Office Rental at a Turning Point: Those Without ESG Standards Will Struggle to Remain A-Class

The news that Zagreb needs new office buildings to meet the demand for office space is not new. The current vacancy rate in Zagreb has fallen below three percent, making it significantly more difficult for tenants to find adequate office space. At the same time, partly due to the low supply of quality apartments on the market, certainly less than the demand, rental prices continue to soar, making rent unaffordable for most people living on salaries, especially young singles and families. This problem is also placed in the context of the further increase in the number of short-term rental units for tourists, which further inflates the entire story, not only in Zagreb but also in coastal cities.

New Squares

However, when it comes to the office rental segment, there is good news, as well as new rules of the game that will significantly impact the sector, as revealed by Colliers’ Zagreb office – an announcement of as many as 95,000 new office square meters in almost all parts of Zagreb, which will certainly enrich the offer of new office spaces.

– The comparative advantage of new projects is certainly lower utility and common costs, allowing tenants to save in the long term, while also enabling them to fully customize the layout to their needs, which also affects the tenant’s investment savings in furnishing the space. The sought monthly rents in such office spaces will range from 14.5 to 19.5 euros per square meter. Additionally, existing A-class projects will have to adapt to compete with newly built buildings – emphasizes Nuccia Basanić, head of the Commercial Real Estate Consulting and Brokerage Department at Colliers.

Here’s what is happening in the market. Tenants are increasingly precisely defining their desires and needs regarding office spaces while simultaneously adapting to new ESG standards. Landlords are also investing further in their capacities to improve office spaces and remain competitive with these new square meters.

Green Regulation

As Colliers reminds us, this year, extensive ESG regulations came into effect, requiring all large companies to prepare an ESG report. What does this specifically mean for landlords? For companies to comply with ESG standards, their suppliers, including landlords, must also comply with them. Landlords need to ensure tenants that their office space meets these standards, from material selection, energy savings to space maintenance. This is most often included in the possession of various green certificates. Based on these factors, entities reporting on ESG will choose office spaces. All of this will significantly impact this market segment.

– Statistically speaking, in Zagreb, most office buildings classified as A-class were built in 2006 and 2007, which accounts for as much as 27 percent of the total available office spaces for rent. Despite the high demand in the office segment over the past few years, only a limited number of buildings have been renovated and adapted to the new construction standards. We will see how they will further adapt to ESG standards, as their occupancy will certainly depend on that in the future. At the same time, new projects are being announced and built, which are carefully planned to allow for layout flexibility and provide tenants with additional amenities. It is almost a rule that new buildings are certified with one of the international green certificates – says Basanić.

Therefore, this will be a challenging period for both tenants and landlords, as changes are no longer dictated solely by new trends but also by European Union legislation, which, of course, carries much greater weight and creates new obligations for both parties.

Tenant Demands

Of course, additional amenities remain a lure for tenants. When it comes to the desires and needs of tenants, Basanić points out that they often have a clear vision of what they are looking for, whether it is about location, additional amenities, or specific features of office spaces.

– Sometimes these demands are realistic, and sometimes they are difficult to achieve in our market. Our goal is to find them a space that best meets their specific needs and desires – adds Basanić.

For tenants, it remains extremely important to have access to additional amenities such as restaurants and cafes, various shops, and service activities in close proximity. Since we spend most of the day at work, it is crucial to ensure that users can carry out various activities during breaks. When planning new office buildings, developers must carefully consider this aspect. If office spaces are developed in isolated locations, outside business zones, it is necessary to create new business destinations that will provide their tenants with a rich spectrum of services.

– In addition to additional amenities, tenants still value a sufficient number of parking spaces, especially if they are not in the tram zone, as well as bike parking or electric car charging stations. Additionally, in office space, it is very important that the space is flexible and that each tenant can adapt it to their business, brand, and corporate culture. This is a condition that almost all tenants require when they contact us in search of new office space – reveals Basanić.

Expensive Reconstruction

Existing office buildings are often located in well-connected locations in the city, but they often do not allow for expansion within the building, which is a disadvantage for many tenants and one of the main reasons for moving to a new location. Furthermore, high investment costs in existing space, non-compliance with ESG regulations, and landlords’ expectations regarding renewed rents at the end of the lease become reasons why tenants are increasingly considering new projects. Namely, the reconstruction project within the existing office space can reach an investment of 400 to 600 euros per square meter for the tenant.

In the residential real estate market, there is almost an equal ratio between supply and demand as in the office segment, but since it is largely a business of individuals, there is much more disorder. Therefore, agents advise both tenants and landlords to enter into notarized lease agreements, which are the highest level of security for all parties, and prior to that, to carefully select future partners in that cooperation. Namely, there are still scammers in the market renting non-existent properties and tenants who are not inclined to meet their obligations. Also, unlike the office segment, the offer still often includes outdated furniture.

Long-term and Short-term Rentals

The founder of the Opereta agency, Boro Vujović, points out that such apartments are generally not in their offer.

– What is not furnished is most often not rented through agencies, except in exceptional cases and circumstances. More and more landlords are aware that outdated furniture from the seventies no longer works and that it is not competitive, especially at the sought-after prices, which are increasingly rising for various reasons. Additionally, there are more and more apartments in new buildings, so they are automatically furnished. What used to be rented for 500 to 600 euros a month is now hard to find below 700 to 800 euros, and these are one-bedroom apartments, which is unaffordable for a large number of tenants. One of the reasons for higher rental prices is certainly the higher sales prices of apartments, especially if investing in rental property. It is not the same if an investor paid three or four thousand euros per square meter; the rental price cannot be the same. Another reason is certainly the high demand compared to supply, and the location also affects the price – says Vujović.

It is known that the boom in short-term rentals, which seems to be ongoing in Croatia, affects the prices of both sales and rental square meters in the residential segment. The latest wave of registrations of new rental apartments has reportedly been triggered by changes in the Tourism Act, which finally gives local units the tools to stop the further spread of the number of apartments as needed. According to the latest statistics from eVisitor, in private accommodation in January 2024, there were 636,772 beds, which is 38,172 more than in the same month last year and 31,332 more than in January 2020.