Central & Eastern European (CEE) office markets continued to perform strongly in 2008 despite deteriorating economic conditions in the region, according to CB Richard Ellis' research report, CEE Offices MarketView Full Year 2008.
Jos Tromp, Head of CEE Research & Consulting at CBRE, explained: "Take-up in several CEE office markets established new records in 2008. 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." Rents in Central Europe (CE) and Southeast Europe (SEE) remained relatively stable in the second half of 2008. After strong increases in the first half of 2008, rents in Eastern Europe (EE) fell in the second half due to rapidly deteriorating market fundamentals as well as strong exchange rate fluctuations.
CEE economies ran into increasingly stiff headwinds as 2008 progressed, leading to reduced growth forecasts and possible recessions in some CEE countries in 2009. Tromp comments: "How CEE office markets perform in the near term will depend to a large extent on their property market fundamentals." Markets in Central Europe, such as Warsaw and Prague, with continued economic growth, 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. "Despite strong take-up in 2008, demand is likely to fall in 2009 as occupiers process the effects of the current economic situation on their businesses and 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," Tromp said.
Vacancy rate movements will vary according to individual market conditions. In markets with stronger economies, lower vacancy rates and reasonable pipelines, vacancy rates will remain below or close to natural vacancy levels. Some markets have reached vacancy rates at levels potentially of concern and future movement hinges largely on demand. Markets with substantial pipelines are likely to struggle to absorb this space.
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. In markets where the gap between the two becomes too large, prime properties will face downward pressure too," 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.
As a direct result of limited lending, some CE markets might face supply drying up over the next couple of years. This will open up possibilities for equity-backed developers/investors, especially now that land prices are coming under pressure. As development potential is limited in the core areas of Prague and Warsaw, and vacancy is likely to increase in non-central locations, developers/investors need to apply a careful site selection policy.