The Office Vacancy Rate Will Continue to Rise, but Investment Volumes May Have Bottomed Out

Adorján Salamon, CEOof ESTON International, remains optimistic: the company he leads had a particularlysuccessful year.

While the officevacancy rate is expected to continue rising, investment transaction volumes mayhave reached their lowest point last year. We also touched onquestions such as: what should be done with aging, 20-year-old buildings thatare outdated both physically and morally? Why aren’t domestic funds investinglocally? And what are the key drivers of the market today?

- There’s very little speculative development happening in theBudapest office market. Why is that?

- Speculativedevelopment depends on two key factors: confidence that the building canbe leased within a reasonable timeframe after completion, and investors willingto acquire it at a price that ensures a risk-adjusted return for the developer.Without both, speculative development simply doesn’t make sense in today’smarket.

- So pre-leases aren’t essential anymore?

- They’re stillhelpful, but far less common. The few developers willing to launch newprojects often do so based on confidence in the location, the uniqueness of theproduct, or the absence of competition. They move forward without pre-leases,which requires significant capital and a higher appetite for risk.

- High-qualitybuildings in prime locations will find tenants— especially while themarket lacks such supply. The challenge is ensuring that rents coverconstruction and financing costs. Today, projects with rents below€20/sqm/month are not financially viable. It’s not enough to have tenants; youalso need a buyer who can pay that price—or more.

Modern, green, ESG-compliant, and ideallycarbon-neutral buildings in strong locations are what today’s buyers want. Fromthere, you can gauge real interest. I don’t expect leasing timelines to improvein 2025; they may even stretch slightly. However, premium products will alwayslease or sell—there will always be tenants looking to upgrade. And as long asnew supply remains limited, demand will absorb these properties.

On pricing: the €3,000/sqm level seen inrecent years is now closer to €4,000. Meanwhile, the office sector’s share ofinvestment volume has dropped significantly—from 77% of the market in 2021 tojust 23% in 2024. The total real estate investment market itself has shrunk toonly 31% of its 2021 size.

- Are we heading toward a hard landing?

No, I don’tbelieve so. Liquidity remains in the market, but buyers are highlyselective. There’s still plenty of capital seeking opportunities, but withoutpressure on owners to sell, transactions are down. While the data isn’t yet conclusive,current negotiations suggest 2024 may have been the low point for activity. Adrop in financing costs would go a long way in restoring market momentum.

- Isn’t the gradual decline of remote work helping to reduce vacancy rates?

Not in the shortterm. Vacancy rates are expected to keep rising over the next 1–2 years.As new buildings complete in Zugló, Dürer Park, and BudaPart, governmentagencies will relocate—freeing up around 250,000–300,000 sqm of space. Abouttwo-thirds of that is currently leased on market terms. This will add 100,000+sqm to the market, increasing vacancy.

Much of thatspace consists of older, outdated buildings. Some may be converted, but manywill simply stand empty—especially those in secondary locations. For example,renovating a 20-year-old office building may cost €500/sqm while onlygenerating €14/sqm/month in rent—roughly equivalent to three years of income.That’s hardly an enticing investment case.

- What’s the second chance for these older buildings?

- Student housing,hotel, or other alternative uses may be viable options—however, these cannotalways be implemented, as many older buildings are simply unsuitable for suchconversions, even if the owner is willing to invest in redevelopment. Forinstance, a building might theoretically be converted into a hotel, but if itslayout only allows for rooms that are larger than optimal, it significantlyreduces operational efficiency and, in many cases, undermines the return oninvestment altogether.

- The office market ison the brink of a paradigm shift: demand is becoming more selective, and thegap between rental prices is widening. Older buildings will only be leasable atlower rates—below today’s market average—while new buildings will be able tocommand higher rents. From another perspective, however, this creates acompelling entry point for investors.

- The Ministry of Interior vacated its building on Széchenyi Square, nextto the Gresham Palace (Four Seasons). Given the prime location and heritagevalue, shouldn’t repurposing be straightforward?

- Absolutely—that’strue. But I would add that a downtown heritage building is always a uniqueasset, inherently carrying added value. Its prime location and historicalcharacter will, in all likelihood, support redevelopment into a hotel orserviced apartment project.

- What would you recommend to someone looking to invest €50 million in theHungarian real estate market?

- Diversificationis key. Sectors like student housing and residential-to-rent are gainingpopularity, though they’re still emerging markets without establishedbenchmarks. There’s limited product, but they’re increasingly relevant in abalanced portfolio. Logistics and certain retail formats—like strip malls orbig-box properties—also attract interest, although the number of transactionsis low. Automotive and battery-related investments have slowed, but demand forthose asset types persists. Supply, however, is extremely limited.

- Who is buying in the current market?

- Hungarianinvestors are active— but many are now looking across Europe. They expectHungarian properties to offer a yield premium compared to other regionalmarkets, but that premium currently isn’t there. At the same time, sellersaren’t under pressure, so prices haven’t dropped significantly. We’re expandingwith our clients. Three years ago, we advised Tesco and Adventum Group on adeal involving 18 shopping centers—14 in Hungary and 4 in the Czech Republic.Last year, we supported four retail acquisitions in Slovakia and signed aregional strategic agreement with the MOL Group. This is where I see growth:when local opportunities are limited, we follow our clients abroad and supportthem as advisors, offering a true one-stop-shop model. Our valuation team isactive in Spain, Italy, Romania, and Serbia—and we’re often more agile thaninternational competitors.

- Given all this, how was 2024 for ESTON, and what are your expectationsfor 2025?

- Surprisinglystrong—we exceeded our targets. Every division performed well. Capitalmarkets were quieter, but I expect a strong first half in 2025. Last year, wesold a number of development sites and repositioning opportunities, and thisyear we’re negotiating deals involving both income-generating and developmentassets. I believe our H1 2025 results will outperform the last two years. SinceCOVID, the volume of leases we’ve facilitated has grown annually—typically by10%. Our Project Management team handled 75% more projects in 2024 than in2023—more than doubling in two years. Our Valuation team completed 260assignments in 2024.

- I’m especiallyproud of our Office Leasing division. We handled transactions significantlylarger than the market average. ESTON closed the two largest new office leasedeals of 2024—together exceeding the size of the next three deals combined. Onenotable trend shift: historically, lease renewals and new leases were evenlysplit 50/50. In 2024, the ratio moved to two-thirds renewals and one-third newleases. A falling interest rate environment would support continued growth. I’mnot expecting a boom—but I do expect steady improvement.

The original interview was published by irodakereso.info

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