No new offices have started for the last three quarters. What’s stopping the developers? Is it concern about demand?
It’s a cocktail of concerns. You can’t really say for all developers what’s the biggest reason stopping them. We’ve spoken to several about it and we don’t hear too often that they’d be so worried about demand. That’s not surprising, because it’s been strong so far. Last year almost set a record in terms of take-up, with re-negotiations and new leases split nearly 50-50. That pattern has continued this year.
Then there’s the lack of financing and the fact that the developers don’t have any benchmarks on the yields they can achieve because of the lack of transactions. They can’t do proper budgeting because you need to work with yields for that. Then, when they see the rental levels they’d have to achieve, they worry that they’re way too high to put them on the market.
It sounds like there’s theoretical office demand – just not at rent levels that would make it viable for new construction.
I don’t agree with the word ‘theoretical’. We are representing a couple of larger occupiers who are ready to move despite having to relocate and despite the increased costs. These could be mitigated by downsizing. But basically, they don’t have any projects to choose from. For anyone who needs to relocate in the next 18 months, there are only a handful of projects — and not all of them are in the right locations. Nowadays, everything is about location. That’s why I don’t agree with the word ‘theoretical.’ The demand is there. It’s just a question how many companies would be willing to re-locate and to what extent the expected recession in USA will influence the local demand in the upcoming 18 months.
Do tenants understand that new space will simply cost more from now on?
They do if it’s a project already under construction. Now, prices have basically peaked and we do not expect further increases. Most landlords are in wait and see mode. But tenants are now coming to the understanding that it’s going to be more expensive. They’re already talking about rents they’ve never seen before thanks to indexation. The whole market basically jumped by minimum 10% overnight.
Do they know how much space they need yet and how many of their people will be coming back to the office?
There’s less uncertainty in that regards. In some cases, companies told us they’re even prepared to expand, either now or in the future. They really want their employees in the office, and some will even let them have their own desks while providing flexibility. Even the large corporations are ready to take decisions. What they need is flexibility in the lease. When uncertain about the future size, they’re ready to keep the same volume but they ask for reduction options or break options.
What’s happening with incentives, given how high fit out costs have gone?
It’s drastic. Now, we don’t see just see big fit out incentive contributions for developments as before, but even during renegotiations. It’s no surprise now to get €200 per sqm on renegotiations where tenants want to improve the interiors. Before, it was half that much or even less.
Aren’t existing tenants in a strong position now? Landlords must be scared they’ll be left with empty space.
That’s actually not true, because there’s a lack of new construction and new projects are getting more expensive. Landlords know what options the client really has and that relocating will be expensive. This gives the landlords a stronger negotiating position, so they don’t just give tenants everything they want.
What do you make of the difficulties US corporations have getting people to return to the office? You’re not worried that’s coming here?
It’s a different culture here in CE. Employers tend to provide less flexibility than in the US, even though the labor markets here are very tight. CE employees are more willing to work from the office. Commuting times usually play a major role for return to the office. Our colleagues in the London have 2-hour commutes. That’s four hours per day and it costs a fortune. The motivation to come to the office is understandably lower. Here you can commute comfortably even if you live outside Prague.
Also in ThePrime
ThePrime Pod: Stuart Jordan (Savills) – It’s all about the debt