Although advisors report an outstanding take-up for the first half of 2009 on the Budapest office market, the structure of the demand has altered in an unfavourable way: renewals amounting to 37% of all the leased areas in H1 2009, and this share is increasing. Renewals are more typical in the inner areas while in Non-Central Pest (NCP) submarket pre-lets and new leases dominate. claims the latest Budapest Office Market Report of CB Richard Ellis (CBRE).
Hungary's GDP is forecast to contract by 6.5% for the whole 2009. The economy is likely to bottom out in the third quarter and thereafter there is potential for a period of stagnation to occur before growth turns positive again. The most affected sectors are manufacturing and industrial, due to heavily contracted exports industrial output will have declined by cca. 10% by the end of the year. Businesses in the service sector are less damaged by the global economic downturn, however, the overall impact of the crisis on the office market is severe.
Modern office stock in Budapest reached 2.21 million m² by July 2009 with 65,200 m² of newly completed space being added. Although this is higher than in previous quarter, the peak of the development wave is still ahead. "Forecast shall be monitored more frequently than in previous years as delays are more common and many projects have been suspended. According to our latest pipeline revision, cca. 345,000 m² of modern office space is under construction in Budapest. There are changes of timing and construction status of the running projects but essentially no new development has been launched since the beginning of the year." commented Gábor Borbély, Senior Analyst of CBRE Hungary.
In the second quarter (Q2) of this year, the delivered office space was already 50% pre-let. Despite the moderate growth in the new availability, overall vacancy has increased for two reasons. Firstly, new tenants (new leases and expansions) created only 35% of H1 take-up an all time low. Renewals and pre-lets further increased their share in demand but neither contributed to the growth of occupied office stock this quarter. Secondly, many tenants have downsized renegotiating their leases for a smaller office area which has led to an increase in second-hand office vacancy. Overall Budapest vacancy rate stands at 18%.
Vacancy levels have risen in all office hubs since March except for NCP South where although the vacancy rate is highest at 32%, it has fallen from 41%. The lowest vacancy rate recorded in July is in Central Buda at 7%. Although the significant differences across submarkets are likely to persist, CBRE expects the gap to narrow between the highest and the lowest vacancy rates. This is backed by higher demand in NCP areas compared to Central districts while pipeline availability is relatively high in Central submarket and Non-Central Buda (NCB) South.
Rental levels are under continuous pressure across all locations. Mostly incentives are growing but in many cases lowered headline rents are also offered. Comparing the rental levels offered a year ago and now, headline rents have gone back in all submarkets but Central office hubs. Headline rents decreased to the largest extent in Non-Central Buda (NCB) submarket. Central Pest and Central Buda office hubs have seen a slight increase in offered rents over the last 12 months which is due to the low vacancy in old stock and higher headline rents in the future projects. CBD headline range has widened as we see lower offer rents for some existing vacant spaces but also higher headline rents for the one prime office project currently under construction.