Annualized demand for office spaces has officially returned to pre-pandemic intensity, returning to 2019 levels, but many challenges exist on the horizon, according to Colliers experts.
More precisely, demand for modern office spaces continued its recovery, the second quarter of 2022 also being the best quarter since Q4 2019. New demand reached 73,500 square meters in the first half of 2022, up by 94% compared to last year, while total demand for modern office space stood at over 130,000 square meters, which is also up over last year’s first semester, though by a less impressive 16%. Colliers consultants note that the sharp acceleration in new demand is fueled by the fact that some of the companies have been on the sidelines for most of the pandemic period and are now finally pulling the trigger when they feel they have more clarity.
Most notable additions in the first half of the year were the River Developments’ Oslo and London buildings part of the Sema Parc project (31,500 sqm), Forte Partners’ Tandem (21,000 sqm) and the first building in Atenor’s @Expo project (21,000 sqm). Also, for the second half of the year, Colliers consultants are expecting a similar figure of new stock.
“Taken together with a somewhat light calendar of new buildings to be delivered in the next few years, the office scene is starting to feel landlord driven in certain submarkets. That said, we still need to underscore the fact that at least several large tenants which leased large surfaces before the pandemic are still trying to sublease part of their offices on account of adjusting their strategy. Also, the divergence between total demand and new demand, where one is expanding nicely and the other is growing exponentially, is probably one of the more interesting trends of the recent period and it shows that the number of companies reducing their office presence amid hybrid work was overstated for 2021-2022. However, the hybrid work transformation is happening as we speak, hence some companies might soon take the decisions they’ve kept postponing, so there is still some room for negative surprises in terms of occupancy. Some caution is also warranted given the current context of heightened economic uncertainty globally”, explains Victor Coșconel, Head of Leasing | Office & Industrial Agencies la Colliers.
The drop in vacancy rate from 16.50% at the end of last year to 15.25% mid-2022 is another indicator of a market in recovery-mode, but even more impressive is the fact that vacancy for good buildings is much lower than this; on average, the rate for good buildings in good locations drops towards 10%. Furthermore, occupancy increased in most of the large office markets, with some now seeing the vacancy rate firmly in single-digit territory.
Colliers consultants note that upside pressures on rents are clearly emerging and headline rents for new office buildings yet to be delivered, during the next couple of years, are climbing steadily. Meanwhile, rents for older, albeit good office buildings, remain flat when the leasing deal is up for renewal. The latter would not have been common practice a few years ago, when landlords would try to woo tenants with more attractive terms.
“Based solely on our pipeline of leasing deals and knowledge of the market, it looks like office leasing activity could return to pre-pandemic peak levels within two years if the trend holds and no radical decisions will be taken by the largest tenants, a few years sooner than we would have normally anticipated. Taken together with a less than robust deliveries calendar, of around 120,000 square meters of new offices expected per year between 2022 and 2024, we would expect a generalization of upside pressures on rents for good buildings in the following quarters. Inflation is also an argument for higher rents. Overall, based on this strong demand, vacancy could drop towards single-digit territory within two years from over 16% at the end of 2021. Vacancy for good offices is likely in neutral market territory, no longer a tenants’ one”, Victor Coșconel points out.
Colliers consultants also highlight that two major interlinked themes emerge in the post-pandemic period. One is the reorganization of office space to be more in line with a hybrid work program, which most companies seem to be leaning towards, and the other theme relates to getting employees back in the office, as it is now rare for companies to have more than 40-50% of employees in the office on a normal day. Long commuting times are a major factor in employees staying away from the offices, and Colliers consultants believe this could strengthen the case for developers to look into delivering some projects in residential areas.
Colliers innovates and responds to current challenges and future needs in the office market with Office 360°, its complete approach of the office with all its touchpoints, carried out in a unique and highly complex process that is tailored to the very last detail to fit the companies’ needs and strategic plans. Colliers’ approach to cost control at each stage of the office transformation delivers additional savings often in excess of 10-15%, when compared to the values obtained usually from contractors, in negotiations during the tender stage.
Overall, 2022 has been a good year for the local office scene so far and the best may still be yet to come if momentum remains on the current path, but Colliers consultants retain a cautiously optimistic approach, as global economic risks are significant. Going further, they see the undersupply of modern offices in Bucharest as an insulating factor over the longer term and they would rather expect the modern office stock to start growing again in a few years. Consequently, it could surpass 4 million square meters by the end of the new decade, and might even close in on the 5 million milestone, if no other (economic) crisis will show up on the radar.