The efficiency of the Budapest office market could be greatly improved if areas that were sought after by tenants were freed up or built. Currently, hardly any new office developments are built, and the total office vacancy is increasing, but we are seeing enormous densification in certain submarkets. There is no chance that this unhealthy situation will change in the short term - the consulting company Newmark VLK Hungary Kft. commented on the H1 office market data for the year published in the past few days.
Many quarters have passed in the Budapest office market, with constantly increasing vacancies, which is at 12.6% in the middle of summer. It seems high but this is still not alarming yet, there was a similar and even much higher rate in the previous recession cycles. It is much more of a problem that this indicator does not faithfully reflect how much vacant office space tenants are looking for and how much of it is on the market. Observers can draw wrong conclusions, preventing them from making a well-founded decision regarding their office leases - commented Valter Kalaus, managing partner of Newmark VLK Hungary.
"Even if a tenant occupying, say, 3,000 sqm wants to move to a new, modern office building, it can almost count on one hand the available options. Almost all developers have slowed down their projects, which is understandable. The areas freed up as a result of the downsizing implemented by the public sector are not up-to-date, tenants who are getting close to their lease expiry do not want to move there, so the only option is to extend their lease," he said.
Companies usually move when they expand or shrink significantly, the latter being the norm these days. Other than that, they move because they want to work in a more modern, better office building with different designs. According to Newmark VLK Hungary, this can be implemented for one year only. In 12 months very few new buildings will be available.
"Companies, willing to move, will easily go from a very old B category to a used A category office building, but a 6–8-year-old A category building is unlikely to be an attractive new option." said the manager.
Mr Kalaus pointed out that the desire to move is growing not only because of the economic conditions but also because the new office buildings operate more efficiently. Due to their high technical standards, the total rental cost including the service charge fees, is also lower, a highly important feature for most of the tenants. Technical efficiency also makes it easier to handle area expansion needs appearing over the lease period. The older buildings fail to meet these challenges.
The motivation to relocate is encouraged also by the fact that companies have to pay more attention to the employees’ needs. The latest vacancy figures (34.8%) show that companies are increasingly willing to move to centrally located offices even if they are in relatively modern buildings in the suburbs. There are more services available in the inner districts and the commute is also faster and easier.
Landlords will suffer more pain in the short term if their property is in an unfavourable location and of poor quality because they have not been renovated over the years.
"Office buildings in which tenants are finishing the first 5-year term can be considered new buildings, but the 10-11-year-old ones are facing even more difficult years than before since the number of environmentally conscious and economically operable buildings have been increased dramatically." - argued Valter Kalaus.
He expects that the share of relocations among lease transactions may further decrease because these tenants will not easily find an attractive space worth moving to. In addition, there is a good deal of competition for a really good location with a good service environment, many smaller companies are simply pushed out by the stronger competitors of these locations, say for example from the popular Central-Buda area.
At the same time - albeit invisibly - vacant office areas will be available upon the departure of a large tenant. The areas that "emerge" in a large headquarters building due to the tenant company restructuring and trying to sublet the unnecessary spaces, can be classified in the same category. There will also be cases when the same tenant will simply give back the unwanted area, but this may have significant, not necessarily pleasant consequences for him.
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About Newmark VLK Hungary
Newmark VLK Hungary, a Newmark Global Partner, is a member of the Newmark Global Network, based in Budapest and led by Valter Kalaus. Newmark VLK Hungary delivers value for clients in the office, retail, industrial, hospitality and leisure property markets. The group, initially formed in 2008, leverages Newmark’s (Nasdaq: NMRK) global platform, with revenues in excess of $2.7 billion for the trailing twelve months ending December 31, 2022, operating from over 170 offices with approximately 7.300 professionals around the world, offering a comprehensive suite of services that seamlessly powers every phase of the property life cycle. To learn more about Newmark VLK Hungary, please visit: nmrk.hu.
