The current backdrop, however, has become much more challenging, leading to fears of a widespread economic slowdown among Western countries, which would hurt Romania’s medium-term outlook and, in turn, the outlook for the local real estate market. Nevertheless, Laurentiu Lazar, Managing Partner for Colliers Romania, argues that the longer-term recipe for growth is still in place and investors will continue to consider this even in case of a negative economic scenario in the next period.
The office market is seen as a bellwether for the commercial real estate scene and so, the fact that the vacancy rate dropped towards 15% in Bucharest from 16,50% at the end of 2021 (with deeper moves lower in parts of the country), is illustrative of a fast-paced recovery taking place. In fact, together with a less crowded deliveries calendar over the next two years, the market is moving towards a landlord’s one for good class A office buildings in certain submarkets. Overall, new demand for Bucharest office spaces nearly doubled in the first semester (to over 70,000 sqm), compared with the similar period from last year while the annualized pace of new demand is at pre-pandemic levels.
“With results as good as we have had for the last few quarters, plus a solid pipeline of deals on all major real estate sectors, we are still not overtly enthusiastic for Romania. In fact, we are leaning towards a cautiously optimistic approach, as global risks are higher than they have ever been in the last years and a small and open economy like Romania cannot do anything more than swim with the tide, whichever way it goes”, says Laurentiu Lazar.
On the industrial side, following a c.7% growth of the leasable modern warehousing stock, it closed in on the 6 million square meters level. Demand is still on par with record levels seen in the last couple of years, owing to the fact that the local modern stock remains well behind it should be for a market that grew as fast as Romania during the last decade, says Laurentiu Lazar. A similar trend of a fast-growing market that remains undersupplied and which feeds into stronger demand for storage spaces is the retail sector, where the stock per capita remains well lower than in Poland or Czechia for similar levels of consumption.
“On the investment side, following deals worth €336 million in the first semester, a c.13% increase over a year ago, we see a solid pipeline of deals, which, if concluded, would lead to the best year since the financial crisis of 2007-2008. That said, it is important to note the challenges that lie ahead, as global growth concerns and inflationary pressures are concerning for the future of various economies and might lead to negative pressures on real estate assets in Western economies”, says Laurentiu Lazar.
The sharply higher interest rates will have a more tangible and shorter-term effect on the local residential market, which relies quite heavily on mortgages, says Laurentiu Lazar. This in turn could lead to a slowdown of activity on the local land market, where residential developers generate some two thirds of deals.
Overall, the risk balance over the shorter term is skewed towards bad news, particularly amid higher interest rates in developed markets, the war in Ukraine and Romania’s wide internal imbalances. These suggest that the risk of a hard landing of the Romanian economy, reminiscent of the 2009-2010 recession, is a possibility, though it does not form our base case, says Laurentiu Lazar.
“Rather than focusing on the short-term risks, we would like to note that in spite of the sharp recession we saw more than a decade ago, Romania was still one of the best performing in the world during the 2000-2020 period. And if we take into account the local talent and the hefty EU fund inflows which could represent around 5-6% of GDP per year until 2027, we cannot help but remain very bullish on the local economy and its real estate markets over the longer run.”