Bucharest Market Update | Griffes

BUCHAREST OFFICE MARKET

y 23

through the lense of 2022 and a fresh perspective over this year

OFFICE DEMAND

What's new on tenants' side?

2023 has started with the kneading of most players, strongly pushed by business decisions that were long delayed. Following thorough assessments of office space utilization and new ways of working, we expect that in 2023 most companies will adapt the surface accordingly, leading to reductions of the leased space. While the strategy is clear, the implementation needs a lot more effort and creativity to find the right solution, and openness from the landlords.

Rent indexation and increases in operational costs are also encouraging companies to optimise their premises.

Overall, in terms of numbers, 2022 brought a 4% increase in total leasing activity compared to the previous year, to around 300,000 sqm transacted throughout the year.

Should I stay or should I go ?

While contract renewals maintained their share to around 40% of the total market activity, we begin noticing tenants contracting their offices, by surrendering space to the landlord, or, in some cases by finding limited solutions, short-term band aid, like subleasing.

On the other hand, as occupiers started to seize opportunities and plan for the upcoming cycle, relocations and new leases were the main driver of last year’s activity, with 60% of the total activity on the market.

Moreover, we are enthusiastic to see new companies opening offices in Romania. Last year, 3% of the total market activity was driven by new entrants, mainly active in the tech sector or business services solutions.

Another trend that we see materialising is the set-up of new business service centres, such as Booking, Ford or Siemens Energy, that gained traction last year and reinforced demand for new office space.

WHERE TENANTS

Tenants went after new buildings

Bucharest, 2022

Leasing activity (excl. renewals)

183,803 sqm

New deliveries

118,725 sqm

All in all, net take-up recorded approximately 120,000 sqm, counting new entries, expansions, and relocations from older buildings or non-competitive stock.

On the medium term, the palette of office options to be considered for large requirements will narrow down, as new supply becomes scarcer starting with 2024.

Although working from anywhere remains the norm, strategies on workplace occupancy are becoming clearer and decisions are taken. Teams are strongly encouraged to return to the office, in different scenarios and timetables.

SUPPLY

During 2022, merely 120,000 sqm of office space has been delivered to the market, out of which 43% in the Center West business district, 23% in downtown buildings, followed by Expozitiei and Floreasca – Barbu Vacarescu areas, each adding 17% to the newly delivered stock.

LAST 5 OFFICE PROJECTS TO BE DELIVERED BEFORE END OF 2024

For 2023 we expect another 110,000 sqm of office space to be finalised, mainly second phases of existing projects and boutique buildings. For next years though, the outlook becomes blurry as the stall in permitting is severely altering the new supply of office buildings in Bucharest. Many projects planned but only one building under construction, part of a larger expansion initiative, to be delivered in 2025 – 2026.

Another 95,000 sqm development pipeline might start construction, enhanced by specific demand.

U-Center phase 2

@Expo - phase 2

Muse

4 Arghezi 4

Center South

Downtown

New CBD: Floreasca - B. Vacarescu

Traditional CBD: Victoriei

Baneasa Expozitiei

Center West

One Cotroceni Park phase 2

EVOLUTION OF NEW SUPPLY

Leased, but empty

Apart from the new buildings, market is beginning to witness a widespread initiative impacting the stock availability. As some companies, especially big tech players, are taking to rightsizing their workspace requirements, we expect large premises to become available, usually fully furnished and equipped.

As subleasing is not working as expected, shadow spaces are adding to the real availability on the market, meaning excess offices, under a leasing contract but not used, and ready for a replacement tenant. In such cases, a partnership with the landlord is key.

33,000 sqm

Under construction - less than 15% of the new supply announced for 2024 - 2025

Flexible – word of the day

In order to increase the real occupancy of the building, landlords are working on improving the facilities offered to their tenants and flexible working spaces is one of the ideas. Either small lounges at the ground floor or full floors, office owners are implementing their own concept, taking the opportunity to right-size their properties for the future demands of today’s workforce and reduce the real occupancy of the building.

RENTS

Headline vs effective rents

During the last years, headline rents in Bucharest remained stable, in line with the area and the specifications of the building. However, starting with 2021, construction prices began to increase, unexpected and widespread, affecting both new developments and fit-out projects, thus impacting both landlords and tenants.

As a consequence, developers started to preserve the headline, offering in exchange a more generous package of benefits, meant to cover part of the growing fit-out budget.

Indexation - on everyone's mind and spreadsheets

With inflation rates rising sharply last year, more pressure is being put on rents and 2023 might be the last chance to secure an office with last year’s terms. The indexation (cannon)ball started rolling, generating an overall surge in rents of nearly 10% in the first quarter of the year.

It is no doubt that this change in the rents will affect tenants’ operations. In the past, the HICP index balanced between 0 and 2% so the impact on the rents was barely visible.

Apart from the rent, tenants must take into account operational costs as well, mainly service charges and utilities consumption. Soaring energy prices, minimum wage revised upwards by 17% starting with 1st of January 2023 and general inflation are translating to higher operational costs to be budgeted by tenants. Thus, the benefits offered by energy-efficient buildings are becoming noticeable for tenants.

Developers started to preserve the headline, offering in exchange benefit packages, meant to cover part of the growing fit-out budget.

Headline rent is the rate promoted for each building, to be secured through the leasing contract.

But that is only one part of the commercial agreement and tenants must factor in the actual cost estimated for the lease term. Trying to attract tenants, developers are offering incentive packages, both for contract renewals and new contracts.

Thus, the effective rent is the rental rate averaged out over the term of the lease, including consideration of rent-free periods and other incentives, such as fit-out contributions.

The commercial offer varies greatly depending on the vacancy of the building, current or expected, the leased surface, the lease duration or tenant’s brand.

DYNAMICS OF HEADLINE & EFFECTIVE RENTS

For new developments, landlords will go the extra mile in leasing their building before delivery and hence the incentive package is usually more generous compared to existing buildings. They offer specific benefits that cater to the particular needs of the tenant, such as turn-key delivery of the space, rent-free months at the beginning of the contract etc. However, existing buildings benefit from an

investment in fit-out, to be used by the following tenant, minimising tenant’s CAPEX.

On the other hand, in case of contract renewals, in addition to rent-free periods, fit-out budgets may be provided for a refresh of the space.

TRENDS TO WATCH

Signs of Stress are flashing everywhere in the market. So are opportunities, for those who watch the market with eyes wide open. Here's what Griffes’ team receptors saying about the future and mostly, about the present:

• IT DEMAND WILL BE PLUMMETING in 2023 in Romania, due to the severe impact of the automatization and work from anywhere concepts. In 2021, IT made 35% from the total office new leases, while in 2022 it already dropped to 27%, reaching 49,500 sqm. A number of factors are driving this, starting with the still reasonably high productivity in work from home, massive layoffs announced already in January 2023 by big tech companies, and extensive efforts to reduce costs - all these are steering a reduction of the office footprint.

• The return of the SHARED SERVICE CENTRES and the revival of OUTSOURCING ACTIVITIES - as we are bracing for the impact of the new downturn, you also feel the thick air of the cost cutting climate. At a broader scale, we see the densification of near shoring and off-shoring as part of sourcing cheaper (and available) labour. That will also entail more office space, maybe not the classical 10 m for each employee, but surely some quality space where they can be competitive - this truly is a cost driven, fiercely competitive sector - and still create an experience for the employees.

• ANTI-OFFICE attitude WILL PALE / FADE AWAY. Work from home and work from anywhere will become again a privilege, not an entitlement. Why so? We know this is a bold statement, but more than 75% of the tenants Griffes works with are mandating return to office. Teams lack cohesion, co-workers are unable to follow a joint task, quite quitting has reached catastrophic levels, so astute leadership is already taking measures to gather people back in office, minimum 3 days per week.

KEY SHIFTS

• A particular case, Bucharest roadblock in permitting will put PRESSURE ON OFFICE RENTS, which will go upwards. Office deliveries will be very scarce - 110,000 sqm new office space is announced in 2023 and 85% less in 2024. By 2025 and 2026, the capital city will witness the delivery of less than 70,000 sqm. 2022 has already sensed increases over 5% in rents, but 2023 will probably bring more than 7%. Indexation and surging construction and energy costs will pump up headline rents in Bucharest prime district above 24 Eur/sqm, never seen from 2008 levels.

• FLEX will shorten the lease terms. As most players are sceptical in planning too much ahead, the standard 5/7 years lease duration will become a rare bird. The more to be appreciated by the landlords, both in offices and industrial segments.

• Warehouses are blooming - big, small and smarter. The runaway from the city has not taken humanity too farhence the very close LAST MILE concept that will emerge as the governance force of 2023 - inner city logistic, storage, light manufacturing and many distribution points will pop up “after the rain” in Bucharest, inside the inner-city ring, and soon afterwards in Brasov, Constanta, Craiova, Satu Mare, Oradea, Bacău and many other metropolitan areas above 200,000 inhabitants. At least 10 new developments amounting to more than 300,000 sqm have emerged around Bucharest in the last half of 2022.

• Beware of the ChatGPT of the real estate world - unless you have been off the grid for the past few months, you know the hype around this San Francisco based chatbot. The machine, said to be the best chatbot ever created, sheds fear because of the super-fast answering time, ease of access and confident result - you may ask it any curiosity on earth, ask it to write an essay or to make it a business plan and it delivers in minutes. What strikes people is the steady delivery, which names it “the confident bullshitter”. That aside, ChatGPT can change completely the listing of a property, would probably standardize the transaction structure and for sure will outgrow immediately many of the so-called experts, so let the revolution begin!

TIPS FOR TENANTS

Choose your landlord wisely, now more than ever! Brick and mortar is never enough, in times of trouble.

Yes, numbers are important, but a glimpse beyond excel might change your perspective. Look for amenities and buildings with the right ambiance for you.

Subleasing rarely works as anticipated, don’t count on it to cover all your costs with the extra space. Better optimize occupancy together with your landlord.

Think ahead! The new office offering is rapidly shrinking, with a gap expected in 2024 – 2025; as demand will surpass new supply, quality office options are increasingly sought after. So it is high time you chose something now; renew your space, shove-off indexation, ask for some incentives.

Get to know your real options, opportunities might be hiding where least expected.

Drop us a line and we would be happy to explore and unravel the best solutions for you.

Tip #1

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MUSE OFFICE BUILDING

• Last 1,000 square meters available, with private garden!

• Fresh and modern

• Boutique building with character

• Terraces on each floor