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CEE: Offices are back, but occupiers demand more flexibility

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Investors continue to back offices across CEE, but providing flexible space and leases is the new challenge, reports Nicol Dynes.

Demand for offices in CEE, like other core asset classes, is strong again and competition for assets is fierce after the slowdown due to the covid health crisis and ensuing travel restrictions.

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

“We continue to believe in offices,” adds Marcin Juszczyk, member of the management board, CFO/CIO, at 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.”


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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,” notes Victor Constantinescu, managing partner, Romania & co-head of real estate at Kinstellar. “Yields are 7% and above and there’s a lot of interest from investors looking for a better return.”

One noticeable trend arising from the pandemic is the 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,” explains Juszczyk. “We believe this trend will continue and that central and suburban office yields will converge.”

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

‘We’ll see more flexible spaces and flexible leases in line with customers’ demands. Long-term commitments are not the norm anymore.’

Hubert Abt, New Work Offices

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

The market share of flexible offices 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,” says Abt. “The average term of a lease has already declined from seven to eight years to three or four 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, says 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.”

Profitability challenge

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, which 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.”

Offices and warehouses are both set to see rent increases in CEE countries this year. “Logistics and office rents in the region have been stable, but we expect that now inflation will be a trigger for healthy rent increases,” says Wysokińska-Kuzdra.

The prospect of rent increases will be an extra incentive to deploy money in those two in-demand sectors, despite rising prices and construction and operational costs.

“Projects are less profitable because costs are going up, but on the other hand investors have a huge amount of money available,” says Capital Park’s Juszczyk. “Real estate is always seen as a good investment in times of high inflation.”

‘Projects are less profitable because costs are going up, but on the other hand investors have a huge amount of money available.’

Marcin Juszczyk, Capital Park

Investors’ interest will increasingly focus on ESG-compliant assets, which will bring higher valuations and higher rents.

Market pressures will do more than legislation to bring people into line, says Abt: “We don’t need to wait for regulations because the capital markets will force us to adapt. If you don’t comply you will get shot down by the stock exchange or by the big guys.”

Meanwhile, the seemingly ever-increasing demand for logistics assets and the reconfiguration of global supply lines will benefit CEE countries.

Nearshoring a big driver

“Global companies have seen the need to put distribution and shared services centres closer to home,” says Juszczyk. “The nearshoring trend has grown and will be a big driver for the warehouse market in Poland. It is now 22 million sq m but it is set to double in the next five years”.

As companies have moved or strengthened their existing operations, demand for logistics assets in CEE has soared. “We’ll continue to see investment in logistics, especially last mile, as market pressure will force growth in the sector across the CEE region,” says Constantinescu.

In Romania and Bulgaria there is no sign of a slowdown in demand, but there are two obstacles in investors’ way. “Roads and highways have not kept up and there are no good transport links, and there are serious labour shortages in both countries, as emigration is still an issue,” says Constantinescu. “But investors are not deterred: they keep looking for portfolios to purchase.”

2022 set to outperform 2021 as investor confidence returns

Prospects for real estate markets in Europe and CEE are positive, according to Colliers research. “Our prediction is that 2022 will outperform 2021 in terms of investment volumes,” says Dorota Wysokińska-Kuzdra, senior partner, head of corporate finance & living services CEE, at Colliers.

Colliers’ Global & European Outlook 2022 survey shows a definite optimism among market players, with 81% positive about economic growth and 70% confident about market liquidity and rental growth. ESG is becoming a clear priority and 74% of respondents said they have already taken action to improve the environmental performance of their assets.

On a global level investors’ interest is equally divided between the three main regions – North America, Asia-Pacific and EMEA. The top three sectors they are targeting are industrial and logistics (69%), offices (57%) and multi-family or build-to-rent (40%).

Within EMEA the top destinations remain the UK, Germany, France and the Nordics, while the sectors most in demand are industrial and logistics (+48%) and hotels (+52.8%).

‘There’s a very healthy yield spread in offices, much better than in Western Europe. Rental growth and good cash returns can be expected in the sector.’

Dorota Wysokińska-Kuzdra, Colliers

The CEE region, where investment volumes are expected to reach €11 billion in 2021, presents a rather different picture. The most active sector remains offices, which account for 40% of total investment volumes, with retail still at 27% and industrial and logistics at 22%.

“There’s a very healthy yield spread in offices, much better than in Western Europe,” says Wysokińska-Kuzdra. “Rental growth and good cash returns can be expected in the sector.”

However, European and global trends are definitely having an impact on trends in the region, she adds: “There is a clear shift towards decreasing retail and increasing logistics investment. Demand from tenants continues to grow, so investment activity is set to continue and we can expect rental growth in both sectors.”

As for capital flows, the pandemic has not changed the pattern. Although Czech and Hungarian investors have been more active in the region, especially in Poland, 74% of capital still comes from international investors and 26% from domestic players. In Poland 98% of capital comes from overseas investors.

“Most of the money comes from Europe and America but we have seen increasing interest from the Middle East, which has just overtaken Asia-Pacific,” says Wysokińska-Kuzdra.

Looking ahead, the main challenges for 2022 are not exclusive to CEE. The main concern is the rise of inflation and in particular rising energy, labour and construction costs. Another common theme is the availability as well as the increasing cost of land.

As far as sectors are concerned, industrial and logistics will continue to benefit from high occupier and investor demand and from the nearshoring trend, but product is extremely limited and yields are dropping below retail or offices.

Residential is in great demand but “needs to develop quickly because we are virtually starting from scratch”, says Wysokińska-Kuzdra. Rising house prices are contributing to lower affordability and leading to record levels of demand for accommodation for rent – but the problem is lack of product. 

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