Bucharest’s modern office stock will increase by over 500,000 sqm in 2019 and 2020. According to Colliers International Romania, these dynamics of the office market could generate variations in the office buildings’ market values of plus or minus 5% during the indicated period. To measure these possible changes, three factors were considered: the average vacancy rate, the level of the incentives packages that owners offer to tenants and yield compression.
The first half of 2019 recorded modern office spaces deliveries of 185,000 sqm in Bucharest, with another 150,000 sqm of offices in the pipeline for the second half of the year and with over 230,000 sqm for 2020. Under these circumstances, the 10% vacancy rate registered at the end of June 2019 could gradually increase to 13% at the end of 2020. Such an evolution of the vacancy rate could impact the value of the office buildings to decrease by approximately 3-5% in the indicated period.
In order to keep the vacancy rate at the lowest levels possible for their own projects, the owners resort to various solutions, from refurbishments or certifications to more advantageous incentives packages (e.g. rent-free months and fit-out costs). These measures, too, can have a major impact in the value of the project.
“To keep up with newer, higher quality, LEED, BREEAM or even WELL certified projects, landlords of office buildings built between 2007-2008 will have to make an additional effort in refurbishing their spaces. On the other hand, the large volume of relocations from competitive stock (86,000 sqm only in the first half of 2019) and the intention to maintain the headline rent determines the owners of modern buildings to keep and attract tenants by offering incentives packages. According to our estimates, if the period in which the tenants enjoy these benefits increases by 3-6 months, the market value of the office projects could decrease by almost 1-3%”, Anca Baldea, Associate Director, Valuation and Advisory Services at Colliers International, said.
At the other end of the spectrum, investor demand could bring an increase in the value of office buildings. The interest in offices in Romania has been quite high in the first semester of the year, as office transactions accounted for 62% of the total transaction volume. For the remainder of the year, we estimate that this two-thirds ratio of the office segments will be maintained.
„Investor demand for office projects in Bucharest is robust and the economy is still going strong. If this favourable context continues, the yields for prime office projects could drop by 25-50 basis points, and the market value could increase with 2-5%”, Anca Baldea concluded.
