Horatiu Florescu is Chairman & CEO Knight Frank Romania & Hungary. He is one of the most successful consultants on the local market, with a property experience of over 20 years. He has advised main developers and multinational companies in Romania and has been involved in some of the biggest real estate office projects in Romania. Alone, he has leased approximately 950.000 sqm of office space.
Prior to setting up the Romanian associated office of Knight Frank in 2009, Horatiu was Vice President of Colliers International Romania.
We sat down with him for a complex overview of the local real estate market in 2021.
Main takeaways:
- While it is impossible to generalize, the most common request tenants now have is related to flexibility
- The office segment was the most attractive in terms of transaction volumes in 2020
- In 2021, working from home will continue, but offices will still play a crucial role
- The need for collaboration and the idea of office experience versus dull office spaces will increase
- Green, sustainable offices will win the war for talent
- Technology will not replace people though. It will only ease their work
First, a step back: the state of the office industry in 2020
Knight Frank Romania shared with Bright Spaces some of the most important data regarding the office market in Bucharest in 2020:
- 2020 witnessed a total take-up for class A and B offices of approximately 237,500 sq m – 60% from the amount transacted the year before
- 162 transactions were signed in 2020, compared to 232 in 2019.
- Larger transactions of over 5,000 sq m were again on top, accounting for a 35% share of the total take-up.
- Transactions between 1,000 sq m and 3,000 sq m with a 30% share followed.
- The most numerous deals were those below 1,000 sq m (almost 60% of the total take-up), followed by transactions between 1,000 sq m and 3,000 sq m with 26%
- The most sought after submarkets in 2020 were Center-West, which saw almost 63,000 sq m of leasing activity (26% of total take up) and Dimitrie Pompeiu, where 37,000 sq m of space was leased (16% of total take up), followed closely by North-West Expozitiei area with ~32,000 sq m (14% of total take up).
When it comes to capital markets, in 2020:
- There was a total of EUR 881 million in transactions on the local market, a level which is above the volume that was reported the previous year and also above the expectations from mid-2020.
- The record transaction that was reported on the market is the NEPI office portfolio which was sold to AFI for an amount in excess of EUR 290 million. – “Despite the fact that the pandemic and associated uncertainty led to a significant delay, the closing of this transaction and several other significant transactions confirmed the maturity and attractiveness of the local market.” adds Mr. Florescu.
Evolution of the office industry in Bucharest in 2021
Looking at 2021, we believe and see demand starting to recover and most probably, this upcoming fall it is going to accelerate. Of course, it all depends on the evolution of the pandemic, but we can already analyse the numbers of Q1 2021. We had a take up of 53,000 sq m (versus 55,000 sq m in Q1 2020) in 43 deals, while there were only 36 deals in 2020, when there wasn’t a pandemic issue yet, at least not until mid-end of March last year.
If I were to mention one of the most significant transactions from Q1 2021, it would be the biggest one in which we were the exclusive agent, Immofinanz acquiring the former HQ of BCR in Bucharest for 36 million euro. The property will be modernized and transformed into a green myhive building, which demonstrates long-term plans on the market.
The new emerging office hub in Expozitiei will also flourish, with the deliveries of J8, developed by Portland Trust, and @Expo, by Atenor.
Also, we had almost 30,000 sq m of class A office delivered in Bucharest, in two projects (Campus 6.2 20,000 sq m & Matei Millo 8,500 sq m), while until the end of 2021 approximately 250,000 sq m should be delivered and by end of 2023 we expect over 500,000 sq m of new office space to be delivered on the Bucharest market. This will all add up to the already existent stock of almost 3 million square meters.
Bucharest is still on the emerging hot markets at an European level and it hasn’t reached its peak.
The headline rents are rather at or slightly below pre-COVID levels. The incentive packages have improved slightly in favour of the tenants, especially in case of properties with high vacancy rates where landlords are more flexible and really want to attract new tenants.
Coming back to office
Some of the companies have returned to their offices since the end of the lockdown in the second half of May, with employees coming mainly to the office in shifts (e.g. every other day/ week).
Companies with a large number of employees are more reluctant to return to the office given the increased complexity of the returning plan and process, the higher risks (e.g. to have a COVID outbreak within the company) and costs for supplies (e.g. disinfectants, masks).
In order to respect the social distancing the preferred approach seems to be the rotation of the employees coming to the office. For projects under construction, the owners have started to adapt the installations and equipment to reduce the risks: provide more fresh air through the ventilation system and install better quality filters, more opening windows, smarter lifts, etc.
What 2021 has in store for different real estate markets
In 2020, according to Knight Frank:
- The office segment was the most attractive in terms of transaction volumes, generating more than 80% of the total market volume.
- The industrial/logistics segment was the second most active in terms of volume generating roughly 10% of the total volume
- The retail segment accounted for almost 5% of the total volume.
Horatiu Florescu emphasizes that the residential and industrial segments continued to flourish even during the pandemic, even though, when it comes to the residential market, in many European countries housing prices have dropped and demand was lower.
However, in Bucharest we expect 2021 to also be a very good year for residential and to even prove it, we can tell you that we sold 50% of UP-site, our premium exclusive project developed by Atenor in Floreasca, Bucharest, in less than four months. This not only proves that there is liquidity on the market, but also that demand is high for good residential projects. The residential market is just maturing and there is a long way to grow in Bucharest, which is why it makes a lot of sense to both invest and develop here.
When it comes to industrial, in Bucharest, the total take-up in 2020 was approximately 498,000 sq m, while nationwide the take-up reached approx. 722,000 sq m, a 67% increase compared to the previous year.
A total of 90 leasing transactions were recorded nationwide in 2020 out of which 22 were larger than 10,000 sq m. Although Bucharest accounted for 69% of total take-up, Timisoara (~98,000 sq m) and Craiova (~57,000 sq m) were the most sought-after regional locations accounting for a further 13% and respectively 8%of the total volume.
The largest volume of demand came from FMCG & Retail companies, which rented together ~60% of the total volume recorded in 2020 (~422,000 sq m), companies with activities in the field of logistics (16% and 118,000 sq m, respectively) and production (8%, ~58,000 sq m). We expect this growing trend to continue.
Tenants’ requests in terms of leasing conditions in 2021
While each tenant comes with a different set a request, says Mr. Florescu, making it impossible to generalize on the way their needs will change, there is something that unites them: the need for more flexibility.
The office space in 2021
What will the office space look like in 2021 and more importantly, what needs will it meet? Horatiu Florescu says that this year, the office spaces will adapt to the new world – and most of them have already did so.
We think that this year working from home will continue, but offices will still play a crucial role. Undeniably, despite our newfound acceptance of remote working, there is a growing need for businesses to provide office space for their employees to develop their skills, collaborate and learn from one another.
The ‘death of the office’ narrative that murmured through 2020 wasn’t silenced by academic rhetoric, it was silenced by people sincerely missing their office environments – and everything that came with them. Businesses still want a central hub. In fact, limited percentages of employees want to work from home five days a week, and many want their offices to feature more collaboration space.
So, while the demand for flexibility continues, social capital remains critical. The need for collaboration and the idea of office experience versus dull office spaces will increase.
Regarding health and wellbeing oriented strategy, Mr. Florescu says that while forward-thinking companies had already adopted them, the pandemic has catalyzed efforts across the board.
Green, sustainable offices will win the war for talent. There is a growing recognition that younger generations of talent are seeking out businesses that increasingly align with their moral values across environmental, social and governance initiatives.
These include efforts to reduce corporate carbon footprints, improve employee wellbeing, and ensure diversity and inclusion. As businesses continue to view real estate as a strategic device and an investment, choosing to base their teams in green, sustainable offices is a clear way to demonstrate a commitment to the cause (for both employees, clients and competitors).
Technology in real estate
The real estate industry is going to become more tech-oriented, but are real estate companies ready to embrace digitization?
It depends in what sense. We, at Knight Frank, even say that there is a human element in property that is easily overlooked and we do it for a reason and for 125 years. Now, I am absolutely sure that we are ready to embrace digitization, and we even do already, however, the human element will still play a major role when in comes to closing transactions.
When it comes to automation, Mr. Florescu thinks that the real estate industry will have to be more and more adaptable to changes and embrace automation as long as it doesn’t affect the quality of processes.
For example, our headquarter has partnered with London-based PropTech start-up PRODA, for the beta testing phase of its AI-enabled software. PRODA focuses on solving core data processing pain points in real estate. The software addresses the issue of unstructured data, a key barrier to digital transformation in the industry. It automatically captures property data from spreadsheets, before standardising, error-checking and securely storing it. PRODA has the potential to significantly reduce the amount of time it takes to complete deals.
Technology will not replace people though. It will only ease their work, offering them the time and resources to become more focused on clients, innovation and project management, Horatiu Florescu concludes.
Speeding up manual processes frees up time, so we can focus on providing high quality consultancy services and advice, benefitting not only our team day-to-day but also our clients.
I think the core in-house team will be much more focused on client-centricity, project management and innovation, bringing human skills that a machine cannot replicate or replace.
