Office vacancy set to rise in Budapest after record level of new supply

Despite the dramatic deterioration in Hungary’s real economy, and its visible impact on the property market, take-up continued to rise in the first quarter of the year. Office lease extensions and pre-leases were prevalent among the contracts signed in the first quarter. While the level of completions was roughly on a par with Q1 2008, DTZ’s latest Budapest Office Market Update expects a record level of new supply coming to the market this year.

Office market supply in Budapest increased by 48,439 m² in Q1 2009, bringing the total stock to almost 2,150,000 m². Take-up amounted to almost 65,000 m2, with lease renewals accounting for 31% of the total. Some 30% of the demand stemmed from relocation from outside stock.

DTZ forecasts 340,000 m² of office accommodation will be completed this year. A significant amount, or 26% of the proposed schemes for this year, is located in the Váci út corridor, which will increasing the hegemony of this sub-market, DTZ said. By contrast, CBD will witness the smallest amount of new developments due to the lack of development sites and the obstacles to refurbishment both on legal and financial grounds, it added.

The vacancy rate did not change considerably in the first three months and totalled 16.5% at end-May. There was a significant difference in terms of occupancy between the offices on the Buda and Pest side of the Danube: Buda recorded a vacancy rateof 14% compared to 18% in Pest. Central Buda has the highest occupancy level among sub-markets, with a 95% rate, while South Pest has the highest vacancy rate (55%). DTZ anticipates that the vacancy rate in the next three months will rise to over 17% due to weakening occupier demand and the large amount of new stock coming to the market.

'In order to interpret the supply and the vacancy rate, it is worthwhile to analyse the factual projects and deals in detail. Some 76% of the office space handed over in the last quarter was built-to-suit. This means that the properties in question were already fully leased at the very beginning of their development. In other words a notable portion of the current low vacancy rate does not reflect the present demand, but the take-up from a few years. We predict a growing vacancy rate and a lower take-up compared to the same period of the past years,' said Fraciska Horváth, Director, Head of Office Agency at DTZ.

Average headline rents in the most modern offices in central locations are not expected to fall significantly in the next six months. However, those buildings which suffer from high vacancy rates and are facing financial difficulties will be forced to lower rental levels, Horváth added. 'We have noticed some lowering of headline rental offers on the market, but these are for larger space or shorter lease terms in buildings with very low occupancy rates.'