Office occupiers are taking advantage of friendly market conditions to secure more favourable lease terms in most Central & Eastern European (CEE) markets, leading to a stronger demand for office space in the second half (H2) 2009 compared to H1 2009, according to new research by CB Richard Ellis (CBRE). H2 2009 office take-up increased by 22% as compared to H1 2009, but total 2009 take-up fell by 33% compared to 2008's record level. Downward pressure on prime rents eased across the majority of CEE markets in H2 2009, despite the fact that market fundamentals remain challenging in several markets.
CEE office investment turnover increased significantly in H2 2009, with institutional cross-border investors targeting defensive office properties in Prague and Warsaw and Moscow attracting strong local investor activity.
Jos Tromp, Head of CEE Research & Consulting, commented: "Demand for office space recovered to some extent in H2 2009, demonstrating occupiers' willingness to take advantage of favorable market conditions to reduce their occupancy costs by for example restructuring occupational portfolios. For this reason, renewals are accounting for a higher share of total leasing activity in many CEE markets, especially in Central Europe (CE), as occupiers secure better rental terms in their current premises. Reduced pipelines will probably result in lower gross demand in CE markets such as Prague and Warsaw in 2010, but higher net absorption should result in lower vacancy."
Most CEE office markets remained occupier-friendly in 2009 as vacancy rates continued to rise, but this should start to change in some markets in 2010.
Tromp explains: "Occupiers maintained the upper hand across CEE in 2009 as demand failed to keep up with development completions in most markets. Space remained empty for longer and as a result average vacancy across CEE rose to 15.8% (including Moscow and Kyiv). CE in particular should become more owner-friendly this year. Vacancy rates in CE city centres are lower than city-wide vacancy rates and confirmed pipelines are less than 8% of current stocks.
"Other CEE markets will remain occupier-friendly in 2010. Strong development will continue in Southeastern Europe (SEE). Bucharest, Sofia and Belgrade, which already have vacancy rates above 16%, will welcome substantial amounts of new space in 2010, much of it postponed from delivery originally planned for 2008 or 2009. Moscow's active development market, which is orientated towards large tenants, along with its already high vacancy rate, means it should remain occupier-friendly for most of 2010."
Despite occupier-friendly conditions, prime office rents stabilised across most CEE markets in H2 2009. According to Tromp: "While downward pressure remained on prime rents in most CEE markets in H2 2009, prime rents were generally more stable, particularly in Q4 2009. Volatility was lessened by sentiment that the worst of the economic downturn had passed.
In addition, substantial falls to prime rents in H1 2009 in markets such as Warsaw, Moscow and Kyiv meant that rental corrections occurred very quickly there. Downward pressure on rents remains most pronounced in SE, where supply/demand imbalances remain common. Meanwhile, occupiers' window of opportunity may be closing in markets such as Warsaw and Prague, where development pipelines are restricted and vacancy rates should fall during 2010."
The CEE weighted average prime office yield stayed steady in H2 2009 at 10.1% (including Russia and Ukraine). Pavel Schanka, CEE Capital Markets, commented: "More transactions closed near quoted prime yield levels in H2 2009, especially in CE, providing evidence that office investment activity will increase further in 2010. The fact that prime office yields fell in many Western European markets in H2 2009 has raised the possibility that some downward movement to yields could occur in 2010, especially in core CE markets.
Increasing demand for best properties combined with limited prime office stock available and offered to market are