Zagreb Overcomes Surge of New Office Inventory

After being inundated with new supply—a trend that shifted the pendulum in favor of tenants—office rents here are leveling off, according to a Q3 review by Colliers International’s Croatian group. Class A rates have recovered into the $21 to $24 per sf range, while a stampede to quality has allowed the region’s newest office towers to fill up sooner than anticipated.

“Absorption has accelerated in 2007 as companies have used the opportunity of favorable terms to relocate,” reports Colliers International Croatia managing director Tomislav Perovic. The industry veteran terms Zagreb’s leasing climate as “dynamic” following a third quarter when 220,000 sf was absorbed. The activity is especially encouraging given that summer is a slow time for Zagreb, says Perovic. Colliers anticipates the dose of leasing should keep rents from plummeting as much as had been feared when the glut of new supply cascaded onto the scene. Demand has not been fully wrung out despite the deals already done, says Perovic, because several major tenants have remained on the sidelines in hopes that rates would fall further. That patience has resulted in substantial interest for the two remaining buildings slated to come on line by year’s end, properties accounting for about 125,000 sf.

Beyond those buildings, Zagreb will have little new office space developed through the end of the decade when a new wave of skyscrapers is slated for arrival. That should provide ample time to pare down the 2.1 million sf of class A space delivered in 2006, says Perovic, a mark that tripled the class A inventory for Zagreb. The total office market, including owner-occupied space, is now 7.5 million sf.

Besides competitive terms, a desire among companies to operate in modern space has been a key driver for the dramatic lease-up seen thus far in 2007, Perovic says. Most of the new structures began the year with vacancies exceeding 50%, but the majority are now enjoying single-digit vacancies, and Perovic says the migration to new towers is expected to continue. That could mean doom for class B product, he says, as such properties in solid locations are being targeted for demolition to make way for 21st century replacements. Those that remain are offering tenants a further price alternative, with class B rates averaging $13 to $17 per sf, according to Colliers.