Signs of recovery in the Istanbul office market (TR)

On the back of the recovery from the economic crisis, we are observing an increase in tenant demand.

In the last two years, lease transactions were at a minimum, with only a small number of tenants taking new space, mainly in the business areas of Ümraniye and Levent. In addition to the economic crisis, some of the reasons for the limited number of transactions were the high fit-out and moving costs, shortage of alternatives and long approval procedures. However, despite these challenges, and on the back of recovery, we expect to see a significant number of deals in the last half of 2010.

A number of multinational corporations have reactivated their activities, which were for the most part postponed immediately after the crisis. Mainly corporations engaged in the financial, technology, FMCG and services sectors are active in securing their new contracts. However, the motives behind the current demand are different from what was seen in the market in 2007 and 2008, where occupier interest was directed to more prestigious offices. Now in 2010, tenants are looking for A-class office space in secondary regions like Ümraniye and Kavacýk for budgetary purposes. In this regard, downsizing, optimization of space and consolidation are the main trends in the office market.

Since the beginning of 2010, the office market began to show signs of sustained activity, however tenants are still cautious entering into commitments. The completion of a transaction is more time consuming and involves more procedures than companies expect. The market transformed in the last two to three years from a landlords’ market to a tenant’s market, with expectations for greater flexibility on commercial terms and more incentives.

Supply
In addition to the low demand, there was a shortage of supply enabling rents to remain stable in the period following the global economic crisis. Many pipeline projects were postponed in 2009 in prime office districts such as Levent, Zincirlikuyu and Kozyataðý due to lack of financing. In Turkey, project pre-leasing is not a common practice, unlike most other the countries. Although the economy seems to be recovering in 2010 and the mood of the market is optimistic, a lease contract is still the pre-requisite for assuring funds and credit for investors and developers. Thus office projects will likely be neglected when compared to residential and retail projects, which provide higher short term returns.

For new projects to come online, developers require sustained low interest rates with ease of credit. Also, for developers and investors to feel more confident in the market, more transactions are needed along with decreasing vacancy rates. This would enable the realization of pipeline projects concentrating in the main CBD.

Suburbanization of office market
Much of the tenant demand over the last two years has shifted from the main CBD to secondary regions on the Asian Side. Umraniye, for instance, has become an attractive location for companies who are looking for quality A class office space and budget alternatives in accessible locations with connections to both bridges. Kavacik is another location that appeals to companies with budgetary and accessibility concerns. However, the area has infrastructure and permit related issues. We expect to observe the emergence of new sub-centers like Kagithane, due to the development of a new traffic tunnel and Kartal, with its new metro line.

Rental growth outlook
Low tenant demand in 2009 was the main reason for the decrease in prime rents. Although prime rents remained stable in 2010, we expect to see a sharp drop in prime rents in the main CBD, once the pipeline stock is realized. The main reason for the stable figures was the undersupply in most of the districts of Istanbul, as discussed above.

Office trends: Green buildings
Many of the larger office building tenants will be attracted by low rents and concessions offered by landlords in class A and B office buildings. In a market where earthquakes are a reality, with a risk of flooding in some areas, such as Basýn Ekspres in the airport region, sub-standard offices will struggle to keep tenants. Demand for environmentally-friendly, energy-saving and certificated offices will influence pipeline projects and future trends. Many multinational corporations have started to adopt sustainability standards. For the time being, these companies require some of the features of green offices, even if they do not insist on LEED or BREEAM certification.
The greening of office buildings is gaining momentum in Turkey, like the rest of the world.

The pioneering Levent Ofis by Tekfen-Oz Real Estate Development is the first speculative office building in Turkey. The development follows Siemens Offices in Gebze, which was the first owner-user office project. Most of the pipeline projects evaluate energy labeling systems in an effort to integrate these standards in their projects. Increasing demand for green offices, especially in the US and European countries, will create pressure for Turkish developers. This trend will provide a learning opportunity for developers, tenants, architects, engineers and real estate professionals. In the last two years we have observed balconies and winter gardens in the concept designs of new office projects and this is due to the support and incentives given by the local authorities. Should such incentives be given to energy saving project concepts, the realization of green buildings will be supported by many developers. We support these efforts and believe that by applying these standards, green buildings and energy improvements provide another way for developers to add value to their projects.