Millennium Tower I changes ownership with Newmark VLK Hungary advising the buyer

Landmark 18,800 sqm Class A office building acquired in Budapest’s South Pest submarket

Budapest – Europe’s fastest-growing and ultra-low-cost airline, Wizz Air has acquired Millennium Tower I, an approximately 18,800 sqm Class A office building located in the Millennium Towers office park along the Danube. The property provides modern office space and around 270 parking spaces in one of the capital’s most established business locations.

Valter Kalaus, Managing Partner of Newmark VLK Hungary ads: “This is a major office investment in the Hungarian market and a clear sign of Wizz Air’s long-term commitment to Hungary. We are proud to have supported our client in securing a stable foundation for their future growth.”

Newmark VLK Hungary represented the occupier throughout the acquisition, delivering strategic advisory, technical due diligence, negotiations and full tenant representation. The transaction stands among the largest recent owner-occupier office deals in Hungary and signals long-term confidence in the local market.

https://www.irodakereso.hu/cikkek/irodapiaci-hirek/a-newmark-vlk-hungary-kozremukodesevel-cserelt-gazdat-a-millennium-tower-i-irodahaz

The most effective pressure on office developers and investors to adopt sustainable business practices and develop ESG-compliant products is seen as the mandatory disclosure obligation, which places a heavy burden on both landlords and tenants, according to Valter Kalaus, managing partner of Newmark VLK Hungary.

The more this drives the behavior of office owners, the easier it will be to assess the ESG compliance of complexes. The EU mandatory disclosure obligations require companies to report on their ESG performance and risks. Evolving technology enabling tracking and reporting is crucial to achieving this.

When it comes to mandatory ESG compliance in EU office markets, Budapest is regarded as being in a relatively favorable position, as a good share of its office infrastructure is only 15 to 20 years old. Some Western European cities are in a more challenging situation than the Hungarian capital due to the number of older buildings that are outdated, from an ESG perspective.

In the current office market, where ESG elements are becoming a basic requirement, landlords face the difficult business choice of repositioning or repurposing, as owners need to examine the commercial feasibility of a given office building in a good location. If a major tenant relocates from an asset, the owner must consider the feasibility of upgrading the building or opting for a change of use. Carrying out an upgrade becomes a more complex process where there are still major tenants in situ.

From the tenant’s perspective, international companies require landlords to comply with mandatory disclosure regulations. ESG features and practices should be integrated into the daily life of an office complex, with efficient PM and FM ensuring the sustainable operation of a complex that could reduce costs by 20%. This includes waste reduction, biophilia, solar energy, electric charging facilities and controlled air conditioning.

Long-term Value

“ESG-related pressures are exerted on all key market players, including landlords, financial backers and endusers, to exercise the traditional goals of risk management and long-term value appreciation through ESG-compliant products,” comments Kalaus. He considers ESG in real estate to be most clearly defined in the “Environmental” aspect, with broad adoption of features and practices by all actors.

Stakeholders typically need to consider three major issues: location, price, and ESG, and also how this impacts the wider population. With regard to location, an office needs to have good public transport connections, car access and electric battery charging facilities.

“This is a team effort, and all market players need to work together with regard to ESG, including financers, developers, constructors, landlords and office operators. Offices will need to provide flexibility, smart systems and an employee-centric environment,” says Kalaus. Sustainability accreditation has become a crucial factor in any successful office project; most of the office deals that Newmark VLK work on involve the requirement and need for an office building that is sustainability accredited.

“I am optimistic regarding the office market in Budapest. Office is a cyclical business, and with an upturn in office development, there will be a growing number of ESG-compliant, quality office developments in Budapest,” Kalaus concludes

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Development in the Budapest office market is low, with developers exercising caution and new projects not being initiated in an uncertain and demanding financial environment. With overall vacancy rates rising and the development pipeline falling, concerns are being expressed over the longer-term availability of larger, contiguous, quality, well-located, ESG-compliant office space.

It is a complicated question as to what would need to be in place for a new Budapest office development to be initiated. Financing is crucial, and most banks require a 45-50% prelease for an office development,” comments Valter Kalaus, managing partner of Newmark VLK Hungary. His firm has acted as tenant representatives and consultants in the office market since 2002 and subsequently became active in the industrial, retail, hotel and leisure sectors.

He sees overall vacancy in the Budapest office at 14%, which could rise to 18% if owner-occupied stock is not included in the figure. The highest vacancy rate is in the periphery, while it is significantly lower in the most popular sub-markets such as the Váci Corridor, the Central Business District or inner Buda.

Concerning the initiation of new projects, Skanska, for example, could undertake the second and third phases of H2Offices and the Hold utca office project if preleases are concluded; development will not start on a speculative basis. Few new office developments are expected to be undertaken in the next two to three years. An average letting size in the current market is 700-800 sqm of modern space in a good location.

“Location is still key: the office should be easily accessible, and its design should be tailored to the needs of the people working there, providing the right conditions for efficient working. Today, it is also a natural expectation that you should not have to travel long distances to reach services such as restaurants, cafés and shopping facilities during a break or after work. Proximity to a gym or beauty or barber shop can be an added advantage,” adds Kalaus.

The Upgrade Option One development option is upgrading an older office space to meet current ESG requirements from tenants. However, in many cases, mechanical systems can only be updated if the property is vacant and therefore, the tenant would be forced to transfer to a different building. The landlord is caught between keeping the tenant and undertaking a significant upgrade.

The conversion of an office complex to a hotel or residential block is also possible. A building owner needs to consider the physical viability of the conversion and its viability from a financial perspective. A three- or fourstar hotel conversion is seen as a possibility, depending on the size and location.

Despite the latest news from Amazon, the hybrid work model is seen as here to stay, with three to four days a week in the office seen as reasonable and well-balanced for team members. This encourages loyalty, brand awareness and teamwork, according to Kalaus.

He sees tenant requirements as related to elements such as mechanical systems, lighting, fresh air, and electric car charging systems. Offices must provide lounges, brainstorming and meeting rooms, as well as a large kitchen for internal gatherings. Many employers offer quality food, a free bar or café, breakfast, quiet areas and a nursery to provide their employees with a more enjoyable work environment. Leases now need to be flexible in terms of size and length. “ESG is now the hot topic, and the ‘E’ is the easiest to provide in offices with accredited space. ESG requirements apply to all market players, including landlords, tenants, lenders and facility managers,” Kalaus concludes.

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Budapest faces the challenge of preserving its classic Central European “fin de siecle” look and atmosphere while developing its role as a modern city, business center, and tourist destination and, indeed, improving it as a pleasant and healthy place to live, work and visit. Meanwhile, industrial players face the challenges of developing in accordance with ever-stricter environmental regulations and locational demands from tenants in both the Greater Budapest area and provincial centers.

REVITALIZING THE NEGLECTED

“We have to protect our historic buildings, but some of them may be turned into modern office buildings while their facade still shows their original look,” remarks Valter Kalaus, managing partner at Newmark VLK Hungary.

Several hundred thousand square meters of office space are expected to become available in Budapest as state organizations relocate to new offices. This shift presents a significant opportunity for property owners to either renovate and enhance the value of their buildings or reposition them into residential units or hotels. Such conversions are particularly advantageous for diversifying the hotel market, according to the commercial real estate consultancy firm, Newmark VLK Hungary’s June market report.

In the next two to three years, various state and governmental organizations will vacate several buildings in downtown, creating a new situation in the office market at a time when office use has fundamentally changed. Property owners will need to address the hundreds of thousands of square meters of office space that will be vacated. While this will require financial investment, it also offers an opportunity to enhance the development of these properties, according to experts from Newmark VLK Hungary.

They emphasized that the first step is a thorough technical survey, along with a real estate market assessment to determine the property’s best future use. While it could remain as office space, market conditions might prompt consideration of converting it into apartments or hotels. Both types of conversions are already common in Western Europe and the United States. In Budapest, there have been cases where office buildings have been successfully converted into hotels.

“These unoccupied buildings cannot remain unused as they are typically in prime business locations. Many weren’t initially constructed as office spaces, but if the owner opts to keep them as offices, significant investment will be needed to meet the latest technical and environmental standards, including ESG requirements. The question is whether the owner is willing to carry out the necessary renovations and modernizations within the building, and whether this can be done while tenants are still residing there. If the renovations are carried out, the next question is whether the tenant is willing to pay the increased rent or if they will move to another, newer building instead. However, since there are very few new buildings available, this fact could be a catalyst for the office market and may result in new building developments that will be able to accommodate these multinational tenants in 3-4 years,” said Valter Kalaus, the company’s managing director.

According to the consulting firm, uncertainties in the office market might prompt owners to consider new functions for their properties, given the strong demand, particularly in the hotel market and also in the residential sector. However, it is important to consider that it is technically easier to create smaller room units in buildings currently used as offices in downtown areas compared to newly built office buildings in outer districts, due to differing technical parameters.

Róbert Székely, the company’s hotel market expert, states that professional surveys indicate increasing demand for accommodations, and this trend is expected to continue in the coming years. According to the May hotel industry forecasts by STR (Smith Travel Research), a 5.1% increase in RevPAR is expected in European markets in 2024, with an additional 2.8% growth in 2025. The forecasts predict that growth will continue in the following years, although with variations in each local market.

These trends support the demand for three- and four-star hotels. With no greenfield development opportunities or vacant lots available in downtown areas, hotel developers have shifted their focus to repositioning buildings with different original functions, such as office or residential buildings. By converting these structures, they can and are increasingly likely to create new value.

As a new trend, he mentioned that, unlike previous years when operational contracts were more common, long-term lease agreements have now emerged, providing greater security for the owners.

“In the office market, tenants typically sign contracts for 3, 5, or maybe 7 years. In hotels, we can talk about 20-30 years, and the building will have a single tenant, which is much easier to manage than having many tenants with different lease terms if it remains as an office. Although banks consider it riskier for such a property to operate with a single tenant, they are beginning to accept that long-term revenue generation is more secure, as the owner or landlord does not always have to find new tenants when the current tenant’s lease expires or if the tenant does not want to stay,” he added.

He believes that the Budapest hotel market benefits from the broadened supply created through building conversions. More hotel brands, more hotel market products, and, of course, more tourists can give new momentum to tourism and infrastructure development. Four-star hotels are perhaps the most popular category for business travelers and individual tourists, and they are generally profitable in the inner districts where Budapest tourism is concentrated. In buildings selected for conversion outside of the downtown area, there are opportunities for lower-priced hotels or other alternative accommodation uses, such as youth hostels, hostels, aparthotels, or mixed functions like student accommodation combined with a hostel. Naturally, these accommodations will likely attract more price-sensitive or younger guests who are willing to stay further from the CBD in exchange for lower rates.

It remains an open question when investment activity in Hungary and the CEE region will pick up ater a subdued period due to concerns over the cost of finance, and the uncertain economic and geo-political environment, says real estate editor Gary J. Morrell. Another worry is how long yield corrections will continue.

Despite concerns over the cost of construction and debt finance and also around demand, healthy pipelines remain in the industrial, hotel and office sectors. All projects must be of a standard to meet changing tenant, customer, staff and guest expectations regarding the quality and design of space and increasingly strict and all­ embracing sustainability requirements.

“I don’t expect much noise on the investment market in 2024, but we also know that there is money to be spent, so I am certain we will see some interesting deals,” comments Valter Kalaus, managing principal at Newmark VLK Hungary. “I expect 2024 to be a difficult but interesting year.

I don’t anticipate many new projects, but I do expect some interesting resurrections of old ones and re-births of some forgotten ones. Both the office and industrial segments might show good signs so that we might see some noteworthy transactions. Tenants who are in the position to make a move can most certainly get some outstanding deals,” Kalaus adds.

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Hungary, and Central Europe in general, has successfully ptomoted itself as advanced but cost-effective business destinations for international companies looking to establish what used to be called shared services centers. That trend helped make what are now increasingly called business services centers a core driver of the developer-led office market.

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NEWMARK VLK HUNGARY’S Managing Partner says demand for experienced advisors providing high added value is ever growing, as the alternative – rectifying a poor lease contract after it is signed – is difficult and expensive.

The real estate office market has slowed down, tenants are more cautious. Sadly, it often results in drawn-out decision making as tenants focus on safe solutions, fearing the unpredictability of the future. In consequence, there are more renewals and fewer relocations.

The vacancy rate is rising, slowly but surely. Is this the golden age of tenant representation?

A competent and experienced Tenant Advocate is always a must have, however, tenants are often unaware of the difference we can make. They are optimistic about being able to conclude lease transactions on their own. More often than not, they end up with a less than optimal result that is difficult or expensive to rectify. The current vacancy rate represents a healthy market but is a bit misleading: although the number is higher than in previous periods (a little over 13%), the amount of high-quality office space available did not increase.

Statistics are often misleading. The 13% vacancy rate is true for the whole Budapest office market, but submarkets show a varied picture. The vacancy rate in the periphery is much higher than in popular submarkets. If you would like to rent an office space in the Váci corridor or in the CBD, you care less about available space in Budaörs.

Or if we look at the vacancy rate in modern, new, or renovated buildings that meet the ESG requirements of multinational companies – it will be a single-digit number. This brings us to the great dilemma of today’s office market: what to do with the outdated office spaces that require major renovations? How much will it cost to change them to be marketable?

What will happen to spaces in secondary locations that have been vacant for a long time? Is there any chance to lease them now? To sum up, the vacancy rate in immediately marketable, sought-after stock is no more than 5-6%, which leads to different conclusions about the state of the market.

How flexible is the market? Is it possible to terminate a lease contract that was signed a couple of years ago on outdated terms?

Short answer: yes, but the price will be high. It depends, of course, on the context. Basically, it is very difficult to terminate a lease contract before expiry, and it will most probably be very expensive. There are solutions, but we must know all the circumstances. The market tries to be flexible as there is demand for it regarding both sizes and lease terms, but it is not always feasible. Almost every transaction has its limits.

The market of serviced offices has grown more valuable, especially due to its inherent flexibility. In many cases, serviced offices are a big help for a transitional period, or can be a perfect solution for smaller companies, as well as for divisions or teams within a larger corporation even for longer terms. But there is always a point where the total cost of the serviced office is higher than in a traditional office. Serviced offices offer convenience and quick fix solutions – if you can afford them.

The most sought-after products are still the ESG-compatible, high quality, economical office buildings in prime locations, with flexible financial terms and technical specifications. But this often could be a “too much to ask for” category.

What is the priority for tenants when choosing an office? ESG? Energy efficiency?

Both, for a reasonable price. The market has evolved a lot and so have the tenants, but they remain price sensitive. Tenants look for better and better buildings, with a strong focus on amenities within the building and nearby.

Newmark is dynamically growing despite the current economic environment and has completed several acquisitions. In the beginning of 2023, they acquired Gerald Eve, a leading advisory firm in Great Britain, as well as two smaller, but strategically and professionally equally important firms. These transactions added 6-700 highly qualified and experienced advisors to the European Newmark network. We already feel the positive impact, although the integration is still ongoing. I am optimistic about the future.

This is a turbulent period for every segment of the market, there is no question. It is of the utmost importance that every professional should do their job with discipline, with the least amount of risk taking and focusing on the fundamentals. An experienced, well-prepared advisor can capitalize on the current market conditions. All in all, I am optimistic about the future, but I am aware that challenges still lie ahead of us, to manage in a calm, considered, conscious way.

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