Author: Victoria Beresan
Despite increased development activity in the segment of offices for all is not enough. The volume of new supply was interrupted by the figures for the same period last year, however, the objects appeared on the market almost full. How to behave rents, what's missing from the tenants and what will happen to the office market in the second half of the year, find out together with experts from the Property Times.
Began to build
Despite some uncertainty, which sowed the political changes in the country, the first half of the market of office real estate remember the increase in development activity. Huge demand and shortage of supply were the main drivers of growth in the number of new objects in the segment.
"In the first quarter of 2019 a new proposal on the market of office real estate in Kiev amounted to about 48,500 sq m, while in the second quarter — 11 000 sq. m. Thus, the volume of new supply during the first half of 2019, more than twice the figure for January-June 2018. Until the end of the year a new proposal in the segment could increase by an additional 69 000 sq m, and in this case, to record-breaking rate of new summer offers at the office real estate market in Kiev during the period from 2015," says Marta Kostiuk, head of research and consulting in development at Cushman & Wakefield.
However, even in this situation now new facilities are not enough or they have come to the market is full, or not quite meet the expectations of tenants by area or functionality. Due to shortage of premises and the minimum admission offices to free market net absorption of retail space fell by 20% year-on-year and amounted to 65 000 sq. m. Such data led analysts CBRE Ukraine and noted that the reduction was due to high level of rental activity in the past years, particularly in 2017. Then it was signed agreements with a total volume of 155,000 sq. m.
Source: Cushman & Wakefield
The portrait of the tenant
The main demand in the first half of office space was formed by IT-a party, a company providing business services, industry and energy.
The largest share, according to analysts CBRE Ukraine, the gross absorption — 28% (+27% YTD), the company took the production sector of industry and energy. In the first half of 2019, their share was 24% (-16% YTD), but it still left a superiority in the number of transactions on the market. Share of 23% was assigned to the sector coworker and offices with full services, 22% was divided between other segments. In the existing office premises of A class declared rents varovais in the range of $24-$40/sqm/month rental rates class B — in the range of $15- $27/sq m/month.
Interestingly, analysts have noted a tendency for downward momentum of interest in IT-market to office space. For four years the companies from this sector were the most common tenants. In the first half of 2019, their share was 24% (-16% YTD), but it still left a superiority in the number of transactions on the market. Share of 23% was assigned to the sector coworker and offices with full services, 22% was divided between other segments.
To explain such a sluggish interest from "it people" in several factors. First, they are constrained choices and lack of understanding of the political situation in the country, so many companies decided to postpone the signing of agreements. Secondly, the majority of transactions in this segment are associated with the expansion of the state and finding a large area proposals. The objects that appeared on the market in the first half, could not satisfy the appetites of the area, and most of them were already pre-signed.
Offices, as a rule, find their tenants long before delivery. This trend in 2019 only increased and will remain dominant in the market.
"In 2018 in Kiev there is a significant increase in the number of requests for lease of office premises with an area of over 1,000 sq m, as well as a number of large corporate tenants are ready to consider the possibility of signing pre-lease contracts in the facilities, commissioning of which is planned in 12 months from today. And in the case of many office properties announced for commissioning in Kyiv in the second half of 2019 and in 2020 are currently in active negotiations with potential tenants," says Kostiuk.
In the first half of 2019, the primary vacancy rate in the office market in Kiev the average ranged between 6.7 6% because the room is in a newly entered objects was relatively quickly absorbed by the market.
But in the company JLL (Ukraine) said that in Q2 for the first time in three years it was possible to observe the increase in vacant space. The rate of vacancy during this period was 8.2%, whereas in mid-2015, he was much higher at 27.2 per cent. “This is a temporary phenomenon which is due to the relocation of some companies, in particular to improve the quality of the offices, so the release areas has occurred in the classroom. However, by the end of 2019 we expect to reduce the average vacancy rate to 6%, as demand and interest in high-end homes remains,” — said Alexander Globin, head of office space at JLL (Ukraine)
Among the largest deals in the first half of 2019, the analysts said CBRE Ukraine office building on vul. Goloseevskaya, 22-24 company production, industry and energy (9 000 sq. m.), agreement on extension of company DTEK Academy in Unit City Business Park (4 400 sqm) and the company platform on the street. Borichev Current, 35V (3 900 sq. m.). Also, the lease of 3,900 sq. m. in BC Paladis company sphere of business services.Among the new objects have appeared on the market in 1H 2019 BC Palo Alto (5 000 sq. m.) and BTS Zitadelle (3,800 sq m).
Martha Kostiuk noted that, according to them, the total market volume in the first half of the year is 1 million 947 sq m, the new offer is 48, 436 sq m, area of the leased premises — 39 500 sq m, and net absorption — 11 700 sq. m.
Rents in the aforesaid period was quite predictable. "Low development activity combined with relatively high demand of tenants contributed to a further increase in rental rates. Rental rates for space of the highest quality in the second quarter of 2019 was at $30 per sq m per month," — said Kostiuk.
However, according to CBRE Ukraine, in the existing office premises of A class declared rents varovais in the range of $24-$50/sq m/month, the rent rate of grade B — in the range of $15- $29/sq m/month.
The immediate prospects
The experts we interviewed unanimously claim that in the absence of adverse changes to the business after the completion of the election process in Ukraine real estate market is waiting for positive developments. "Until the end of 2019, the demand for office space in Kiev will remain at the current level as the average market vacancy and rental rates. At the same time, relatively high-quality properties in Central areas of the city could see a further decline in vacancy rates and increased rental rates," says Marta Kostyuk.
Analysts at CBRE Ukraine also anticipate a recovery in rental activity, and I assure that with the gradual commissioning of new facilities, the new offer will be to keep pace with the rate of absorption of landlords who are planning to expand or relocate to the offices of higher quality. "Obviously, this will enable tenants to select the business centers and class A office space with good infrastructure, which is especially attract tenants of the it sector and business services," — believe in the company.
Source: Cushman & Wakefield
However, as the practice of signing in advance, for all quality office space is not enough. The rule “first come, first — serve” as never before is the dominant and relevant in this segment
While the IT sector is competing for in advance is not handed over square metres in offices, co-working operators are already actively began to build up their muscles. According to Cushman & Wakefield's share in the volume of lease transactions in the segment in the first half amounted to about 13% in the first half of 2019.
Among coworker and offices with full services, which continue to expand market in Kiev, it is worth noting Creative States Creative Quarter, Platforma and Regus, the number will continue to grow.
Now it becomes clear that the office market is undergoing a qualitative transformation. The traditional understanding of the content and functionality of the space not interested in anyone else. Objects impose clear requirements: convenient location, rooms for different number of team members, offices in one person. Growing requests for individual formats, that is ground under the specific client and business suites.
Modern office space looking for a creative and functional zones for different needs, as well as a comfortable environment where it is easy to work and build a corporate culture. Employees must not feel “slaves”, so the office needs to become a modern business space with the ability to be creative, to grow, to feel fun and to be as efficient as possible.
Marta Kostiuk, head of research and consulting in development at Cushman & Wakefield
Office real estate in Kiev is an attractive class of investment assets for secondary investments in Ukraine, and in the first half of this segment was approximately 51% in the total volume of investments in the commercial real estate market, but the quality of objects for sale is getting smaller. According to Cushman & Wakefield, the total volume of secondary investment transactions on the office market in Kiev in the first half of 2019 was approximately $67 million, of which $39 million was invested in the second quarter of 2019.
In the second half of 2019, a new proposal in the segment can be extended for an additional 69 000 sq m, and in this case, to record-breaking rate of new summer offers at the office real estate market in Kiev during the period from 2015. If the economy is not going to happen shocks, the current intensification of development activity and investment demand in the office market will continue.
Alexander Globin, head of office space at JLL (Ukraine)
Rental rates for the 2nd quarter of 2019 have not changed. The maximum rate of rent, which is characteristic for class A in the CBD amounted to $32/sqm / month (excluding VAT and operating expenses). In General, the market rents for class A range from $23 to $32/sqm / month depending on the location and level of the building, in class - from $16 to $25/sqm / month.
The main demand for space on the office market in Kiev we have seen from the IT sector, which accounted for about 37% of transaction volume 1st half of the year. Also a high proportion in the production of the company is 28%.
Another important trend is the increasing interest large companies whose offices occupy more than 5 thousand sq. m, to conclude preliminary lease agreements have not yet entered objects. This is already happening, and in the future, we assume that the objects that will be introduced in the next 2 years, at the time of launch will have completed 60% or more. Of course, this is due to the low vacancy rate in quality business centers, but also the credibility of developers with corporate clients.