CEE office demand to fall in 2009, says CBRE

Central & Eastern European (CEE) office markets continued to perform strongly in 2008 despite deteriorating economic conditions, but demand is likely to fall this year as occupiers process the effects of the current economic situation, according to CB Richard Ellis' CEE Offices MarketView Full Year 2008 report.

'Despite strong demand, CEE office markets could not completely absorb record amounts of new office space delivered in 2008, causing vacancy to rise in many markets,' said Jos Tromp, Head of CEE Research & Consulting, CB Richard Ellis. 'Demand is likely to fall in 2009 as occupiers postpone expansion and relocation plans. Outsourcing is expected to soften the landing for some of the markets, but this will most likely take effect not earlier than the second half of 2009,' he added.

CEE economies ran into increasingly stiff headwinds as 2008 progressed, leading to reduced growth forecasts and possible recessions in some CEE countries in 2009, including Hungary and Ukraine. 'How CEE office markets perform in the near term will depend to a large extent on their property market fundamentals,' Tromp commented.

Markets in Central Europe, such as Warsaw and Prague, with limited vacancy rates and reasonable pipelines, will outperform most other markets in the region. Meanwhile, property markets in countries with weaker economies or with economies more easily influenced by external factors, such as Russia and Ukraine, are likely to become more volatile in the short- to medium-term.

Development completions will remain high in 2009 as buildings already under construction are completed, but will fall in 2010 as developers and investors struggle to finance projects in the face of more challenging market conditions. Some SEE countries have substantial pipelines relative to the size of their markets. Market fundamentals in Poland and Czech Republic are stable, with Hungary and Slovakia being more vulnerable.

With the exception of core CE markets, prime rents are likely to come under pressure across CEE. 'The gap between effective rents for prime and secondary properties is likely to increase as tenants are offered increased incentives, especially for long-term vacant space and speculatively built office space,' continued Tromp.

As take-up is likely to slow in the first half of 2009 and the amount of development completions remains high, occupiers will gain power in most of the office markets across CEE. Rents will therefore come under pressure, especially in speculatively built offices in non-central locations. Even though competition will be limited in the short term for prime office buildings, corporations are analysing cost structures carefully with potential relocations as a result. Careful monitoring of competition will be key in 2009.