What to expect on the office market?

How do you expect the office development market to perform in 2010? To what extent might development projects be delayed and how long might projects (already in blueprint) be postponed?

Adrienne Konthur, Managing Director,
CB Richard Ellis International Real Estate Consulting Llc.

While over half a million square meters (sqm) of office space have been built in the past two years, the next two years will see the yield of a maximum of 200,000 sqm. The beginning of 2010 will be crowded, indeed, as many projects have delayed their completion this year: We expect a dozen new buildings to be inaugurated in the first half of the year alone. Moreover, these developments are rather large-scale, with the typical office project averaging about 13,000 sqm. The second half of the year seems as if it will be pronouncedly calm and the same applies for all of 2011 since, with a few exceptions, no new project has been launched since the start of the crisis.

All in all, there will be around 45% less new openings (approximately 170,000 sqm in 2010) compared to last year’s record levels. The development market is facing some calm years ahead: Many projects are under preparation, however, their actual yield time is greatly undetermined. Certainly, almost anyone could launch a new development if they had the necessary number of pre-rental agreements. However, the market, unfortunately, has been exhibiting some contradictory behavior. In the second half of 2009, companies have signed far less pre-rental contracts and have more typically resettled and extended their old contracts than move to another office. Basically, economic conditions must improve significantly in order to put expansion and relocation plans back on companies’ tables.

Andreas Lindelöf, Managing Director,
Skanska Property Hungary Kft.

As I see it, the office market in 2010 will not be any easier than in 2009. With the current supply pipeline and forecasted demand, there will be continuous, heavy pressure applied to rental levels and other tenant-related incentives. This implies a likewise continuously challenging competition for developers and investors since tenants will have a wider range of office projects to choose from. However, I do perceive a tiny increase in the number of serious enquiries. This budding optimism is no doubt fueled by reports citing positive economic progress (to a large extent outside the borders but also, to a certain degree, within the country). To meet the ever-challenging market demands, we have strengthened our team on both the issues of leasing and project execution: This pays off. It is a fact that there are a significant number of projects currently under production due for completion in 2010. However, I can not speculate on other developer’s future projects and the parameters that are needed to start them. What I can tell you is that Skanska is currently in the process of acquiring additional building rights for a Vaci corridor submarket, with the aim to start a project here in late 2010. In addition, we are preparing the first phase of our own new office project, Scandinavian Gardens, possibly in 2011. The Scandinavian Gardens project is adjacent to our ongoing green office project. First of all, Skanska is not dependent on external financing and, secondly, with the strength of our brand name, financial stability, as well as our primary focus on environmentally sustainable and attractive office projects, I foresee a very positive outlook for us on the Hungarian market.

Rudolf Riedl, Managing Director, RE Project Development

In my opinion, the office development market will be facing “slowdown trends” for the next one and a half years, at least. Statistics show that, by the end of last year, around 300,000 square meters (sqm) of office space stood empty in Budapest. An additional 150,000 sqm of empty office space will sit on the market in 2010! This means that office vacancy rates will rise from 20 to 25 percent. It’s mostly the suburban districts of Budapest which are mostly affected by this. For instance, the proportion of vacant offices in Budafok or Budaõrs might be around 25 to 30 percent, while in central Buda this average will only be about 10 percent. No new investment will begin this year; developers are waiting for recovery from the crisis. Those currently ongoing projects will continue to wade through the present circumstances in shallow numbers. However, construction of many office buildings came to a halt once they were structurally completed. The 2009 take up results were good, thanks to renewed tenant contracts. A major upswing might only be expected after the banks start funding projects again and vacancy rates drop down significantly. This can be expected in 2013 at the earliest. Right now, an office building project needs to be 40-50 percent pre-leased to receive the funding it needs to maintain. With the exception of tailor-made projects, this is impossible. At least two years more are required for the normalization and the recovery of the office market. This is why new projects currently holding building permits will only start construction in the second half of 2011 meeting with, at least, a 1.5 year delay.