From a landlord’s perspective, shared service centers make near perfect tenants given their demand for large floorplates and typically long-lease periods. That makes it all the more important SSCs have good representation when looking for a property, says Valter Kalaus of tenant representation specialists VLK Cresa.
Hungary has become a preferred location for SSC largely because of labor costs, Kalaus says, and a ready availability of young people with good language skills, especially beyond the relatively common German or English. And if SSCs like Hungary, landlords in Hungary certainly like SSCs.
“With average leases between three and five years, SSCs tend to sign for a longer-term,” Kalaus explains. “The amount of IT infrastructure they put in makes them less likely to move, and that gives a feeling of greater comfort to the landlord.”
The sector also represents a sizeable share of the overall office market. Some 90 companies have around 100 SSCs in Hungary, mostly in Budapest, although secondary markets are beginning to develop. Collectively those centers employ around 40,000 people, the managing partner explains. Translate that into area, and it comes to 400,000-500,000 square meters of office space. “In other words, 10-12% of the entire Budapest office space is leased by SSCs and this ratio is even higher in the countryside.”
So, in theory, once established, SSCs tend to stay put, securing a large chunk of space for the landlord. But SSCs also expand, especially over the initial two-three years of establishment, and that can bring a few growing pains. “Moves come when an SSC is not able to expand within the building.” Flexibility is key here; Kalaus says an average office rental is for 700-800 sqm; a typical SSC is more likely to need 1,000 – 3,000 sqm, but not all at once. Staff numbers – and thus the need for more space – are ramped up over time.
“Selecting the right building, working with the right advisor who can give unbiased opinion of what building, what property and what location is best for their business is key to the SSC’s success,” the real estate professional says.
Room to Expand
Each client has their own needs, Kalaus says. Exact equations change from deal to deal, but location is important (staff need easy access to their work place), as is availability of the right kind of skill sets, and room to expand as required. This latter point, in particular, requires knowledge of a building. “You need to know the building; there might be space on the second floor because someone has moved out. You need to know the tenants opposite or above, to know who might be moving out in a year’s time.”
If these are challenges in Budapest, they are even more so in the countryside, because second-tier markets are only now starting to launch speculative developments. The 22,000 sqm Forest Offices in Debrecen, due to be delivered in the third quarter of 2018, is particularly significant in this regard, in that it is the first speculative office building outside of Budapest since the financial crisis.
“More recently we are seeing SSCs going to second-tier cities like Debrecen, Szeged, and Pécs, based on good universities in cities where there are young people willing to work in such centers.”
Finding office space, particularly with flexibility on availability, remains something of a chicken-and-egg challenge, Kalaus says. Even for a built-to-suit project, landlords want a tenant who will be in place for longer than just a few years. They may also want at least the possibility of exiting in the long-term, and that requires liquidity in the local market. And tenants, particularly SSCs, need to know there will be space available for them if they wish to expand.
But the challenges are worth overcoming. With so many new developments up for grabs, SSC tenants should be very prudent of the choice they make in order to find the best building and make the best deal.
“I personally have done a number of SSC deals, in Budapest and the countryside for big companies like AVIS, AGCO, Cemex and SEI. They are very interesting projects; they usually have very good teams established internally. They make for good tenants and good clients.”