Falling office demand pushes yields out in CEE

Changed economic conditions have caused occupiers of office space to reconsider their cost bases in Central and Eastern Europe (CEE), leading to decreased demand for office space and downward pressure on rents in many markets, according to CB Richard Ellis’ forthcoming report, CEE Office Investment MarketView H1 2009.

Investment in office properties also fell 89% in the first half of 2009 compared to the year-earlier period to EUR 224 mln. Almost all activity occurred in the core Central European (CE) markets of Prague and Warsaw, as well as Moscow. In addition, further signs emerged that office market performance is diverging by individual market and sub-region, with core CE office markets generally continuing to outperform other markets in the CEE region.

After establishing a record in 2008, H1 2009 CEE office take-up fell by 34% from H1 2008 and 32% from H2 2008 levels. Jos Tromp, Head of CEE Research & Consulting, said: 'As expected, demand for office space in CEE fell from both 2008 record levels as well as compared with the long-term average. This reflects the more challenging economic environment in which companies are operating, leading them to postpone expansion plans, reduce headcounts and implement cost saving measures, all of which are impacting demand for office space. Positively, take-up rebounded somewhat in Q2 2009, up 19% on Q1 2009, suggesting that occupiers are beginning to execute strategic commercial real estate decisions.'

Outward movement of yields slowed across CEE in Q2 2009, with the CEE weighted average prime office yield moving out by only 29 basis points (bps) to 10.1%, and only 5 bps in CE. Pavel Schanka, CEE Capital Markets, said: 'Prime yields now differ widely by CEE sub-region, reflecting their different levels of risk. Central Europe’s average yield of 7.1% is well below Southeastern Europe’s yield of 9.6% or Eastern Europe’s yield of 13.6%. The risk spreads between the three sub-regions have clearly increased in recent quarters. The limited outward movement to yields in Central Europe and Southeastern Europe in Q2 2009 give some hope that yields may be beginning to stabilise.'

Other broad trends noticeable across most CEE markets include rising vacancy rates and decreased development activity. While broad similarities exist in most CEE markets, there is evidence that individual market performances are diverging, with CE office markets generally outperforming other markets. Tromp: 'While the overall CEE vacancy rate is 14.9%, it is only 11.1% excluding Moscow and Kiev.'