A very early spring

HUNGARY Spring came to Budapest earlier this year. In fact, the signs that spring was coming - at least on the Budapest office market - were already visible at the end of 2010: more and bigger deals, tenants starting to expand, and stabilising rents. Further signs of an improvement on a much troubled market were also in evidence throughout Q1 2011. In this period, to name just a few of the big office deals, audit company BDO signed a leasing contract for the entire  'C' building (3,600 sqm) of the Laurus Offices complex, while Cetelem Bank chose the Eiffel Square office building for its new headquarters. Also in Q1, Erste Bank leased 5,500 sqm of BSR Center in Budapest. "After the difficult year of 2010, we could even say that this represents massive demand, which could also get better as the year goes on. We expect tenants to remain active in 2011," comments Róbert Papp, director of the office department at GVA Robertson. The firm's numbers do give some ground for optimism:  Q4 2010 gross take-up (124,825 sqm) was almost three times higher compared to Q3 2010 levels (48,166 sqm). Over the first three months of the year the take up was around 75,000 sqm, excluding renewals.
Is it safe to say that the Budapest office market is out of the woods? It depends on who you ask. While the vacancy rate remains very high at 20.5-21 pct, market players are making more cheerful noises. "We could say that we are seeing a revival on the market. There are companies with larger space demands, while developers are considering starting work on new projects soon," adds Róbert Papp. Gábor Borbély, a senior analyst in the CEE research and consulting department at CB Richard Ellis in Budapest, confirms that leasing agents are busier these days, handling an increasing number of enquiries. How many of these will end with a leasing contract being signed? "Our projections for the end of 2012 are for a vacancy rate of 15-16 pct, given that the demand is sustained on levels similar to the last two quarters. However, there are districts of the city that are set for faster recovery - for example the Váci út corridor, which is very popular with tenants. We think that in 2012 the vacancy rate there could even be below 10 pct," predicts Gábor Borbély.

Hitting new heights
Given the erstwhile unfavourable conditions, the pipeline of upcoming office projects has been cut to historically low levels. At the end of 2010 the total office stock in the capital was 3.08 mln sqm. CBRE estimates that this year only 90,000 sqm of new office space is to enter the market, of which around 15,000 sqm of space is in speculative projects. In the current situation rents remain under heavy pressure, but the news is good for prime office buildings, which are already seeing higher rents. Recent months have seen smaller leases for as much as EUR 23 per sqm being signed. Other class 'A' buildings not located in the CBD area have even had rents close to EUR 20, confirming that levels across the city have at least stabilised. The current average rent in the city is EUR 11-13.
Despite this developers are not yet getting overly optimistic. "I would not call it a revival, but there are positive signs for some parts of the Budapest office market. Although we are close to being 90 pct leased in our project I cannot say that the general demand has grown significantly in Budapest. The good thing is that Budapest is finally witnessing differentiation between the submarkets and again location and quality are back as the top criteria," comments Csaba Zeley, development executive of ConvergenCE, the developer of the Eiffel Square office project. According to him, one of the major trends on the market - companies moving to better quality and newer buildings - will also continue through this year, mainly due to the relatively low rent levels. "In Eiffel Square, more than 45 pct of our tenants are new companies or new branches and close to 40 pct of our office tenants are shared service centres. I can see this trend continuing in Budapest, but in contrast to Western European countries or the US, where secondary space is usually leased for such operations, in Budapest they look for the best quality and perfectly located buildings with in-house amenities. I expect net absorption to grow compared to 2010, but we will definitely not reach the average 150,000 sqm per annum level this year. I also expect vacancy to decrease, but we will also witness larger and larger gaps between the submarkets," Mr Zeley adds.
What does the future hold? GVA Robertson's Róbert Papp expects new tenants to be coming to Hungary from abroad. "The general sentiment towards Hungary is improving, hopefully attracting new companies to establish businesses in Hungary. All sectors, and especially banking and financial services, have now been re-activated, and the current market still offers excellent opportunities for cost-saving or upgrading working environments." According to CBRE's Gábor Borbély, companies already present on the market will be the main driving force behind the recovery of the office market. "The era of newcomers flooding into CEE capitals is over. One good thing is that as the economy improves companies are now more comfortable with planning ahead, which will also have a positive impact on the office market," Mr Borbély believes.
Mladen Petrov