Despite a lack of available development financing Central & Eastern Europe's (CEE) office market is generally still growing much more quickly than the majority of its Western European counterparts, according to the latest research from global property advisor CBRE.
Most of the office development is visible in Russia and Poland, while markets in Central Europe (CE) generally have considerably less office space currently under construction. The increased availability of office space and slowing employment has caused occupiers to move from older to new office space. Offices developed in the early 2000s on the back of increased occupier requirements have faced increased competition in the last few years, with occupiers moving to new office space. With yields softening in the non-prime office market and rents being generally low, opportunities are increasing in the value-add segment of the market.
Jos Tromp, Head of CEE Research & Consultancy, CBRE, commented:
"Increased office development activity should have a positive impact on take-up in 2013; however, general vacancy levels are not expected to come down in most markets. This situation is unlikely to change before considerable economic growth returns, which should stimulate occupiers to consider increasing employment levels again. Owners of outdated office space need to become more aggressive in order to compete with more competitive offers available on the market. This means that rents need to be reconsidered and upgrades to existing space have to become a more common practice. Retaining occupancy levels is of the highest priority as net absorption remains low."
Despite the fact that some of the devaluations on non-prime offices are already reflected in current values, it is anticipated that values in this segment will come under further scrutiny during 2013. Anticipated portfolio sales are expected to reflect the urgent requirement for upgrades to older existing buildings, especially in non-prime locations.
Mike Atwell, Head of CEE Capital Markets, CBRE, commented:
"Structural vacancy is increasing in CEE's office market; a trend that was seen in Western Europe in the early 2000s when the Dot-Com bubble burst and too much office space was under construction. As most of the older stock was built around 10-15 years ago, the relatively low standards and considerably increased client requirements have caused these buildings to fall away from being of marketable quality."
Office take-up decreased by 12% in CEE year-on-year (y-o-y), with a few positive exceptions. Warsaw particularly saw a strong year with an increased take-up of 9% compared to 2011. Prague, Budapest and Bucharest faced weak take-up, generally 25% below 2011-levels, with additional renewal activity pushing up total leasing activity to twice that level in the case of Budapest for example. Moscow's take-up was roughly 15% down y-o-y, partially caused by the below average pipeline under construction.
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