Modern Office Spaces Remain ‘Hot Property’ Despite Rising Prices Due to Inflation

Zagreb is currently experiencing a shortage of office spaces, and the stories that offices are being converted into rental apartments due to vacancy do not hold water. Industry experts indicate that it is possible that offices located in residential buildings in and around the center are being converted into apartments due to tourism activities, but there is a chronic shortage of modern and well-equipped office space, especially Class A offices.

– The occupancy rate of office spaces in Zagreb is excellent, there are actually very few free offices on the market, especially Class A offices, which are insufficient given the demand. The same is true in Split and Rijeka if we look for trends across the entire market, while in other cities the story is different – says Dubravko Ranilović, president of the Real Estate Business Association at HGK and owner and founder of Kastel Real Estate.

Investment Shortage

Given that the main focus in the real estate market remains on the construction of residential square meters, especially in the Zagreb area, investments in commercial square meters, at least those primarily of the office type, are still overshadowed by the main residential demand. The numbers speak for themselves. According to official data, the volume of investment transactions in commercial real estate in Croatia last year amounted to around 400 million euros, which is significantly less than the previous year when it was around 700 million euros.

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Dubravko Ranilović

 

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– There is certainly interest in investments, and yields are stable at around seven to eight percent, but there is a lack of investment – notes Krunoslav Lisjak, director of the Investment Department at Opereta agency, who adds that with the exception of one larger commercial investment on the outskirts of Zagreb, in Buzin, which is in its final phase, there is still a lack of larger investments in the construction of especially Class A office spaces in the City of Zagreb.

– The same applies to Split, where apart from the well-known skyscraper nearing completion, further investments in new commercial square meters seem to be on hold, or do not meet the demand for them, while the focus remains on tourist investments – said Lisjak.

Due to the lack of investments in this segment relative to demand, there is currently a rise in the sought-after rental prices for commercial spaces throughout Croatia, especially in Zagreb. Inflationary conditions certainly have an additional impact, and it can be expected that some landlords will exercise their right to index rental prices or adjust prices according to the inflation rate.

– Given all of the above, a further increase in rental prices is realistically expected – believes Lisjak, who also emphasizes that the increased interest in commercial square meters is certainly influenced by the demand arising from the structural reconstruction of the City of Zagreb, where public and state entities as well as educational institutions have expressed interest in larger office spaces.

Demand for Modern and Quality Spaces

However, other trends are also noticeable. Tenants are focused on higher quality office spaces, insisting on better energy certificates, seeking smart energy-efficient solutions, and more acceptable levels of general and utility costs.

– Tenants are willing to pay a slightly higher rent for such spaces. Many companies are facing demands and the application of new ecological and more sustainable standards from their foreign owners, and this is an unstoppable trend that is certainly coming to the market. In other words, for spaces to be interesting for long-term leasing, property owners should consider how they can meet this type of demand – emphasized Lisjak.

Vedrana Likan, director of Colliers International, a leading consulting company for investments and real estate, points out that the situation in the commercial real estate market is characterized by high demand and supply that cannot meet it. According to her, Class A office spaces remain ‘hot property’ in the Croatian commercial real estate market, and they are the ones we lack.

– Zagreb is the absolute leader in the number of square meters available, over one and a half million square meters, as well as in the demand that it cannot satisfy, with other larger Croatian cities closely following. Tenants are looking for modern, high-quality spaces in attractive locations, spaces that are in close proximity, or even better, in the same building, with additional amenities and conveniences. Buildings that can meet these requirements do not stay vacant for long, as they represent added value in branding the employer who leases commercial spaces – explains Likan.

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Vedrana Likan

photo Ratko Mavar

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Regarding the occupancy of office spaces in Zagreb, we are currently, she adds, at just four percent vacancy rate, while prices for Class A offices are around 13 euros per square meter and prime rents are between 15 and 18 euros per square meter. A slight correction in prices occurs as a result of economic conditions in the market, but there have not yet been significant increases.

– In such circumstances, Zagreb is currently awaiting the completion of several larger office buildings, including Matrix C and Buzin City Island. Both buildings are expected to be completed in the coming months. While GTC and KFK are finishing the mentioned buildings, some other developers are just starting to build their square meters, so in the coming period, we expect a further strengthening of the supply of top-notch office buildings in Zagreb – notes Likan and adds that, regarding trends, although there has been much talk about completely remote work in recent years, we have returned to offices through a hybrid work model.

Revitalization of Old Buildings

Lisjak from Opereta, for example, despite all the challenges, currently sees certain opportunities. There is a significant number of commercial square meters built during the 1960s and 1970s in the wider center or in New Zagreb, whether standalone buildings or within residential zones that should be revitalized.

– Although modernizing these spaces involves significant additional investments, they are generally located in very well-connected locations with all the necessary infrastructure and undeniable interest in leasing once they are renovated – says Lisjak and adds that some such projects are being prepared.

There are also changes in the retail market, shops, and shopping centers, which are expanding to secondary and tertiary locations, moving away from the centralization that the office space market follows. These alternative locations offer less saturation, and interest in such locations is certainly persistent, believes Likan. The logistics and warehouse market is also in focus, both on the demand side and the supply side. Tenants are looking for modern Class A square meters that will meet the highest standards in terms of equipment and energy efficiency. Such spaces generate great interest and do not remain vacant for long.

– Unfortunately, there are not enough such properties on the market – concludes Ranilović.