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.