Eastern, Central Europe’s Maturing Office Sectors
- Oct 11, 2018
Central and Eastern Europe’s vast growth is translating into a big change in the region’s office sector. Skanska, CBRE, Dentons and PwC tell the story in their new report, CEE Investment Report 2018: New Frontiers of Growth.
“Over the last 10 years, Central and Eastern Europe have evolved from an emerging market to one that is now increasingly regarded as mature,” Adrian Karczewicz, head of divestments with Skanska’s commercial development business in CEE, said in a prepared statement. For the commercial real estate sector, CEE has been a key target for several years now. It’s a profitable, safe and stable region for doing business.”
CEE’s evolution into an emerging market kicked into high gear after Poland, the Czech Republic, Slovakia, Hungary and Romania joined the European Union as part of the 2004 enlargement. CEE has since held the distinction of being the fastest growing region in the EU, and the office market’s strong numbers reflect that growth. Net absorption in CEE totaled 15 million square feet in 2017, and with take-up in major cities having reached nearly 7.5 million square feet in the first half of 2018, it’s likely that absorption will exceed 10 million square feet for another year.
Behind the demand
The robust demand for modern office space can be attributed to a handful of factors, the business services sector being one of them. “The strong economic growth, infrastructure development supported by EU funds and high-quality labor force led to the inflow of a wide range of investors, both occupiers and real estate companies,” per the report, which also notes that the business services sector accounts for 53.2 percent of leased space in the regional office portfolio of report contributor Skanska.
Perhaps going against traditional perception, the public sector is another loud voice among the cries for additional Class A office square footage. Having been developed in the years following communism’s fall in the early 1990s, a large segment of the office supply in CEE is relatively new and of high quality. As public sector entities join the competition for top talent and the push to provide them with alluring work environments, these agencies are beginning to shed their older headquarters for premier buildings. And these office users face steep competition from a growing number of both international and domestic companies that, bolstered by strong domestic consumption and economic development, are increasing their occupancies in the CEE region.
Building and buying
Developers are responding to the rising demand for modern office space in CEE. Roughly 64.5 million square feet of new product is due to hit the market within the next three years, adding a notable percentage of options to the 227.1 million-square-foot pool of existing office properties in the region.
Investment activity in CEE office properties is also recording high numbers. Approximately $6.7 billion is expected to be invested in the office sector in 2018 by parties from all corners of the world. The long list of transactions so far this year includes New York-based Madison International Realty’s acquisition of a 50 percent stake in Poland’s Warsaw Spire, the tallest office building in Central Europe, for roughly $423 million. Mill Park, a two-building office development in Budapest, Hungary, traded in an approximately $116 million transaction when an entity of Vienna-based Erste Asset Management GmbH purchased the asset from Skanska.
Image courtesy of Skanska