Overall demand for modern office space contracted by almost 10% in the first half of this year compared to the same period last year, and the vacancy rate rose to a seven-year high as companies still lack clarity on when the majority of employees will return to the office, says a market report by real estate consultancy Colliers, which points out that the modern office stock in Bucharest has surpassed 3 million square meters.
Activity in the office market remained relatively subdued in the first half of 2021, with limited signs of a return to pre-pandemic levels, according to the report. Total demand for modern office space contracted by almost 10% to 112,000 square meters compared to the same period last year, and new demand was around 38,000 square meters, down 15% at the end of the first half and 22% compared to the same period in 2019.
Colliers consultants noted that firms have already started organizing, resizing and reconfiguring offices to fit the needs of a post-COVID world, and the fact that the labor market is recovering quickly should somewhat protect the office market and, in particular, Class A office buildings occupied by solid blue-chip companies with significant turnover.
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Only 36,000 square meters of modern office space was delivered in the first half of the year. The completion of Campus 6.2 by Skanska (close to 19,800 sqm) and Tiriac Tower from the Țiriac Imobiliare portfolio (16,500 sqm) are the major completions that have raised Bucharest’s modern office stock above the 3 million sqm level. As the initial estimate for 2021 was to deliver around 260,000 square meters of new modern office space, the second half of the year is shaping up to be quite busy, although some of the future deliveries might rather be postponed to the first part of 2022.
“Managers are still exploring the new post-pandemic working system, with the mix between office and remote working being decided by each individual company. They are approaching real estate needs with caution, and for some the hybrid working model is generating the need for smaller office spaces in the future. In general, the new low demand for office space can also be explained by the fact that there are new concerns about a new wave of coronavirus, especially as Romania could be hit harder than most countries in the region due to a much lower vaccination rate. Currently, between 10 and 20% of employees work out of the office on a regular basis, and the long-awaited return to the office for at least 50% of employees will probably have to wait at least a few more quarters,” explains Sebastian Dragomir, Partner at Colliers.
As for the vacancy rate, at the end of the first half of the year it rose to a 7-year high of 15.75%, up from 11.25% a year earlier. However, the market is much more developed than in 2014, when vacancy rates were reaching such levels, and modern office stock was around 1.7 million square meters, compared to just over 3 million square meters today. However, newer buildings with qualitative technical specifications fare much better in terms of overall occupancy, due to their attractiveness, but also because they are leased by solid companies, quite a few of which continue to expand.
Colliers’ consultants judge that the office market is clearly in favor of tenants, and have therefore seen pressure on agreed rent levels, albeit at actual net levels rather than gross rents. They also note that although the average net rent for Bucharest is probably around 10% lower than before the pandemic, this dynamic has been driven by older and less qualitative buildings being forced to offer more incentives to attract or retain tenants. Also, the stock of sublease space, at least 80,000 square feet according to Colliers measurements (and probably an underestimate), offers good alternatives for very attractive rents, which puts even more pressure on less competitive office space. For new buildings, at modern standards comparable to developed markets in Western Europe or the US, things haven’t changed and probably won’t change much in terms of rents. IT&C remains the market driver, with almost half of reported transactions, but industrial and other professional services also make a significant contribution in 2021.
The office market in Bucharest remains quite complicated, but Colliers consultants assess that the effects of the pandemic have not been uniform. It is worth noting that two of the newest completed buildings in Bucharest – 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 good, while others will suffer. The gap between older, less-quality projects and older/new buildings is likely to widen on all fronts: rent, occupancy, investment return.
“Questions about the future remain and, as a purely empirical observation, our consultants have noted (including in contracts) that quite a few companies seem to be thinking about the fact that, post pandemic, they may not have more than 50-60% of employees in the office at any one time. This, coupled with 10-15% for potential future staff increases, means that currently occupied office space should decrease by 20-30% at renewal. However, this is far from being the rule and decisions are made on a case-by-case basis, as companies that have expanded quite a lot recently (such as IT&C companies) may well keep their current space at renewal and the reduced need for office space caused by the hybrid working system would be balanced by new hires,” says Sebastian Dragomir.
Eurostat surveys show short-term hiring intentions already above the historical average – and therefore in a period of expansion – for most business services sectors, with some hiring indicators already at levels comparable to pre-pandemic highs. In other words, the labor market is actually a positive for office market developments.
On the other hand, this challenging market, plus much higher construction costs, will likely dampen enthusiasm for new development, while deliveries will remain below 100,000 square feet per year from 2022, which should accelerate the eventual recovery of the local office market. Further, consultants Colliers believe that Bucharest’s low supply of modern office space per capita is an isolating factor in the long term and rather expect the modern office stock to start growing again in a few years. As a result, it could exceed 4 million square meters by the end of the new decade and even approach the 5 million square meter threshold, if there is not another (economic) crisis.
Edited for English by: Service For Life S.R.L.