Sustainable growth is the name of the game for the local office market in 2015, say industry representatives after the first semester results. Total leasing activity is set to reach at least last year’s levels and some pundits predict growth. There is even talk of Romania coming up on the radar of new investors.


Simona Bazavan


Leasing activity involving office space has been on an upward trend for a couple of years now, and the first semester of 2015 was no exception, pundits say. The total office take-up for Bucharest in the first half of 2015 was up by 7 percent y-o-y, Andrei Drosu, research consultant with JLL, told BR.

“After a rather slow first three months, demand started picking up, especially in the second quarter, when big names in the IT&C industry started to act,” he added. Three large transactions alone accounted for more than a third of the total market activity: Genpact pre-leasing 22,000 sqm in Hermes Business Campus, and Oracle leasing 10,000 sqm in Sky Tower and pre-leasing 20,000 sqm in Oregon Park, he added.

But more important than this increase is the fact that new demand, meaning new leases, pre-leases or the lease of additional space by existing tenants, has been growing by more than overall take-up.

“New demand, as a share of total demand, is on an upward trend compared to renegotiation deals and now represents more than a third,” Mihai Paduroiu, head of the office agency at CBRE Romania, told BR.

Indeed, while total take-up stood at around 130,000 sqm in the first six months, a similar volume to that reported during the same period a year ago, new demand was up by 18 percent from 54,000 sqm last year to 64,000 sqm in 2015, Daniela Popescu, head of research at Colliers International Romania, told BR.

“It is important to mention that this increase in net demand was mostly fueled by new companies entering the local market and the setting up of new divisions by existing players. Relocations to new offices with a similar quality level were constant at around 44,000 sqm,” she noted.

Another constant is that, as has been the case over the past few years, new demand is coming from newcomers in the IT industry, shared service centers, business process outsourcing providers and the expansion of existing players from the same sectors.

Overall, pundits expect that by the end of 2015, total leasing activity will reach last year’s 300,000 sqm level, and some even forecast increases. “By the end of the year we will see a significant evolution in demand and we estimate an increase of over 20 percent in leased volumes. And this is good news as it shows many local companies are getting healthier,” Andreea Paun, associate director with the office agency of Colliers International Romania, told BR.


Dreaming of a landlord’s market

Between 100,000 and 120,000 sqm of new office space is expected to be delivered in 2015 in Bucharest, similar to the volume reported in the previous two years. Given that overall demand has remained relatively constant, the average vacancy rate for Bucharest is not expected to undergo significant changes through to the end of the year, say pundits.

The 27,000 sqm City Offices project developed by Globalworth in southern Bucharest and Skanska’s 17,700 sqm Green Court building B in Floreasca-Barbu Vacarescu were the main projects delivered in the first half of 2015. The largest due to follow by yearend is AFI Park 4&5 (32,000 sqm), according to JLL data.

“We do not expect significant fluctuations in the vacancy rate by the end of the year, mainly because many of the large pre-leases concluded this year are for buildings that will be delivered next year, while the delivery of some projects in 2015 with large unoccupied spaces will most likely be covered by the high new demand,” said Drosu. 

The overall vacancy rate in Bucharest stands at about 13 percent at present, but there are considerable differences between the types of buildings and the areas where they are located. For class A office spaces, for example, the vacancy rate stands at about 6 percent, according to Paduroiu, while in the Barbu Vacarescu-Floreasca area, currently the capital’s hotspot address for office headquarters, it is expected to drop below 5 percent, said Paun. 

Even on the longer run, the vacancy rate should remain relatively constant, despite the fact the volume currently expected to be delivered in 2016 is about 300,000 sqm, almost three times above this year’s figure. 

“Bucharest’s per capita office stock represents around 30-35 percent of that of cities like Prague and Warsaw. Given Romania’s business attractiveness at present – fiscal incentives, economic growth and an overall improving perception – the vacancy rate will probably not go up by much. It will remain constant, if not even drop, but either way there will not be any sudden changes,” said Stefan Tudos, leasing manager at Genesis Development, during BR’s 14th Realty event this June. 

Rents too are predicted to remain relatively stable until the end of the year and there are even hopes of increases. “We have already seen an increase in prime rents from EUR 18/sqm/month to EUR 18.5/sqm/month said the CBRE representative.

Tenants’ expectations of rents and the packages offered by owners are in relative balance, say market representatives. “The market has definitely stabilized and rents I believe can no longer drop. Moreover there is a trend towards growth. This is no longer entirely a tenant’s market,” said Tudos.


Where are the investors?

After the investment volume in real estate assets reached a whopping EUR 1.2 billion last year, up from EUR 300 million the previous year and the highest level since 2007, expectations are that in 2015 it will come close to EUR 1 billion, according to JLL data. Given that so far the volume has been below EUR 100 million, the remainder of the year should be a very active one for investors.

But more important perhaps than the actual volume of investments would be the entrance onto the local market of new players, say industry players, as for the past couple of years, investments in the acquisition of real estate assets have been mostly split between two investment funds – New Europe Property Investments (NEPI) and Globalworth Real Estate Investments, which is controlled by Greek businessman Ioannis Papalekas.

Pundits say that the premises are now there for this to change. “I’m very glad to see that there are increasingly more investors who, although they might not enter the local market for the next six months or year, are considering Romania for the first time in about seven years. There is money and everyone feels the pressure from them. Bank deposits and bonds don’t offer an attractive return. On the other hand, real estate offers a relatively safe alternative and Romania is becoming increasingly interesting,” said Silviana Badea, head of capital markets at JLL, during this year’s Realty event.

Georgiana Andrei, director of the office & retail agency at Colliers International Romania, talked during the same event of concrete offers coming from players that are either not present locally or have been active in Romania but haven’t bought anything since 2008.

However, despite this interest, many of the reasons that have so far prevented large investment funds from buying properties in Romania are still valid. One problem remains the ratio between yields and the level of interest rates for financing investments, which makes Romania less attractive than countries like Poland. Lack of predictability regarding rents is part of the problem.

“Large investors come the moment they know they can count on a constant and predictable rent level on the long run. Given that locally contracts are closed for periods of about five years and there is great flexibility for tenants, it is less likely that a large investor will be attracted. On more mature markets contracts are closed for 10 or even 15 years and investors can rely on a constant revenue flow. We still need to work on this. Until contracts are truly medium- and long-term it will be hard for yields to drop enough to attract large investors,” warned Tudos.

But even despite such setbacks, Romania could see the entry of new players with an appetite for risk, said Badea. In turn, they will be followed by more risk-averse players, as was the case before the crisis, she argued.


And going outside Bucharest…

Outside the capital, the office market is expected to post a considerable increase this year, albeit partly because regional office markets in Romania are considerably underdeveloped compared to countries like Poland or the Czech Republic.

Nevertheless, last year’s record demand for office space in regional cities such as Timisoara, Cluj-Napoca and Iasi is projected to go up by about 30 percent by yearend to around 80,000 sqm, according to DTZ Echinox data.

Some 25,000 sqm of office space was leased in the first quarter alone and new office deliveries are expected to double by the end of 2015, meaning the office market outside Bucharest is projected to surpass last year’s record levels.

New demand, which represented about 43 percent of last year’s 55,000 sqm total take-up and which is expected to maintain a similar share in 2015, is and will continue to be the market’s main driver, according to Mihaela Galatanu, head of research at DTZ Echinox.

IT and telecom players remain the most active firms expanding outside Bucharest. Last year they generated 70 percent of office demand, while the remaining 30 percent came from industrial and manufacturing companies.

And the outlook remains positive. “Demand from the IT and telecom sectors is becoming more sophisticated. While between 2006 and 2009 Romania was interesting for setting up call centers, in 2015 we can talk about demand for software, hardware, financial and marketing specialists. We now have centers in Romania that are servicing operations from Europe and all over the world,” added Galatanu.

High demand is also reflected in an average vacancy rate of around 5 percent in most regional cities, while headline rents average EUR 8-11/sqm/month, with a lower level in Brasov of between EUR 7 and EUR 9/sqm/month, according to the report.

Developers are keeping pace with the growing demand. In 2014 the modern stock of office space in the main cities outside Bucharest increased by 10 percent, reaching a total of 493,000 sqm. New deliveries amounted to 43,000 sqm, out of which 83 percent was in Cluj-Napoca alone.

This year the situation will be more balanced with 43,000 sqm expected to be delivered in Cluj-Napoca, 35,000 sqm in Iasi and 17,000 sqm in Timisoara. Brasov will see no deliveries in 2015 but its modern office stock is projected to grow to 90,000 sqm by the end of the next year. The largest project due to come onto the market in 2016 in the Transylvanian city is the second phase of Coresi Business Park (10,000 sqm).

Going further into 2016, approximately 80,000 sqm of office space is in the pipeline in the main regional cities, and by the end of next year, the total stock might exceed 665,000 sqm, according to DTZ Echinox data.