Office
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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