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Colliers: More than 265,000 sqm of office area is scheduled for delivery in 2017

More than 265,000 sqm of office area is scheduled for delivery in 2017, broadly in line with the level received in 2016, according to the recently launched market report of Colliers.

2017-06-18 12:34:45

Approximately 50 per cent of these deliveries are already under advanced negotiations and almost all have managed to secure anchor tenants during development. We estimate a net take-up of approximately 175,000 sqm during 2017, most of which will be generated by new tenants in the market. During 2016, new entry tenants generated transactions of over 107,000 sqm, up by 118 per cent from the post-crisis average. We expect this optimism to be carried forward into 2017 as well.

"We believe demand will remain strongest in the already established areas such as Central West, West or Floreasca Barbu Vacarescu. Over the longer term, the agglomeration of some office areas will encourage developers to explore new locations which offer the complete package: short commute time, availability of public transport, and retail areas. We have seen a first example of this trend with the construction of the Timpuri Noi Square by Vastint. Similarly, we believe there is a latent potential in the area on Bulevardul Expozitiei, especially when considering three factors: i) the city of Bucharest plans to construct a new metro line connecting this area with the Henri Coanda Airport by 2020, ii) the area benefits from a close proximity to residential areas in the northern part of Bucharest as well as easy access to the Western area via light rail transport and iii) the abundance of land plots available in the area," the report cites.

According to Colliers, the stock of modern office spaces in Bucharest reached 2.1mn sqm, after registering new deliveries of 230,000 sqm during 2016. In fact, the volume of new deliveries marks the fastest pace of expansion since 2009 and is 112 per cent more than the yearly average of deliveries in the post-crisis period. By all means, the Bucharest office market is shifting gears. One of the explanations for this increased volume of deliveries is the focus on large projects (with GLAs larger than 25,000 sqm), which accounted for 60 per cent of the total volume of deliveries from 2016. At the same time, we have seen an increase in the number of pre-lease transactions in the market. During 2016, pre-leased transactions accounted for 82,100 sqm (up by 200 per cent from the post-crisis average)
In terms of geographical distribution, the highest contributors to the stock are Floreasca-Barbu Vacarescu (42 per cent of total deliveries), Dimitrie Pompeiu (26 per cent of total deliveries) and the Central West Area (24 per cent of total deliveries).

In total, these zones accounted for 92 per cent of the total deliveries in the market. These areas have developed considerably in the post-crisis years as accessibility, transportation and proximity to amenities started to rank higher in tenants' requirements.

Regarding demand, the total take-up in the market for 2016 reached 369,000 sqm, up by 52 per cent from the previous year. IT and BPO/SSC were the main drivers behind this expansion and accounted for a total of 50 per cent of the transactions. In fact, we estimate that more than 20,000 people were hired in these sectors during 2016, which would mean that IT and BPO/SSC are on their way to becoming the largest employers in Bucharest, outpacing employment in retail trade. Demand for office buildings has been strongest in the already established areas such as: Floreasca Barbu Vacarescu (13 per cent of total demand), Dimitrie Pompeiu (17 per cent), and the Central West part of the city (24 per cent). In the case of the area between Calea Floreasca and Barbu Vacarescu, demand is starting to outpace the volume of office space on offer, as the vacancy rate continues to decrease rapidly.

Looking at the broader market, it is clear that tenants continue to have the upper-hand. Net take-up during 2016 reached 166,600 sqm, which covers 73 per cent of the area delivered to the market in the same period. We expect supply to continue outpacing demand during 2017 as well, which will invariably increase competition in the market. New buildings which offer good connections to the public transport scheme, Green certifications and an interesting mix of amenities will remain the market favorite and will be able to keep rents around the current levels. Conversely buildings which do not fit into this paradigm will need to differentiate themselves in the market or risk competing solely on costs. "We believe this increased competition will manifest itself on a like-for-like basis: buildings from older established business districts (e.g. Dimitrie Pompeiu) will have to face a direct competition from districts such as Central West. With regards to the latter, we believe there is still a strong short-term potential for development, particularly as it is one of the most spread-out business areas in the capital, spawning over three metro stops. These characteristics allow for the development of very large buildings, which along with the development of new amenities may well result in the buildup of Bucharest first mega-district for business," the reports states.

Conversely, buildings in the central area with good transport connections will have to compete with the newer ones in the same area, as well as buildings in the Floreasca Barbu Vacarescu business area. Overall, existing landlords will need to move along two directions: 1) offer more flexibility for tenants, and 2) reshape their amenities in order to become more relevant for a workforce of which 40 per cent are millennials.

Regarding the evolution of office market in Tier 2 and 3 cities, over the past five years, the business landscape in Romania has been reshaped with an increased focus on the services sector. At a macro level, IT and BPO/SSC have become the second largest contributor to GDP growth, outpacing industrial production. The Collirs reports reads:

"This switch towards the services industry was most evident on the office market.
Bucharest remains the most prominent Romanian city, but other cities are seeing a very rapid pace of development: Iasi is rapidly becoming a magnet for the BPO/SSC industry as it has a large pool of highly competitive workforce and has sparked the interest of companies such as: Amazon, Xerox, UniCredit and Accenture.

In Iasi, an insufficient number of office buildings is becoming the biggest drag on growth.
• Cluj Napoca has become a direct competitor for Bucharest on the IT market. Over the past three years, the city has rapidly moved towards the higher end of the market. This tendency is evident in the employment structure of Cluj Napoca, which is more focused towards the IT sector rather than BPO/SSC when compared to other cities in Romania. The existence of a large critical mass of IT companies may also create during the upcoming period the appropriate conditions for foster innovation and the incubation of new ideas and businesses. During 2016, some of the biggest transaction in the market included Arvato, Impact Hub and Sig Comiblock and Magneti Marelli. As in the case of Iasi, available office spaces appear to be insufficient to keep up with market demand.

• Timisoara is another city with an interesting proposition for companies. The mixture between a very strong industrial sector and IT skills has created the basis for an engineering-focused demand for office spaces. Timisioara has seen interest during the past year from players such as HP, Continental, or Huawei. Moving forward, the biggest challenge that the city faces is gathering the necessary workforce to keep up with demand.

• Brasov is showing potential as a prospective center focused on engineering and an alternative for Timisoara, with players such as Siemens (2015), Tata (2015), or Continental (2016) setting up office spaces in the areas. With global demand on an upward trend due to corporate restructurings, we believe Romania is in the position where it could absorb more new investments than it does currently. In order to achieve this, it needs to address three bottlenecks:
- availability of a large enough workforce at competitive costs,
- availability of office spaces,
- technical skills of the workforce, especially from a regional stand point (secondary, tertiary cities).

If the respective shortfalls were to be resolved, we believe Bucharest could employ an additional 20,000 people every year, which would be result in an additional demand of 160,000 sqm of new office space every year. Similarly, cities such as Cluj and Iasi could each absorb as much as 50,000 sqm every year. Looking forward, the report classifies Romania's top cities into three main categories:

1. The heavy hitters: Bucharest and Cluj Napoca have a critical mass of workforce with strog IT skills, but are already pushing the edge of workforce availability, and thus driving up salaries. The solution in this case would be to invest more in technical skills and move up the value chain, which would make the rise in salaries sustainable.

2. The up-and-coming cities: Iasi enjoys an ample workforce at low costs, which has helped fuel a very rapid development in the BPO/SSC. We believe Craiova is another city with latent potential, and could see an accelerated pace of development over the upcoming years. However, in order to encourage growth, this type of cities need to improve their supply of modern office spaces.

3. The niche players: Timisoara and Brasov are emerging as strong engineering polls at a competitive cost. However, the rapid development of the former is already starting to strain its workforce availability.


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