Maximizing Potential: Opportunities in vacant office buildings

by   CIJ News iDesk III
2024-07-02   09:41
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Several hundred thousand square meters of office space are expected to become available in Budapest as state organizations relocate to new offices. This shift presents a significant opportunity for property owners to either renovate and enhance the value of their buildings or reposition them into residential units or hotels. Such conversions are particularly advantageous for diversifying the hotel market, according to the commercial real estate consultancy firm, Newmark VLK Hungary’s June market report.

In the next two to three years, various state and governmental organizations will vacate several buildings in downtown, creating a new situation in the office market at a time when office use has fundamentally changed. Property owners will need to address the hundreds of thousands of square meters of office space that will be vacated. While this will require financial investment, it also offers an opportunity to enhance the development of these properties, according to experts from Newmark VLK Hungary.

They emphasized that the first step is a thorough technical survey, along with a real estate market assessment to determine the property's best future use. While it could remain as office space, market conditions might prompt consideration of converting it into apartments or hotels. Both types of conversions are already common in Western Europe and the United States. In Budapest, there have been cases where office buildings have been successfully converted into hotels.

“These unoccupied buildings cannot remain unused as they are typically in prime business locations. Many weren't initially constructed as office spaces, but if the owner opts to keep them as offices, significant investment will be needed to meet the latest technical and environmental standards, including ESG requirements. The question is whether the owner is willing to carry out the necessary renovations and modernizations within the building, and whether this can be done while tenants are still residing there. If the renovations are carried out, the next question is whether the tenant is willing to pay the increased rent or if they will move to another, newer building instead. However, since there are very few new buildings available, this fact could be a catalyst for the office market and may result in new building developments that will be able to accommodate these multinational tenants in 3-4 years," said Valter Kalaus, the company's managing director.

According to the consulting firm, uncertainties in the office market might prompt owners to consider new functions for their properties, given the strong demand, particularly in the hotel market and also in the residential sector. However, it is important to consider that it is technically easier to create smaller room units in buildings currently used as offices in downtown areas compared to newly built office buildings in outer districts, due to differing technical parameters.

Róbert Székely, the company's hotel market expert, states that professional surveys indicate increasing demand for accommodations, and this trend is expected to continue in the coming years. According to the May hotel industry forecasts by STR (Smith Travel Research), a 5.1% increase in RevPAR is expected in European markets in 2024, with an additional 2.8% growth in 2025. The forecasts predict that growth will continue in the following years, although with variations in each local market.

These trends support the demand for three- and four-star hotels. With no greenfield development opportunities or vacant lots available in downtown areas, hotel developers have shifted their focus to repositioning buildings with different original functions, such as office or residential buildings. By converting these structures, they can and are increasingly likely to create new value.

As a new trend, he mentioned that, unlike previous years when operational contracts were more common, long-term lease agreements have now emerged, providing greater security for the owners.

"In the office market, tenants typically sign contracts for 3, 5, or maybe 7 years. In hotels, we can talk about 20-30 years, and the building will have a single tenant, which is much easier to manage than having many tenants with different lease terms if it remains as an office. Although banks consider it riskier for such a property to operate with a single tenant, they are beginning to accept that long-term revenue generation is more secure, as the owner or landlord does not always have to find new tenants when the current tenant's lease expires or if the tenant does not want to stay," he added.

He believes that the Budapest hotel market benefits from the broadened supply created through building conversions. More hotel brands, more hotel market products, and, of course, more tourists can give new momentum to tourism and infrastructure development. Four-star hotels are perhaps the most popular category for business travelers and individual tourists, and they are generally profitable in the inner districts where Budapest tourism is concentrated. In buildings selected for conversion outside of the downtown area, there are opportunities for lower-priced hotels or other alternative accommodation uses, such as youth hostels, hostels, aparthotels, or mixed functions like student accommodation combined with a hostel. Naturally, these accommodations will likely attract more price-sensitive or younger guests who are willing to stay further from the CBD in exchange for lower rates.

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