Written by Dejan Krajinović, Beobuild Core D.O.O., EECFA Serbia

Office has been struggling to sustain steady growth as its output performance surprisingly meandered in the previous period. Finally, investments are picking up, but will it be enough to improve market conditions?
Office construction
Although Serbia’s office segment has been enjoying positive developments during the ongoing expansion, its performance has been rather bumpy and below market expectations. The initial strong recovery of construction outputs in 2016 had a short breath and corrected back by a double-digit margin in the following year. This was not expected in any way since permit numbers continued surging unabated, while investment-wise all market conditions improved further.
Find out more about office construction in the EECFA Serbia Construction Forecast Report. Sample report
The sudden decrease in 2017 was largely caused by the delay in two major planned projects in Belgrade which had received their permits, but construction start did not follow as planned. With its small base and still recovering outputs, this was enough to produce a significant delay in new deliveries and sway outputs of the entire segment.

Unlike other regional centers, the Belgrade market is still underdeveloped and substantially behind in stock size owing to a delayed transition and the lack of institutional funds and developers from the EU that already invested in Central and Eastern Europe. Because the downturn of 2008 and 2009 reduced financing, most office projects have been developed in a pre-leased manner, thus keeping vacancy at a constant low and rents at a stable high. Consequentially, the costs of renting class A office in Belgrade can go 40% higher than its regional peers such as Zagreb or Sofia.
The construction of office buildings has again accelerated in 2018 and 2019, and the project pipeline is slowly entering realization, meaning that new deliveries should start increasing the modern stock by a significant rate in the coming period and vacancy could also temporarily increase. Having in mind the very propulsive take-up figures in the last three years, there is no fear of a prolonged vacancy at the moment. Belgrade is the largest market and there was only 10.000m2 of new stock delivered in 2018, making a tiny contribution to the total of 860.000m2.
On the other hand, several larger projects entered realization in the same period, so another GLA 120.000m2 is under construction in Belgrade and will enter the market in H2 2020. The gap between demand and supply is already very wide and although bigger projects entered construction, it will take time for new offices to become available. Furthermore, most new projects will be leased before or during construction, so, the effect, if any, on the rent costs should be very limited in this cycle. Pressures on the demand side are set to remain strong in mid-term, so more investments will be necessary if Belgrade is to keep its regional competitiveness.
Belgrade’s office market is dominated by few real estate developers, the major ones being AFI Europe, MPC Properties, GTC Serbia and Erste Group. There is also a big stock of owned office space, and in these conditions many larger enterprises will easily find interest in building headquarters. At this stage, the office market would greatly benefit from the arrival of more long-term investors committed to this segment.
With economic and market outlooks stronger every year, the project pipeline in office construction is still proportionally weak and relatively short. Although the latest cycle saw a number of projects and their size growing, to keep pace with rising demand on the horizon, it will take much more investments. It could get problematic if the new cycle of projects was not ready by 2020.
Office reconstruction and renovation
There is also a great potential in the reconstruction of Serbia’s old stock of offices from the 70’s and 80’s as many derelict office buildings wait for reconstruction. These properties were abandoned when many companies collapsed during the transition, but locations are in most cases exclusive and central. What is the problem with the 30 or 40 years old offices is the lack of underground parking, which complicates fulfilling today’s urban standards and repels private developers.
Nevertheless, the share of renovation works in office outputs have been rising year by year and it is expected to sustain its growth pattern in the coming period. What is also supporting office construction has been the strong performance in industrial construction, as well as certain government projects on modernizing administrative buildings. The contribution of public investments in this segment is also rising, with more relaxed budgetary position after a successful fiscal consolidation.