Despite the not very encouraging forecasts given by experts at the end of 2022, the office real estate market of the Kyiv region in 2023 demonstrated stability and strengthening of demand. Property Times spoke with market experts about the main trends, key indicators and forecasts.

“There is a change in the formats of tenants, a reduction in occupied space, moving to areas far from the center,” — Kostyantyn Oliynyk, head of the Strategic Consulting Department of the UTG company says. — “The largest Ukrainian corporations transferred employees from rented premises to their own administrative real estate. A number of companies have turned in low-demand representative offices, small and medium-sized companies are rationalizing the cost part.”

 

Moving, medium-term contracts

Despite the continuation of hostilities and regular missile attacks on the capital, the market has managed to adapt, new trends have emerged that testify to the segment’s resilience to external factors.

Pavlo Makuha, commercial real estate expert, founder of BRIDGY, notes that despite the most significant challenges in the history of the professional office real estate market in Kyiv, the market has demonstrated its viability and the ability of market players to further transform.

CBRE analysts identified several main trends that were characteristic of the capital region’s office real estate market last year: “Most companies have suspended staff reductions and are looking for ways to optimize real estate costs by reviewing lease terms or improving office space by moving. Although the market continued to experience some area reduction, the increase in net absorption as of the end of 2023 indicates a weakening of this trend.

Tenant demand showed signs of strengthening, with annual gross take-up reaching approximately 91,000 sq.m, which is four times more compared to 2022, but still remains 32% below the pre-war level of 2021. By type of deal, relocation deals (55%) and renegotiation of existing contracts (17%) prevailed, accounting for about 72% of leasing activity, while expansion of office space occurred relatively infrequently (6%).

In contrast to traditional war-related relocations or reductions in office space, a new trend is emerging. Large companies stay in their current offices, avoiding relocation due to its cost and to maintain the stability of work processes. Thus, in some cases, international companies can maintain their office premises nominally, continuing to pay rent and related costs, even if the actual use of the premises by employees remains low – from 15 to 50%. As a result, in some cases the relocation scenario cannot compete financially with the option of renting the same office.”

“There is a change in the formats of tenants, a reduction in occupied space, moving to areas far from the center,” —Kostyantyn Oliynyk, head of the Strategic Consulting Department of the UTG company says. — “The largest Ukrainian corporations transferred employees from rented premises to their own administrative real estate. A number of companies have turned in low-demand representative offices, small and medium-sized companies are rationalizing the cost part.”

At the same time, another trend was observed, tenants got a unique opportunity to move from their lower-class offices to higher-class offices without a significant increase in rental costs, Pavlo Makuha says.

Market experts also note that planning terms have changed. “In the second half of 2023, there is an increase in requests from tenants for medium-term contracts of 2-3 years,” —Levon Papoyan, a partner at SnP Partners comments. — “As for flexible offices, offices with renovation and preferably with furniture, short-term contracts for 1 year with extension are mostly signed.”

“In 2023, there was a relative (compared with 2022) activity of potential buyers – both investors and end consumers, in the acquisition of office premises and, as a result, the closing of a number of agreements on the purchase and sale of office buildings worth from $2 million to $10 million and with an area of 1,500 sq.m to 10,000 sq.m,” —Pavlo Makuha says.

The main trend since the beginning of the full-scale invasion – respect for security – has been preserved and strengthened. “Market players understand this and take care of organizing their own shelters or arranging joint shelters together with landlords,” —Ilya Koenigshtein says, CEO and founder of Creative States.

Another trend that has emerged in recent years is all-in-one offers. “Residents are increasingly interested not in individual solutions, but in complete ecosystems that include related products and services,” —Ilya Koenigshtein comments.

Vacancy: positive dynamics

According to CBRE analysts, as of the end of 2023, the average vacancy rate was 25% (-1% y/y), while the vacancy rate in class B (27%) remained higher than in class A (24 .7%), especially in lower-quality buildings. The main part of the vacant premises was concentrated in newly built facilities, in which the level of occupancy remains low, as well as in buildings of lower quality, which, as a rule, were located outside the CDR.

Kostyantyn Oliynyk gives slightly different data: “The weighted average vacancy in business centers of Kyiv at the end of 2023 was: A — 27.4%, B — 20.2%, C — 14.5%.”

“If we take only Class A buildings that have been in operation for 5 years or more, the vacancy rate in them will be significantly lower than the average for Class A. This is the result of the fact that the premises in which the interior decoration has not been completed, as well as those that entered the market last sometimes, they did not have time to quickly find their tenants during the martial law”, — explains Pavlo Makuha. — “If we check the vacancy rate of class A and class B commercial centers that have been operating for more than 5 years, it can be stated that in many buildings the vacancy rate is even lower than 5%, which leads to a logical conclusion: a classic office tenant in the central business district desperately needs high-quality offices.”

“Regarding occupancy of our locations. The first two “Arsenals” keep the indicator at the level of 80%. Creative State of Arsenal 3 even at the time of its first announcement broke the record for pre-orders at the level of 50%”, —Ilya Koenigstein comments. — “In Gulliver BC, the Creative States location is 50% full. At Creative State of Senator, we are thinking of giving the entire space of the location to one large company that we will serve.”

In general, experts note that the decrease in the vacancy rate, which was observed in 2023, indicates positive dynamics in the market.

Among the reasons for the decrease in vacancy, Levon Papoyan singles out the following:

a limited number of professional business centers were introduced to the market;

the existing demand for office premises not only due to relocation, but also in connection with the expansion of business and new projects (especially international organizations);

two large BCs – 101 Tower and LuWR – still remain out of the market.

 

Rental rates: gradual stabilization

The strengthening of Kyiv’s air defense, a significant increase in demand from both international organizations, diplomatic institutions, companies, and Ukrainian business contributed to the stabilization of rental rates, notes Levon Papoyan.

According to CBRE analysts, the prime rental rate has stabilized at $20/sq.m/month, having decreased by 5% since the beginning of the year. The upper limit of the range of rental rates for class A office space decreased by an average of about 7%, ranging between $18-24/sq.m/month, while for other objects there was a decrease in the upper limit of the range by about 11%, to $8-16/sq.m/month.

“Taking into account the increase in the cost of energy carriers, the increase in the price of utility bills, and with them OPEX (including due to the increase in vacancy and the distribution of operating payments to a smaller number of operators), the burden on tenants will continue to increase, and rental rates will continue their further decline in the near future.” — Kostyantyn Oliynyk comments.

 

New proposal: development activity has slowed down

The total offer of professional office space in Kyiv during 2023 has almost not changed and amounts to about 2,400,000 sq.m, such data is given by Pavlo Makuha.

“In 2023, about 60,000 sq.m were introduced. m. of office premises, but part of the buildings introduced according to the documents were not ready for the start of operational activities, i.e., in fact, a part of the buildings introduced in 2023 will start functioning with fully ready public areas in the second half of 2024. The updated level of new supply declared by the developers during 2024-2025 is about 150,000 sq.m,” — clarifies the expert.

BC, which was introduced in 2023:

– BC Twelve, str. Novokostyantinivska, 12 (13.3 thousand sq.m),

– GRADIENT.Business Center, str. Korolenkivska, 4-6 (20 thousand sq.m),

– Business center at 96 V. Lobanovsky Ave. (2 thousand sq.m),

– Unit.City B4, str. Dorohozhytska, 3 (13.2 thousand sq.m).

“At the same time, developer activity in the office segment has slowed down, and the amount of office space under construction has decreased,” CBRE analysts note. “However, despite the fact that the office real estate market remains unbalanced, including due to a high level of vacancy, the owners are ready to put into operation new facilities in the final stages of construction.”

 

Format: renovated offices and co-working spaces

Levon Papoyan notes that co-working/flexible offices and renovated offices are in the greatest demand.

“However, there have also been deals in unfurnished premises, but in these cases the premises or building were ideal for a tenant who had the time to perform all types of finishing works and the appropriate budget for it. There is demand from tenants for separate office buildings located in the central business district, as well as for quality projects with a competent concept,” — Pavlo Makuha shares his observations.

“There is a demand for almost all classes, depending on budgets. Class A commercial centers are filling up well due to a significant reduction in rental rates,” —Levon Papoyan adds.

Responding to the request of potential tenants, market operators offer new formats.

“We launched a new location in Kyiv — Creative State of Arsenal 3, which was implemented in a new format for us: since this location is family-type and involves visits by children together with their resident parents, in Creative State of Arsenal 3 the service of professional babysitters and educators who will work with the little ones,” —Ilya Koenigshtein says. “Also, a new CS Kitchen service was launched at all Kyiv locations – your own kitchen.”

Tenants: the list has increased qualitatively

Experts note that the trend of the past years has been preserved — the IT sector (51%) continues to dominate the overall distribution of demand by industry. “Although the pace of development of this segment, which has historically been a key driver of demand and development of business centers, has slowed down due to a reduction in the physical presence of employees in the office. At the same time, the market observed a relative lack of demand for new offices from companies in traditional industries such as pharmaceuticals and medicine or the agricultural sector. The public sector, which accounted for 23% of the demand structure, although likely to have met its needs for office space in 2022-2023, will continue to remain active in the market in 2024. Additionally, potential growth in demand may come from companies in the military-industrial segment, although their current representation in the structure is insignificant,” — CBRE analysts commented.

“Diplomatic missions and government organizations (15%), retail operators, FMCG, and the financial sector were also active in 2023,” —Pavlo Makuha adds.

This is how Ilya Koenigshtein describes the portrait of the resident of flexible offices: “Before the war, this format was recognized mainly in the IT and creative industries, as well as “impertinent financiers” (i.e. fintech). Now, in addition to the mentioned tenants, we also have FMCG, media, and diplomatic missions. HR, agro, marketing, NGO. Logistics, banks, retail”.

In general, compared to 2022, the list of categories of tenants has significantly and qualitatively increased, Levon Papoyan believes.

 

Forecasts: recovery in demand, new supply and reduced vacancy

In 2023, despite the military actions, a certain activity was observed in the office market, experts note that this trend will continue in the current year.

CBRE analysts: “In 2024, we expect a moderate recovery in tenant demand. It is possible that the tenants will be dominated by companies that will take advantage of the opportunity to move to higher quality buildings in more attractive locations.

By the end of 2024, approximately 51,000 square meters are expected to be commissioned. m of office space within four office projects. New office buildings will be predominantly small and medium-sized Class B properties, with the exception of the Heritage BC Class A. However, delays in commissioning can be expected as debt financing remains largely unavailable and demand for office space in general will remain subdued. In case of timely commissioning of the declared objects, the average vacancy on the market may gradually increase. At the same time, quality business centers are likely to see a decrease in vacancy due to attractive rental rates and the desire of some tenants to improve the quality of their offices. Provided there are no further economic fluctuations and a worsening of the security situation, rental rates will remain generally stable, although lower-quality properties may see further reductions in rental rates.”

 

Levon Papoyan: “It is unlikely that there will be a large amount of new supply, as most developers are still in standby mode. There are many reasons, including risks of damage to buildings due to rocket fire; lack of builders; a significant increase in the cost of construction and terms of delivery of materials; lack of confidence in the rapid filling of the BC; the absence of the possibility of forecasting the financial payback of the BC, since the projects started with expectations of rates that were supposed to be much higher than the current ones. Currently, it is impossible to predict when the moment will come for a dynamic increase in rates. And this should not be expected until the end of the war.

As for demand, we expect a slight increase in demand. The categories will hardly change. Uncertainty about the timing of the end of the war, limited personnel, as many men are either overseas or serving in the army, remain constraining factors. Mobilization risks are also a restraining factor.”