First semester of the “pandemic year” in the office market: The drop in new demand is starting to be felt, but the occupancy rate remains significant in most submarkets

New office space delivered in the first half of the year reached nearly 105,000 square meters, in tune with Colliers International’s estimates, but total demand in Bucharest was down by nearly 28%, to a bit over 124,000 square meters, while new demand halved after an exceptional year, to under 45,000 square meters. Overall, Colliers International consultants do not expect to see too much in terms of new contracts, except for companies that are actually pressured to relocate or expand, in the context in which their representatives have no clarity on how work processes will take place in the future or how their own business will evolve.

Building activity in the office market continued almost normally during spring, even in the pandemic lockdown context, and there are no major delays for buildings due in 2020, with a potential pipeline of about 230,000 square meters, mainly already fully contracted or mostly pre-leased, according to data from Colliers International.

The first half of the year saw a delivery of nearly 105,000 square meters in new modern office spaces, with the bulk coming online in the first quarter of the year. Two thirds of the total surface resulted from Ana Tower and the third phase of Globalworth’s Campus project.

”The drop in new demand is just now starting to be felt, with the second quarter of the year printing one of the lowest figures this cycle – just 16,000 square meters. While the first semester does not look too bad at all, there is still great inertia at play, plus based on our own experience, talks about future leasing deals are not proceeding at all at a good pace. This means that the second half of the year could bring further slowdown in office spaces leasing”, explains Sebastian Dragomir, Partner & Head of Office Advisory at Colliers International.

Besides the drop in demand as companies have to cope with uncertainties, another aspect likely to press new demand in the future should be the rise of spaces for sublease. This is because some companies that had relocated in recent years had also leased a large buffer space in case they continued to hire people and expand the business; now that these plans seem out of the window, this may free up quite a bit of spaces for sublease. Furthermore, work from home, either a few days a week on a permanent arrangement (during this state of alert), should also free up space going forward.

No major changes have been seen in terms of rents until now, but Colliers International consultants say that we are likely to see moves. Over the near term, there are quite a few forces acting on the rent side: first, because tenants may not feel inclined to move, due to incurring costs, and their current landlords may not be as flexible with offering lower rents; meanwhile, than companies willing to take on new spaces (via a relocation or pure new demand) will likely lead to landlords being sensibly more generous (especially via incentives/gratuities rather than lower contractual rents). Also, there are quite a few major spaces, fully fitted, available for sublease at competitive rents.

”Overall, pressures on rents seem to grow, with arguments in this direction for the longer run. Meanwhile, vacancy slightly increased in the first half of 2020, ending June at 11.25%, a full percentage point higher than end-2019, with most major submarkets seeing an increase of available spaces, except for Centru Vest (modest decrease) and Dimitrie Pompeiu (flat) areas”, says Sebastian Dragomir.

An important observation to make is that without the Pipera Nord submarket and class B buildings, vacancy would still be comfortably in single digit territory for class A office buildings. On the other hand, as things stand now, we will likely see lower demand going forward as well as pressures on rents. Vacancy is likely to climb towards 13-14% by year-end, with total demand for 2020 likely to cool down to a more mellow figure around 200,000 square meters, roughly half seen in 2019 and below the 300,000 square meter average seen this cycle. Because of time needed to negotiate deals, travel difficulties of decision-makers in international companies as well as uncertainties likely to linger into next year, 2021 may not look exceptionally good, but it could still surprise positively if the recovery quickens, with labour market indicators offering some encouraging prospects for now.

While the next year or so may not bring too many changes, as most of the companies will not expand, but neither will they take any short-term decisions, Colliers consultants are predicting that the office market will never be the same after this ”sanitary” crisis. Work-from-home on a wide scale will continue in companies and a few days a week offered to employees, together with an optimization of leased space, could lead to a smaller office space necessary in the future. However, there are some arguments that, at least for some employers, explain the need for more space (for example, wanting to have, even in a pandemic, an office space for all the employers, that may actually require renting supplementary spaces, especially if requested so by the headquarters). Furthermore, work-from-home cannot fully replace the importance that offices have a medium for building teams, mentoring and corporate culture.