In 2017 office real estate segment is expected to be the most active. Brokers point out to the fact that in the beginning of the year while vacancy rate is relatively high there is a severe deficit in qualitative office premises.
Results of 2016
It is evident that office market of Kyiv shows the signs of recovery. According to DTZ Ukraine around 177 000 sqm of offices were leased in 2016 including 124 000 sqm of pure consumption that showed the real growth of the demand. It is 41% higher than the previous year and 7 times more than in 2014. The most deals were closed by companies that moved into new offices and lease agreement extension deals equal to 11%.
According to CBRE Ukraine the visible trend recordedduring 2016 is the record-low volume of new supply. Annual new completions reached ca. 50,000 sq m, which is 28.1% lower as compared to 2015.
«Owing to the general strengthening of occupierdemand accompinied by slowing pace of new delivery average market vacancy decreased by 2.7 pp from 30,2% to 27,5%», says Kira Pruglo, the Head of Research, CBRE Ukraine.
According to the EY analytical report the highest vacancy rates – up to 30-35% – are in the recently built A class business centers. At the same time vacancy rate in the B class business centers differs depending on location and ranges from 12 to 28%.
The brokers also state the stabilization of rental rates in the second half of 2016 as compared to breakdown during 2015 – beginning of 2016. According to DTZ Ukraine by the end of 2016 the A class offices rates were fixed at $15-25 per sqm/month. The rates in the B and C class premises were $6-16 per sqm/month and $4-8 per sqm/month accordingly.
«In 2016 as a typical trend of last years the demand for offices was formed mostly by IT companies, FMCG and pharmacy», says Marta Kostyuk, the Head of Analytics and Consultancy Department, DTZ Ukraine.
2017: forecast of demand and delivery
In the light of positive changes in economy, improvements in business activity and gradual growth of employment the market experts anticipate the continual growth of demand for offices in the capital of Ukraine.
At the same time the market players acknowledge that the new delivery is shrinking: according to CBRE Ukraine the trend of declining development completion is expected to continue in 2017, with new supply not exceeding ca.30,000 sq m.Taking into account the expected business activity growth it gives a reason to expect the further vacancy decline.
“It is not expected that office real estate construction in Kyiv will revive earlier than second half of 2017 as main international and local development companies want to be sure that they can count for strong demand among large corporate businesses”, says Marta Kostyuk.
Market experts believe that structure of the demand will also hardly change in 2017. “Traditionally the main demand is formed by IT companies, the sector which during recent years showed the positive dynamic growth”, comments Levon Papoyan, the Head of Offices, DTZ Ukraine. In 2016 we also witnessed the moves of pharmacy and FMCG companies to new locations. And we presume the solid demand from them in 2017 as well.
Kira Pruglo from CBRE Ukraine also adds to the list of most active office seekers the energy companies and manufactures. At the same time Kira points out generally lower demand from banks and financial sector.
The tenants’ needs
In spite of the growth of the demand in office segment in 2017 this market is still characterized as the market of tenant. Experts note that almost all business centers with low or zero vacancy offer high level of loyalty to the tenants and the intention of the management company to make a compromise and to keep tenants highly satisfied.
Loyalty is formed by price negotiations as well as by meeting tenants’ needs in terms of technical and maintenance issues. Other than that landlords can cover all refurbishment costs and offer ready-to-use premises.
Among financial tools of tenant retention, Levon Papoyan emphasizes the documentation of the rental rates in UAH from 6 to 12 months and exchange rate band even with the hryvna exchange rate lower than the official one. At the same time Kira Pruglo states that longer rent-free period was still an additional incentive for tenants.
Talking about the design solutions the major trend still remains open space. According to Viktoria Gorulko, the Head of Tenants, DTZ Ukraine among the key factors for tenant to make decision in favor of specific office are availability of modern engineering systems that can be adapted to special needs of any tenant, good insolation, transparent management structure, location with good transport connection. The other important requirement from tenants is the possibility of extension or reduction of leasing area in the course of renting period.
The business centers that can meet the key requirements of tenants are fully leased or have low vacancy. There are even cases when some business centers have waiting list of potential tenants who are ready to lease proper office premises while it is available. However, there are no so many such successful business centers. “Kyiv office market is still unsaturated and immature, and it still lacks in high quality business centers”, underlines Viktoria Gorulko.
«Green» technology: is it a trend?
In search of competitive edge for new office developments the companies opt for green certification that is usual for international markets. Among such certifications are BREEAM, LEED or DGNB. In 2016 two business centers in Ukraine achieve these certifications - BREEAM for BC Astarta in Kyiv and Optima Plaza in Lviv.
“Green certification as a factor of choice means a lot only for international companies, for local companies availability and lack of such certificate is not so crucial”, underlines Viktoria Gorulko. Marta Kostyuk from DTZ believes that green certification will be widely used in the mid run. This year market will get only one new “green” business center.