The first semester of 2012 was more dynamic than the first semester of the previous year, being characterized by a higher level of optimism on the office market of midsize companies, whose reaction to the market trends is quicker.
The second semester of 2012 registered a slower evolution, due to the political events (the referendum for changing the president, the Parliament elections).
In 2012, pre‐leases increased significantly, reaching 59,255 sqm, approx. 53% more than the previous year. This increase of pre‐leases, together with the need for high-quality offices on the market created the context for the emergence of new office projects in 2014‐2015, the easiest to start off being medium‐sized buildings (up to 10,000sqm, or the staged projects).
An important category of companies became visible again on the market, i.e. the start‐ups (which are generating “new demand”), representing either local entrepreneurship initiatives or foreign companies that started again to open subsidiaries/representative offices in Romania. According to our estimates, these companies leased approx. 15,000sqm (representing 9% of the office area transactions in 2012).
SUPPLY: The Competition for High‐Quality Office Spaces, with Competitive Budgets, Begins
OFFICES IN BUSINESS CENTRES. Although the new supply of offices in business centers amounted to merely 107,000 sqm in 2012, by approx. 15% less than the previous year, the total stock of office areas available was maintained at a rather high level in 2012, increasing by 5% at the end of the year, compared to the beginning of the year.
The following chart presents the structure of the supply, according to the rent level, at the end of 2012:
VILLAS. The stock of office spaces in villas also increased significantly in 2012 compared to 2011, by approx. 35%. Most of these are not new buildings, but spaces remaining vacant after companies’ relocations to business center offices, in particular. The villas are assessed in the light of two major criteria: (1) the location, and implicitly, accessibility to the underground, and (2) the quality level of the space. The most wanted locations are those situated in central areas or down‐town, such as Aviatorilor, Victoriei, Domenii, Romana, Universitate, Cotroceni, and adjacent areas. If the building location is an aspect which may not be changed, the second aspect, i.e. the quality level, can be improved. On an increasingly competitive market, villa owners are recommended to consider regular real estate renovations.
In 2012, patrimony and interbellum villas (with a properly preserved or restored architecture) were the most wanted among villa offices.
The structure of the available office areas, by areas (both in business centers, and in villas), at the end of 2012, is as follows:
For those companies looking for new offices, 2013 is expected to be a year of competition for identifying and securing a high-quality office.
In this sense, favorable circumstances are being created for the owners, for launching new projects and pre‐leases. However, taking into consideration the relatively fragile economic stability, both in Romania and in Europe, and the moderate degree of absorption of the new office areas, we believe that the safest projects will be those medium‐seized (up to 10,000sqm), or projects developed in phases.
PREMIERE: BUSINESS CENTRES DEDICATED TO SMEs ARE EMERGING, FINANCED FROM EUROPEAN FUNDS
In 2012, business centers financed from European funds began to be launched, dedicated primarily to the lease of office areas to small and medium‐sized companies, including start‐ups. Such business centers are intended to be business incubators, dynamic and efficient environments for the start-up, development and growth of companies. This type of project has obtained financing through the European funds, Priority Axis 4 “Strengthening the regional and local business environment”. The long term objective of these programs is to strengthen the investment environment, to increase the number of sustainable economic activities, and to reduce the unemployment rate.
Between 2011 and 2012, 6 projects were approved in Bucharest, with areas comprised between approx. 1,800sqm and 15,000sqm. The implementation stage began for only 5 of these projects (some of them being almost completed), one of the project’s financings being terminated. Such business centers provide a number of advantages to potential tenants, more specifically, access to a number of facilities(often free of charge), such as meeting rooms, fully equipped conference rooms, internet services, fully equipped kitchenettes, etc.
DEMAND: Relocation Intentions Intensify
MIDSIZE COMPANY SEGMENT DEMAND
According to the data analyzed by ESOP, the year 2012 is characterized, especially as far as the midsize company segment is concerned, by an intensification in the relocation intentions, represented by the demand increase by approx. 57%, compared to 2011.
Nevertheless, this demand increase should be interpreted as an intensification of the relocation intentions. The higher demand volume was counterbalanced by increased prudence in decision making, due to the economic instability; therefore, only approximately 35% of the relocation intentions materialized in transactions in 2012, the rest of the companies postponing the relocation decision, and extending the lease contracts for the current offices or expanding their offices within the same buildings.
DEMAND STRUCTURE AND EVOLUTION
From a structural point of view, in 2012, compared to 2011, there were no major changes in terms of the budgets announced by the companies looking for offices, the main demand being for offices with budgets within 11 EUR/sqm (78% of the total demand).
Regarding the demand evolution by budget category in 2006‐2012, the lowest variations appeared within the segment of office areas with rents comprised between 11 and 15EUR/sqm; however, this segment weights less within the total demand coming from midsize companies (between 31% and 20% for the analyzed period 2006‐2012).
TRANSACTION VOLUME ON THE MARKET
In 2012, the transaction volume was lower at the level of the entire market. Compared to 2011, the decrease was by approx. 20.4%, and 15.4% respectively, compared to 2010, taking into consideration exclusively the relocation, pre‐lease and expansion transactions, which influence the dynamics of the Romanian business environment.
In 2012, the most significant drop in the transaction structure, by approx. 43% compared to the previous year, was related to the relocation segment (leasing of an existing office area/completed real estate). However, this trend is partly justified and offset by significant growth in the level of pre‐leases, of up to 59,255sqm (consisting of 8 transactions, with areas comprised between 640sqm (minimum) and 20,000sqm (maximum).
The increase by 36% in the office areas expansion also indicates a favorable evolution on the office market (although it also indicates a certain degree of prudence on behalf of the companies, which, although gradually increasing the number of their employees, prefer to accommodate these increases with their current offices).
Midsize Companies Preferred Business Centres in 2012 While the first years of the crisis brought the office areas within villas to the companies’ attention, such areas being more flexible in terms of the financial and contractual conditions, in 2012 we noticed the companies’ tendency to go back to business center offices, taking into consideration that many of these real estates became more attractive, by aligning their commercial terms to the
companies’ requests. Thus, approx. 75% of the transactions made by ESOP were related to business center offices, and only 25% to villas.
The average area transacted at the level of the entire market (big and medium‐sized companies) was approx. 1,040sqm, and 420sqm within the segment of midsize companies.
Two types of demand reappeared in 2012, being favorable indicators for the economic environment and the office market.
First, the demand from local or foreign start‐ups, many of them operating in the field of IT & C. We estimate that the volume of the transactions in which newly established companies were involved was approx. 15,000sqm, representing 9% of the total transactions on the market (except for renegotiations).
Second, the companies interested in relocation reappeared in 2012, aiming at optimizing their employees’ comfort or improving the company’s image, and less at rent optimization, as in the previous years. Nevertheless, due to the absence of the emergency factor from these transactions, unlike the relocations for cost reduction purposes, the demand existing on the market in 2012 had a transaction conclusion term of 2 to 4 months longer than in 2009‐2011 (when the average transaction term was 3‐4 months).
In 2012, the rent level stabilized at values close to those recorded in 2011, with slight adjustments of 5‐10% at the level of a small number of projects or areas.
OFFICE BUILDING RENTS. The average rent levels asked by the owners (asking rents), at the end of 2012, are shown in the info graph below (left side).
The above mentioned asking rents involves a negotiation margin, which varies depending on the area and quality of the spaces. For instance, for buildings in North‐Central areas and downtown, the rent may decrease after negotiations by 8% to 13%, while for other areas a decrease in rent level can vary between 10% and 17%.
As far as the villas are concerned, asking rents are as shown in the above-mentioned info-graph (right side).
Patrimony villas. In 2012, patrimony / inter‐war villas were highly demanded. This was also due to the existence of this type of real estate on the market, at a rent level of EUR 10‐12/sqm.
These costs stabilized within the limits of 2011.
Upper class business centres (Class A and B+): – EUR 3.5 – 5.0/sqm/month*)
B and C class business centres: – EUR 2.5 – 3.5/sqm/month*)
Villas (and small‐sized office buildings): – EUR 1.5 – 2.5/sqm/month**)
*) Significant variations in the cost of maintenance from one building to another must be analyzed in the context of including or excluding the consumption of utilities from these values (most notably electricity and/or gas for space heating and cooling). **) Paid on a pro‐rata invoicing principle, based on the utility providers’ bills.
The delivery of 8 A and B class office buildings has been announced for the next 12 months, with a total leasable area or more than 125,000 sqm. Five of these are in the North‐Central area of the capital, more specifically within the Barbu Vacarescu – Pompei perimeter, representing over 90% of the total deliveries of new spaces.
We believe that, in the context of demand with relative dynamics, the deliveries of new spaces, even if at a considerably lower level compared to 2007‐2009, will put real pressure on the existing buildings. For the owners of properties built before 2007‐2008, which have already hosted two or three generations of tenants, a number of real estate improvement measures would be required, in our opinion, as well as an attractive facility package, such as:
tenant attraction by granting financial contribution to interior arrangements;
targeting a wider and more flexible tenant segment; the smaller the areas (e.g. 200‐300 sqm), the higher the chances to lease the real estate within a shorter period of time;
adopting adequate commercial terms for this category of companies (more flexible contract terms, realistic securities, etc.);
taking into consideration, in addition to tenants looking for office areas, also clinics, restaurants, schools or, in general, institutions/companies with a distinct profile (whenever possible);
in some cases, a re‐arrangement of the reception areas or common areas of the building can be an advantage; nevertheless, such an investment should be carefully analyzed, since it is no guarantee for a rapid transaction, but merely places the real estate on a closer position in the competition to recently built spaces.
As far as the rent level is concerned, we believe it will be relatively stable, with potential specific adjustments in the case of certain areas or buildings with a higher vacancy rate.
2013 will be a year of redefining one’s position, both on the tenant market, and the developer market. Each party assesses its opportunities: owners will analyze the possibility of launching new projects, while the tenants will start searching for new offices.
If the international economic situation does not decline unexpectedly, 2013 can be a year of company consolidations in new business centers and expansions within the current buildings occupied or other existing buildings, by relocation transactions.
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