Bucharest office market sees surge in renewals amid record-breaking pause in new supply

by   CIJ News iDesk III
2024-09-17   11:38
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Leasing activity in Bucharest’s office market in the first half of 2024 showed mixed signals, with contract renewals accounting for nearly half of all transactions, according to a new report from Colliers. Uncertainty surrounding hybrid work models has led to a marked increase in renewals, while the city has experienced its longest period without new office space deliveries in 19 years.

Total leasing demand slightly dipped to 160,000 square meters, but new demand—comprising deals that improve overall occupancy—rose by 7% year-on-year to 64,000 square meters. Despite this rise in new leases, the market is still grappling with an unprecedented pause in new office completions. For the second consecutive quarter, no new office space was delivered, and none is expected in the third quarter, marking the first such occurrence since 2005.

The only major project completed this year was the AFI Loft, a 16,500-square-meter office building located above the AFI Cotroceni shopping center in the Centre-West submarket. The most notable new lease was Genesis College’s acquisition of a 10,000-square-meter building from OMV Petrom, a deal that Colliers described as “unique” for the market, underscoring the scarcity of typical transactions.

“The office market is showing resilience, but beneath the headline figures, there’s a more complex narrative,” said Victor Coșconel, Head of Leasing for Office & Industrial Agencies at Colliers. “Demand has surpassed 400,000 square meters over the past four quarters, reflecting a 34% increase compared to the pre-pandemic annual average between 2017 and 2019. This performance ranks Bucharest as the second-best among major office markets in the EMEA region, just behind Gdańsk in Poland and ahead of London’s Docklands.”

However, much of this demand has been driven by companies choosing to renew existing leases rather than relocate. In fact, contract renewals made up nearly 50% of leasing transactions, a stark contrast to pre-pandemic levels when renewals typically accounted for just 28% of demand. This surge in renewals is attributed to uncertainty surrounding hybrid work arrangements, which has prompted many companies to delay decisions on new office space.

One of the standout deals in 2024 was Genpact renewing its 29,000-square-meter lease at Hermes Business Campus, marking the second-largest office lease in Bucharest’s history.

While hybrid work has not triggered the “office apocalypse” once feared, it has led some companies to reduce their office space. However, Bucharest has avoided the oversupply issues that have affected other markets, meaning that certain areas remain landlord-friendly. According to Colliers, tenant presence in offices has increased to around 55% this year, up from 40% a year ago, a positive sign for the market.

In terms of rents, prices have edged higher compared to the first half of 2023. Demand for premium Class A buildings remains robust, driving rent growth in prime locations. The lack of new office space deliveries this year is expected to slightly reduce the overall vacancy rate, further stabilizing the market.

Despite these positive indicators, economic uncertainties, particularly in the IT&C sector, have tempered expectations for new demand. Net job creation in IT&C turned negative in May 2024 for the first time since 2011, and several of the largest IT employers in Romania reduced their workforce in 2023. This cautious approach has impacted leasing activity in one of Bucharest’s most important sectors.

However, the pause in new office supply, coupled with growing demand for ESG-compliant properties, could lead to further rent increases in Class A buildings in prime locations. “The market remains in decent shape, and the absence of new supply in 2024 and 2025 could help further stabilize rents,” Coșconel said. “We are also seeing efforts to bring more employees back to the office, which could fuel demand over the medium term.”

As Bucharest’s office market navigates these uncertainties, the coming months will be critical in determining whether the city can capitalize on its resilience and continue its path toward long-term growth.

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