly and flexibly shaped, which has serious quantifiable advantages.
Summarizing the market situation in the past one to two years, we can say that shrinking rental rates and the increase of free office space has resulted in particularly favorable conditions for those companies planning to move now or in the near future.

A special market situation

The market situation as it is now can be considered extraordinary for companies requiring a large amount of office space because developers with newly completed developments, real estate that is on the market, or due to be launched onto the market, are forced to make compromises and give significant discounts on their rental rates, since a landlord’s leasing power has been weakened as a consequence of the financial crisis and the economic state of the country.

The current office market offers many good opportunities to buy or rent office buildings developed for the speculative market. Today’s depressed rental rates will only be available for a limited time and, when the crisis ends, we can expect a continual decrease in the amount of free office space at our disposal. Today, we find several developments in progress where a larger organization or public renter might obtain 15,000-20,000 sqm of office space, either suitable for an average central office and/or in better condition than their last. However, the situation is constantly changing, as developers’ pursue their interests by trying to lease as much office space and as quickly as possible since they simply can’t afford to wait for that one “Big Renter” who could solve their rental woes in an instant.

Relocation is clearly no easy task, especially for organizations of larger proportions. The number of company board meetings used to discuss the possibility of moving may even exceed the number of companies the current capacity of the market supply-side could actually serve. In many cases, the real reasons for rejecting a relocation opportunity are quite simple: The new location is not perfect, the interior design is not appropriate, or negotiations get stranded. However, the development of company headquarters will, no doubt, continue. At a certain phase in their development and in light of a constantly changing environment, it will become increasingly difficult to find companies without a modern central office.