SHADOW SPACES user guide
THE NOT SO NEW - NEW SUPPLY
Shadow spaces refer to any vacant office space leased by a tenant who is not fully utilising it. Usually, these spaces are actively marketed for lease. They serve as an indicator of additional availability beyond the official vacancy rate.
Over the last 2 years, as companies were seeking cost discipline given increased occupational costs, and as new ways of working significantly lowered actual utilisation of offices, shadow spaces have begun to haunt the market.
We estimate approximately 85,000 sqm of class A office space can be classified as shadow space.
A drop in the ocean one might say, as compared to the total office stock in Bucharest amounting to 3.4 mln sqm - this is approximately 2.5%. However, taking into account the almost invisible new supply expected for 2024 of 16,000 sqm (AFI Loft), it becomes relevant. If we add up the 2 numbers, is actually comparable to the 115,000 sqm of new supply delivered in 2023.
Unlike recent new supply, shadow spaces are spread all across the city, coming in different sizes and within a diverse range of buildings. From 250 sqm units to 10,000 sqm sections, in downtown or the outskirts, shadow spaces represent in between 10%, or even up to 25% (in some cases) of a building’s total leasable surface.
85,000 sqm 2% 250 sqm <-> 10,000 sqm
Shadow office space in Bucharest of the total modern stock in the capital in downtown or the outskirts
SHADOW SPACE BY AREA (SQM)
26,900 20,240 14,774 4,300 3,000 9,100 7,000
In the shadow space context, the figures are illusory - one day tenants manifest their intention to sublet, the second day they change their mind and even withdraw the space from the market, or, even more frequent, they choose to surrender the premises to the landlord.
As such, spaces can disappear or reappear on the radar, as the tenants’ needs adjust, so the total amount is always on the move. For example, only 25,000 sqm have been sublet, mostly for short term (under 3 years), out of the total 100,000 sqm previously announced in the pandemic eve.
Compared to the standard office offering, shadow spaces are luring tenants as they open a door to prime quality office space, with zero investment needed, in buildings or locations that are usually untouchable. Moreover, most shadow spaces are fully fitted and allow savings on capital expenditure and faster move-in.
As for the landlords, they have the opportunity to reshuffle and diversify the tenant mix of the property and increase utilisation of the spaces, even sooner than expected.
VACANT OR AVAILABLE
In Bucharest, the rate of vacant spaces is around 14%. If we were to add the shadow spaces, the space availability rate would rise to 17% of the modern office stock. In terms of surfaces, this amounts to over 570,000 sqm of available space, in all areas of the capital city.
VACANT & AVAILABLE SPACES BY AREA
It may seem much, but coupled with the scarcity in new constructions, the figures are on a downward trend. By the end of 2024, only 16,000 sqm of office space will be added to the Bucharest stock, significantly less than the capacity of the market to absorb spaces.
In recent years, the net take-up of space stood around 100 – 120,000 sqm per year. 100,000 sqm cumulate expansions of current tenants, new tenants entering the market, or tenants upgrading their premises to a modern office space. As such, by the end of the year only, we expect the overall availability of spaces to drop with 2%, trend to continue for 2025 as well, when no new office buildings are planned to be finalised.
As large occupiers were the main generators of shadow spaces, the average available surface per tenant is of 2,600 sqm - either offered for sublease, either in discussions for surrender. Depending on the floor layout and the building specifics, the units might be difficult to split in order to accommodate smaller tenants, which makes the dynamic odd and unpredictable.
At the same time, the average transaction size is hovering around the 1,000 sqm benchmark.
WHAT’S NEXT
Looking ahead, we believe the market will react mildly in the following period, as shadow spaces are slowly becoming part of the supply. Especially for the large units, landlords usually act ahead, trying to avoid a spike in vacancy.
Sooner or later, shadow spaces will come into light, so we see 2 scenarios unfolding:
Spaces will be absorbed by the market with no impact in overall current vacancy, either by subleasing, or through a partnership with the landlord, an anticipated surrender followed by and / or the replacement of the tenant. This will improve tenant mix of the property and actual occupancy and utilisation rate. Through subleasing, tenants can achieve a reduction in operational costs while preserving their footprint for future growth; in the other case, when partnering with the landlord, the space is surrendered to the landlord in order to re-lease it directly to a replacement tenant, impacting the premises for the long term. In this case, the extra space hassle vanishes.
Upon expiry of the lease agreement, spaces will be naturally divested to the landlord, triggering an increase in property vacancy. In general, landlords are fortunate that overall vacancies are low, as we are in a tight supply market situation. However, in cases with rising or significant shadow space in their buildings, landlords would have to be vigilant and take measures in advance. 1 2
CONCLUSION
For the next years, following an unrest and then settlement period, we believe shadow spaces will fade away as new occupiers are seizing the opportunity to grab a fully fitted space, in most cases even including furniture and maybe even for a shorter, atypical duration. We believe these spaces will not have any impact on average rents. For landlords, the ball is still in their court as any shadow space still has a paying tenant and - therefore – should feel no pressure to reduce rents for the vacant space in the building. On the other hand, depending on the tenant and their pressure to reduce costs, in some specific cases we might see lower rental rents, subsidised by the tenant for a short term, expected to rise to the market values while the subsidy ends.
Finally, both parties can be in a win-win position if they think long term and foresee a take-up and exit plan that mutually benefits to employees, the end users of the space, and to the tenure of any healthy property.
Let’s not forget the 4 million sqm office stock in Bucharest and regional cities is new, fresh, high quality and deserves a happy user that enjoys stepping-in every day, as opposed to a ghosting ambiance that may be popular at times, but by no means a sustainable behavior in an economy wanting to thrive.
