The significant reduction in Central and Eastern Europe's (CEE) office development pipeline since the end of 2008 will have positive longer-term effects on the region's office markets and should create more investor-friendly conditions in certain markets, according to new CB Richard Ellis research, CEE Office Development Trends.
In total, the CEE pipeline which measures projected office space completions in the next 18-24 months has reduced by 30% since Q4 2008. This decline should help markets to re-balance and create conditions for more sustainable vacancy rates in some markets and even cause supply shortages in certain Central European markets from mid-2010. Pipelines across CEE are falling as completions outpace new starts and as projects already under construction are postponed or cancelled.
Jos Tromp, Head of CEE Research & Consulting, comments: "There have been significant variations in office pipeline movements from market to market across CEE. In terms of sub-regions, Central Europe's pipeline has fallen the most, down 45% since the end of 2008; while Southeastern Europe's has been cut by 30%. Looking at specific markets, Bratislava's pipeline has fallen by 62%, while Zagreb's more limited pipeline has actually doubled in this time. Prague's pipeline is 43% lower and Warsaw's is 48% down. Moscow's pipeline has fallen less, at 20%, in line with some commentators' beliefs that the market will quickly rebound despite its current high vacancy rate."
The main reasons for the significant reduction in confirmed pipeline space across CEE are present in all markets:
(1) Credit remains scarce, making it difficult to obtain financing for new projects;
(2) Banks are requiring high pre-letting levels before approving financing, a difficult condition to meet in a time of lower demand for office space;
(3) Vacancy and pipelines are high in some markets, discouraging further developments; and
(4) Additionally, the increasing maturity of CE office markets can discourage speculative development.
Despite these common dynamics, specific markets have other individual reasons for pipeline movements. According to Tromp: "Investors and developers have realised that Central European office markets are now more mature, which means that inferior or marginal developments will likely find letting more difficult. This is one reason that new starts have not kept up with completions in this sub-region. Meanwhile, high vacancy rates and substantial existing pipelines in Southeastern Europe raise questions about the prospects for new office projects there. The freezing and cancellation of substantial amounts of office space in markets such as Bucharest and Kyiv have also contributed significantly to diminishing pipelines."
Most pipeline space remains speculative in nature despite changing market conditions. Tromp explains: "Eighty-seven per cent of the total office pipeline at the end of Q3 2009 was speculative, but this is likely to change. The proportion of pre-let pipeline space has stayed relatively stable. In 2009, this mostly reflects pre-lets signed in recent years. In the near future, buildings lacking significant pre-lets are the ones most likely to be postponed or cancelled. Combined, this suggests that the occupational market will drive the office development market in the future."
The reduced pipeline will be an important driver for the medium-term outlook for some markets. Pavel Schanka, Director CEE Capital Markets, explains: "Central European markets such as Prague and Warsaw are likely to become more investor-friendly from mid-2010, once occupier demand improves. Meanwhile in Southeastern European markets and Moscow, this signals the end of a period of rapid development and the beginning of a transition to more sustainable growth patterns. As net demand is down by more than 30% compared to recent years in many markets and as pre-lets have become less common, conditions remain challenging for developers. However opportunities remain in the region and recent transactions show that innovative devel