These are uneasy times for office developers in Brno. Not that it’s easy for developers in any city, post-pandemic, but the robust growth the office sector once enjoyed thanks to new high-tech investments has slowed in recent years. Lukas Netolicky, Cushman & Wakefield’s Head of Regional Cities in the Czech Republic, says there’s little doubt that with at least 26,000 sqm of brand-new space due to hit the market this year, it’s a virtual certainty that vacancy (already +13%) will rise. The big question is: who will take the hit?
A newly published study by Cushman & Wakefield found that 27% of Brno’s vacant space is located in newly completed buildings. An even higher figure (38%) is located in buildings over 10 years old. With a large portion of current take-up coming from companies already present in Brno, can developers make offers that are attractive enough to get them to move? Larger tenants once thought little of jumping from one new office to another, exploiting the need of developers to fill their buildings. But inflation and rising fit-out costs have made that practice trickier these days.
“While companies may save on operating costs by changing their location and space, moving and fit-out expenses often exceed the savings they can achieve,” writes Cushman & Wakefield in its new report. It adds that some corporations are putting off relocation decisions because of uncertainties connected with the geopolitical situation. Added to this is the ongoing rethink when it comes to role of the office in the wake of the home office pandemic.
From Cushman & Wakefield’s new H2 2022 report on Brno’s office market
One of the oddest aspects of the current market is that while vacancy is expected to rise, so are rents – at least for new buildings. “The current prime rent is €16,” says Netolický. “But buildings that got underway in 2022 will require much higher rents. We have two projects whose owners are asking for around €20.” Two deals aren’t enough to declare a new prime rent, though.
The biggest lease deal in Brno for 2022 was Altas Copco’s 8,000 sqm renegotiation and expansion at Spielberk Tower B (brokered by Netolicky). FNZ also completed a 7,000 sqm renegotiation at CPI’s PP Rasinova building. But how about new deals? The largest new occupation lease comes in at just 1,750 sqm (KPMG at Vlněna office park).
Inevitably, rising costs will heap pressure on buildings built more than five years ago. They’re generally of poorer quality and waste far more energy, to begin with. “The best tenants will have a tendency to demand higher quality if they’re to pay higher operating costs. And this is something that only the newest buildings can deliver,” says Netolický, adding that along with the tenant’s willingness to accept higher rent, the owner’s participation in covering fit-out costs will also be needed. This trend is exacerbated by the ongoing battle to attract the best tenants (and to get their employees into the office).
On the other hand, having their offices in prime buildings in the right location is of key importance also when it comes to hiring. “Sometimes it doesn’t matter where you work,” says Netolický. “You do the same type of job whether you’re at one company or the other. So, if one of them has the top office building and the best attitude to employees and provides an ESG-friendly approach, you’ll probably go there. Of course it’s also about money, but if the salary is the same, you’re going to choose the better building.”
Employers understand this, so they’re eager to offer the best location and work environment in order to attract the best talent. This is likely to make them more willing to submit to higher operating costs of their offices, since they tend to constitute just a small percentage of their overall costs.
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