NEW OFFICE SPACE UNDER CONSTRUCTION IN PRAGUE INCREASING
- which meets the needs of occupier and investor demand for cost efficient, good quality and well located office space in Prague resulting in occupiers leaving behind vacant secondary space -
Even though today’s economic conditions remain challenging, the amount of office space under construction in Prague is increasing. Why are so many new office buildings under construction? Who will lease all these new offices? Is it too much space or maybe not enough? What will be the impact of this new construction on the structure of Prague’s office market and city landscape? Latest research from global property advisors CBRE gives answers to these questions.
“Why are so many new office buildings under construction?”
Firstly, from an international perspective, the Prague office market is still relatively undersupplied in terms of office space compared to other EMEA capitals. Also, the quality of Prague office buildings is still low – only less than 30% of office buildings is considered by investors as prime. Moreover, developers who have cash and don´t require external financing can achieve a higher return on investment by developing good quality office projects, rent them at competitive terms and conditions and then sell them to investors compared to investing in standing assets, i.e. existing, income-producing (i.e. rented) office buildings.
“Who will lease all these new offices?”
Occupiers are prepared to relocate in case the new office space is in the right location and of proper quality to enable them to attract or retain key talent and to save costs on real estate. Bert Hesselink, Head of Office Agency at CBRE, comments on current trend: “Especially companies from the sectors Professional Services, IT and Pharmaceutical have proven to be significant drivers of demand for office space since 2009 in Prague and we expect will continue to be. On the other hand, the share of demand for office space from the banking and financial sector as well as the construction sector has declined since 2009.”
“Is too much new office space under construction or maybe not enough?”
The average annual amount of new supply delivered to the market declined by circa 50% since 2009 compared to average annual pre-2009 levels. In the last 2 years, the additional amount of office space supplied to the market was more or less absorbed resulting in the vacancy rate remaining stable. Due to lower levels of new completion we even expect that more office space will be absorbed than new space being supplied resulting in a slight decrease of the vacancy rate in 2013. Due to higher levels of new completions expected again for 2014 we expect the vacancy rate to increase up to 2010 levels potentially close to 14% by the end of 2014 from circa 12% now.
“What will be the impact on Prague´s office market and city landscape”
“Prague will follow trends already (being) seen in some Western European capitals, in which when occupiers are taking new space, they tend to vacate similar, or even larger, volumes of second hand space. This trend will have a notable impact on the profile of available stock across Europe with Prague being no exception”, comments on this development Jana Prokopcová, Head of Research at CBRE. With areas of largely unwanted secondary space being vacated when occupiers upgrade their space, the quality profile of available office space in many European cities is deteriorating. With weak demand for this type of space, there is a growing number of European markets reporting that landlords of secondary stock are increasingly looking at converting outdated office buildings into alternative uses. We expect to see this trend in Prague as well. Especially in central locations we expect some buildings to be re-developed back to residential premises.