Some details also hint at market weakness, beyond the flashy headline. For instance, the year’s biggest deal saw Oracle, arguably the biggest tenant in Bucharest at one point, reducing their overall office footprint by around half, to 26,000 sqm in two different office projects in the Floreasca Barbu Vacarescu submarket. We recall the surveys we have done in the past couple of years, which showed that a bit under half of the respondents were saying that they aimed to reduce the space they occupied, some by over 30%. The sheer size of some tenants can lead to some significant changes, as the spaces vacated by Oracle alone add up to three quarters of a percentage point to the vacancy rate of the whole Bucharest office market.

Then again, we also need to point out that we cannot judge the market by a single deal. For instance, the year’s biggest single deal (Oracle involved multiple contracts) saw Honeywell renew their 24,000 sqm contract without changing the surface, while one of the year’s biggest deals saw Adobe doubling their previously occupied surface, to reach 17,500 sqm.

A few other aspects stood out for us and are maybe quite positive for the local market in the long run. Maybe one of the bigger news coming out of the 2023 market has a lot to do with smaller tenants, as last year continued the trend of an ever more significant share of fairly small companies moving into modern class A offices. Up until a few years ago, this type of demand would have been situated in villas or very old office buildings. Another type of client which made its mark a bit more last year was that of state or state-owned enterprises; while limited in size for now, we would expect state entities to increase their demand amid EU-backed ESG goals. Lastly, another special contract was that of Infineon, an IT company, which commissioned a BTS project from One United with a 15-year lease; to our knowledge, this is a singular contract of this type, as most leases revolve around 5-7 years, going up towards 10 years in rare cases. This is clearly a positive as it shows both growing confidence that some companies have in the local market as well as the prospect of a growing maturity of the office market.

Rents & Vacancy

Bucharest’s office market rents have been broadly stable throughout the last decade, inching higher ever so slightly in recent years. Things changed quite significantly for a portion of the market last year, as we noticed a c.16% increase in prime CBD asking rents, reaching 22 EUR/sqm, with rents going even higher than this in a few cases. This type of increase was recorded, in general, by good quality buildings in terms of their energy efficiency, which are also quite well connected to the city’s infrastructure. Meanwhile, older buildings or those with lesser positions are rather losing tenants and hence cannot justify charging much higher rents. This growing gap between ESG-compliant and well-positioned offices was something which we have talked about for quite a few years and this trend is bound to continue.

Turning to occupancy, last year saw the vacancy rate for Bucharest inch a bit higher to end the year at 15.5% versus 15% a year earlier; the jump was caused by some renewals leading to a lower occupied office, with the biggest impact coming from a single tenant which we mentioned previously - Oracle. It is noteworthy, however, that the previous point about rents also applies to occupancy, as the very best buildings tend to have much lower vacancy than the overall market average (pushing into single digits versus the c.15% average for the whole of Bucharest).

Outlook

With around 3.4 million sqm of leasable areas in modern office buildings, Bucharest looks well positioned in case the global economy turns sour, as the stock is quite low on a per capita basis compared to Western European levels. Furthermore, the city’s growth as a service center has only gotten more visible over the last few years which, coupled with EU directives, should lead to some hefty leasing demand down the line from government or other state affiliated institutions (including state-owned enterprises), which have been quite absent from the office scene.

We also see that the market is at a turning point: on the one hand, we have seen relatively soft new demand based on the recent history (post-pandemic period) which, coupled with the remote work scare, lead many developers to delay many new projects. On the other hand, we also need to acknowledge the fact that hybrid work is truly here to stay and while there is no “one size fits all approach”, it is becoming increasingly clear that offices are also very important even if employees are working from home a few days a week or even most of the time. On this topic, we actually did a survey late last year which validates this point entirely, as the vast majority of respondents still saw the office as an important part of corporate culture, while a question tackling perceived productivity gains saw mixed results. 2023 also marked a turning point in the companies’ approach to remote work, most fully committing to bringing employees back to the office, usually around 2-3 days/week.

While keeping in mind the fact that some of the larger tenants may still cut back their occupied offices, much like Oracle (which could be regarded as a sort of “new supply”), we still note that a single notable office building is due in 2024 – AFI Loft (16,000 sqm) and only some 33,000 sqm might be delivered in 2025, based on the way things look now. In this context, we think that any uptick in demand would quickly mop up vacant spaces in good buildings and eventually lead to a generalized landlords’ market for at least this segment of upper quality offices. In fact, we are seeing pockets around some of Bucharest’s submarkets where landlords are driving the terms, which may seem odd in a market with c.15% vacancy. However, it is not if one keeps in mind the underlying trend of a wider gap in terms of rents and occupancy for the best buildings and the rest.

Regional office markets

Similar to Bucharest, the main regional office markets seem to have had a somewhat soft year (with the exception of Cluj), with vacancy rates jumping quite a bit in some cases, like in Iasi or Brasov. These increases came as some deliveries were recorded in some cases (notably in Iasi), impacting overall occupancy, while some tenants scaled back their office presence. We need to acknowledge what we said earlier about Bucharest’s good quality buildings remains true: in general, modern and truly class A office buildings in the regional cities tend to have quite good occupancy, with the bulk of vacancy coming from the older stock. We would not look at leasing demand figures to judge the strength or weakness of regional office markets, as these markets are characterized to a significant extent by direct and unreported deals; that said, we do see quite a big dip in reported leasing transactions relative to 2022 in certain cities, particularly Timisoara and Iasi, whereas Cluj-Napoca saw an increase. Otherwise, over the longer term, we remain bullish on the economic outlook for regional cities in general and expect them to gradually accelerate in the office market as well, following in the footsteps of Polish regional cities like Wroclaw or Krakow.