Offices in demand in CEE but need for flexibility a challenge

Offices are doing well in CEE but the demand for flexibility is a challenge for the sector, experts agreed at Real Asset Media’s European Outlook 2022: Focus on CEE investment briefing, which took place online this week on the REALX.Global platform.

“We continue to believe in offices,” said Marcin Juszczyk, member of the management board, CFO/CIO, Capital Park. “Supply is limited in Warsaw and new buildings are fully let before they are completed. We expect the supply gap to continue for the next two years and the vacancy rate to go down to single digits.”

The pandemic has led to a clear trend of a renewed interest in suburban offices, away from the CBD but close to residential areas where people live. Occupancy rates have shot up across CEE, not just in Poland.

“The reason is that people are not afraid of going to the office, but they are concerned about commuting on crowded trains,” said Juszczyk. “We believe this trend will continue and that central and suburban office yields will converge.”

Offices, like other core asset classes, are seeing strong demand and fierce competition again after the slowdown due to the health crisis and travel restrictions.

“Offices are back,” said Dorota Wysokińska-Kuzdra, senior partner, head of corporate finance & living services CEE, Colliers. “We’ve seen record yields in recent transactions not just in Warsaw city centre but in secondary cities as well.”

The positive trend is not limited to Poland but extends to the whole CEE region.

“The real estate market is booming and offices are going strong in Romania, Bulgaria and other countries,” said Victor Constantinescu, managing partner, Romania & co-head of Real Estate, Kinstellar. “Yields are 7% and above and there’s a lot of interest from investors looking for a better return.”

Flexibility requirement a challenge for landlords

Demand for offices is high but it is also changing. All companies are opting for more flexibility, which presents a challenge to landlords.

“The question is is how fast can we adapt to the huge demand for flex from corporate clients,” said Hubert Abt, CEO & founder, New Work Offices. “Landlords must adapt quickly and provide services and innovation.”

The choice for landlords is not whether to embrace the trend, but rather how much flex they need to add to their portfolios to stay competitive. In 2019 a 5% share seemed acceptable, but now it has passed 10% and it is fast reaching 20%, he said, so CEE will need to catch up fast.

The market share of flex office in CEE is just 3-4% at the moment, but according to JLL it will grow towards 25-30%.

“We’ll see more flexible spaces and flexible leases in line with customers’ demands,” said Abt. “The average term of a lease has already declined from 7/8 years to 3/4 and is now set to go down to less than three years. Long-term commitments are not the norm anymore.”

It will not be an easy transition, said Abt: “Things will get worse before they get better, from what we can see in our 600 service or lettings contracts a year we have with big corporates and smaller tenants.”

A new market report by New Work Offices found that 70% of flex operations are not profitable.

Bigger players have access to capital markets and can bridge the gap for a time, but smaller operators, who now represent about 50% of the market, are suffering and could soon be out of business. “As a result, the European landscape of flex operators will soon change,” the report says. “Disruption is on its way.”