Relocations, medium-term contracts

Despite the continuation of hostilities and regular missile attacks on the capital, the market has managed to adapt, and new trends have emerged that indicate the segment's resilience to external factors.

CBRE analysts have identified several key trends that characterized the office real estate market of the capital last year: "Most companies suspended staff reductions and sought ways to optimize real estate costs by renegotiating lease terms or improving office space by relocating. Although the market continued to see some reduction in space, the increase in net absorption as of the end of 2023 indicates a weakening of this trend.

Occupier demand showed signs of strengthening, with annual gross absorption reaching approximately 91,000 sqm, a fourfold increase compared to 2022, but still 32% below the pre-war level of 2021. By transaction type, relocations (55%) and renewals (17%) dominated, accounting for around 72% of leasing activity, while office space expansions were relatively infrequent (6%).

In contrast to the traditional war-related relocations or downsizing of office space, a new trend is emerging. Large companies are staying in their current offices, avoiding relocation because of the cost and to maintain the stability of their business processes. Thus, in some cases, multinational companies may maintain their office space nominally, continuing to pay rent and related expenses, even if the actual utilization of the space by employees remains low, ranging from 15 to 50%. As a result, in some cases, the relocation scenario cannot compete financially with the option of renting the same office."

Market experts also note that the planning timeframe has changed. "In the second half of 2023, there was an increase in requests from tenants for medium-term contracts of 2-3 years," comments Levon Papoyan, Partner at SnP Partners, "As for flexible offices, offices with the renovation and preferably with furniture, they are mostly signed short-term contracts for 1 year with an extension”.

The main trend since the beginning of the full-scale invasion - respect for security - has remained and intensified. "Market players understand this and take care of organizing their own shelters or arranging joint ones with landlords," says Ilya Kenigstein, CEO and Founder of Creative States, a network of coworking.

Vacancy: positive dynamics

According to CBRE analysts, as of the end of 2023, the average vacancy rate was 25% (-1% yoy), while the vacancy rate in Class B (27%) remained higher than in Class A (24.7%), especially in lower quality buildings. The bulk of the vacancy was concentrated in newly built properties, which still have low occupancy rates, as well as in lower quality buildings, which were generally located outside the CBD.

In general, experts note that the decrease in vacancy rates observed in 2023 indicates a positive trend in the market.

Among the reasons for the decline in vacancy, Levon Papoyan, SnP Partners identifies the following:

• a limited number of professional business centres were introduced to the market;
• there is a demand for office space not only due to relocation but also due to business expansion and new projects (especially by international organizations);
• two large business centres - 101 Tower and LuWR - are still on the market.

Rental rates: gradual stabilization

The strengthening of Kyiv's air defense, and a significant increase in demand from international organizations, diplomatic missions, companies and Ukrainian businesses have contributed to the stabilization of rental rates.

According to CBRE analysts, prime rents have stabilized at $20 per sqm per month, having decreased by 5% since the beginning of the year. The upper end of the rent range for Class A office space decreased by about 7% on average, ranging from $18-24 per sqm per month, while other properties saw a decrease in the upper end of the range by about 11%, to $8-16 per sqm per month.

New supply: development activity has slowed down

The total supply of professional office space in Kyiv remained almost unchanged in 2023, amounting to about 2,400,000 sqm.

In 2023, about 60,000 sqm of office space was commissioned, but some of the buildings commissioned according to the documents were not ready for the start of operational activities, i.e., in fact, the share of buildings commissioned in 2023 will start operating with fully finished common areas in the second half of 2024. The updated level of new supply announced by developers in 2024-2025 is about 150,000 sqm.

Business centres commissioned in 2023:

• BC Twelve, 12 Novokonstantynivska St. (13,300 sqm)
• GRADIENT.Business Center, 4-6 Korolenkivska St. (20,000 sqm)
• Business Center at 96 V. Lobanovskoho Ave
• Unit.City B4, 3 Dorohozhytska St. (13,200 sqm)

"At the same time, development activity in the office segment has slowed down, and the amount of office space under construction has decreased," CBRE analysts note, "However, despite the fact that the office property market remains unbalanced, including due to high vacancy rates, owners are ready to commission new facilities at the final stages of construction.

Forecasts: recovery in demand, new supply and reduced vacancy

In 2023, despite the hostilities, there was some activity in the office market, and experts note that this trend will continue this year.

CBRE analysts: "In 2024, we expect a moderate recovery in occupier demand. It is possible that the tenants will be dominated by companies that will use the opportunity to move to higher-quality buildings in more attractive locations.

It is expected that by the end of 2024, approximately 51,000 sqm of office space will be commissioned across four office projects. The new office buildings will be mainly small and medium-sized Class B properties, with the exception of the Class A Heritage BC. However, delays in commissioning can be expected as debt financing remains virtually unavailable and demand for office space will remain generally subdued. In case of timely commissioning of the announced facilities, the average vacancy rate in the market may gradually increase. At the same time, quality business centres are likely to see a decline in vacancy due to attractive rental rates and the desire of some tenants to improve the quality of their offices. Absent further economic fluctuations and a deterioration in the security situation, rents will remain generally stable, although lower quality properties may see further rental declines."

It is expected that base rental rates for office space will gradually take on a less chaotic note and begin to stabilize during 2024, which means that the range (fluctuations: from and to) of rental rates for different classes will not be as wide and will have a deviation of 10%-15%.

If the office absorption rate remains at the level of 2023 in 2024, the vacancy rate of fully finished office space will continue to decline, so new office buildings on the market, as well as those that were commissioned in 2020-2022 and did not have time to fill at least 30%, will be in demand and, accordingly, have a higher chance of being filled.