With the economic performance of countries in the region being better than expected, due to the general positive mood an increasing number of investors have been prompted to launch new projects, so much so that on a regional level, the expected expansion of the office market supply will exceed demand. The extent of new supply is expected to slow down the growth of rental fees, in fact, it may lead to their decrease in certain markets over the next three years. The Central European markets with the best performances will probably be Prague and Budapest.

Budapest on the rise

Last year, the Budapest office market was already showing signs of recovery, but in 2015 the Hungarian capital has unambiguously become an attractive destination, for both investors and developers. The economic recovery experienced recently has greatly improved the assessment of Budapest and has increased tenant activities - a record letting volume was measured in the second quarter of 2015, and the net market absorption is 40% higher at present than at this time last year - but this has not yet caused an increase in rental fees. The recommended rental fee in the first half of 2015 - the same as in the last five years - was still 21 euros per square metre in the inner city, though this is generally associated with significant discounts.

The exceptional position of Hungary is shown by the fact that, in contrast to Poland and the Czech Republic, the vacancy rate is constantly dropping; the index has fallen for the first time from historic heights to below the figure measured in rival Prague. Together with the fact that rather little speculative development is in progress, this is expected to bring a rise in rental fees in the mid term.
 

After the amount of modern office space in Budapest expanded by close to 70 thousand square metres in 2014, so far this year just one building has been completed with 20 thousand square metres of new area, and furthermore, additional expansion during 2015 is to be expected almost exclusively in the Váci Greens complex. The increase in developer activity, however, is shown by the fact that in the next two years the completion of several projects now under construction is expected, whilst a number of companies have heralded grandiose new projects, and furthermore, not only on Váci Road, which proved to be a relatively safe choice even during the crisis.

The pinnacle of developments in Prague

The demand for modern offices also increased significantly in Prague in 2015. Contracts were signed for 130 thousand square metres in the second quarter, which is close to twice the value of the previous year, and the quarterly market absorption (72 500 square metres) has not been so high since the end of 2008. Although several speculative developments were completed in the first half of the year, the vacancy rate was still able to fall. Inasmuch as the pace of absorption remains sustainable for the rest of the year, a further drop is conceivable, despite the fact that additional significant new space is expected to be completed. According to the Cushman & Wakefield forecast, the recommended rental fees in the upper segment of the office market will change slowly but in a positive direction over the next two years, whereas the vacancy rate is expected to remain in double figures.
 

The development activity in Prague will reach a peak this year, more than 110 thousand square metres of office space were completed in the first half of the year and almost 150 thousand more are under construction. After this year’s expansion of close of 200 square metres, which will be the highest value following the record year of 2008, the amount of new space opened in 2016 may only amount to 40—60 thousand square metres.

Warsaw no longer in focus

In the first half of the year, the letting volume reached 390 thousand square metres in Warsaw, a growth of 50% on an annual basis. Despite this, a sharp contrast has developed in Poland between Warsaw and the secondary cities, in which demand is outstanding, whereas in the capital the mass of new development is impeding the increase in rental fees.
 

The continuous market absorption of spaces caused a temporary fall in the vacancy index of the city in the first quarter, then the index rose up above 14% again in the second quarter. According to Cushman & Wakefield, despite the high demand, the rapid pace of new openings will continue to keep demand unbalanced in the following twelve to eighteen months. This will put pressure on the recommended rental fees, which will upset the balance between supply and demand, so the market will once again favour tenants with rent-free periods and/or a development contribution. Besides this, whilst the net absorption will remain positive, or will even increase, rental fees will probably fall.

An increase in letting activity is also evidenced in other cities. On the secondary markets, contracts were signed for more than 217 thousand square metres in the first half of 2015, this being close to two thirds of total lettings in 2014. Due to high tenant demand, this tendency is quite certain to continue until the end of the year.
 

The amount of office space in the capital has expanded by 150 thousand square metres in 2015 so far, and the annual construction volume may reach a record of 350 thousand. Office space developments are underway at present on approximately 576 thousand square metres, which will be completed by the end of 2016, but pre-lease agreements have only been signed on less than a fifth of these.

Bucharest is also worth watching

The letting volume in the Romanian capital in the first half year approached 140 thousand square metres, moreover, pre-lease activity has not been so high since 2008. Relative to the proportion of office space, Bucharest can boast of the second most intense development activity in Europe: the opening of more than 400 thousand square metres of office space is projected by the end of 2016. The majority of these are speculative projects, however, which will hinder the increase of rental fees.