The effects of more challenging worldwide economic conditions on Central and Eastern European (CEE) office markets became evident in Q1 2009, according to CB Richard Ellis.
Jos Tromp, Head of CEE Research & Consulting, CB Richard Ellis, explained: "Through the end of 2008, demand remained strong in nearly every CEE office market. In the first quarter of 2009, however, demand weakened in every market as occupiers reconsidered their current and future office space requirements in light of weaker economic conditions. This lower level of demand was not sufficient to absorb substantial amounts of new office space delivered in Q1 2009, driving up vacancy rates in many of the region's office markets." The effects of these changes on prime rents were diverse. Prime rents fell in several markets in Q1 2009 as a result of the higher vacancy rates and lower demand, but held steady in other markets including Prague and Bratislava and increased slightly in Zagreb.
As CB Richard Ellis highlighted in its Offices MarketView Full Year 2008, the performances of individual CEE office markets continue to diverge based on their economic, political, and property market fundamentals. Most Central European markets are seeing more stable prime rent levels than some Southeastern and especially Eastern European counterparts. Eastern European markets such as Moscow and Kyiv have been more heavily impacted by changing economic conditions than other CEE markets thus far, due to their strong reliance on the commodity market. This has resulted in steeper falls in prime rents and faster increases in vacancy rates in these markets than elsewhere in CEE. According to Tromp: "Rapid property market changes in Eastern Europe reflect economic and political volatility in the region as well as deteriorating sentiment in regards to the region's economic prospects since mid-2008. Even markets that have good fundamentals such as Prague are currently suffering from the overall negative sentiment about CEE and the effects of the broader economic downturn."
It is now increasingly likely that most CEE countries will slip into recession in 2009. "Office markets across the region are likely to face more challenging conditions throughout 2009, compounded by forecasts which suggest a return to only modest growth in most CEE countries in 2010," Tromp commented. Markets with vacancy close to or below natural vacancy rate levels that have lower pipelines relative to current supply, such as Prague and Zagreb, are likely to outperform other CEE markets in terms of rents and vacancy levels. Meanwhile, property markets which already have high vacancy rates and/or strong development pipelines, such as Budapest, Sofia and Bucharest, face more challenging prospects in terms of maintaining current rental and vacancy rate levels.
CEE established a quarterly record for office completions in Q1 2009. This was heavily influenced by Moscow, which accounted for about 70% of all CEE completions during the quarter. Leaving aside Moscow, completions in other CEE markets actually fell by 9% quarter-on-quarter (q-o-q). The region's development pipeline will be much lower in 2010 due to constrained financing conditions. Still, many CEE markets need to work through substantial pipelines to be delivered either this year or in early 2010. These markets will face upward pressure on vacancy rates, especially now that demand is significantly below last year's levels.
Slowing economies across the region have negatively impacted office demand. CEE take-up in Q1 2009 fell by 42% q-o-q and 36% y-o-y as demand fell across the region, reflecting the effects of the current economic downturn on occupiers' expansion and relocation plans. Whether demand weakens further or rebounds will depend in large part on whether economic sentiment deteriorates further or improves in the coming months, and on offshoring and nearshoring activity in the region.
Vacancy rates now vary substantially across CEE. The region's average vacancy rate stands at 13.9%, but comes in at 9.4% if Moscow is excl