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Construction of New Office Space in Prague Continues at Sustainable Levels

Research by cushman & Wakefield suggests Demand for office space in prague and Warsaw to be closely linked to the performance of the domestic economy.

Demand for modern office space in Prague shows growth patterns comparable with the development of Czech GDP, but with a time lag of three quarters. An improvement in economic conditions thus generates new demand for offices in approximately nine months.

„The history of Prague’s office market shows that even in the case of economic standstill there is demand for around 80,000 sq m of new offices per year. Performance of the economy additionally increases the overall volume by roughly 16,000 sq m for every 100 bps of GDP growth,“ explains Alexander Rafajlovič, Associate at the Capital Markets Group of Cushman & Wakefield.

In the CEE region, only Warsaw exhibits a similar take-up pattern. On the other hand, Bratislava, Budapest or Bucharest are more influenced by external demand factors – such as outsourcing centres. These services are less dependent on the state of the local economy and paradoxically, higher unemployment can help spur demand by extending the pool of potential employees and keeping costs down.

„Prague and Warsaw both have an advantage due to a number of companies overseeing their regional activities from there. The size and wealth of the local market also make these markets attractive for firms from the services and trade sector,“ adds Radka Novak, Partner and Head of office leasing at Cushman & Wakefield.

Absorption of office space measured as the change in occupied stock in a period has been positive in Prague with the exception of 2010. Both companies moving to new premises as well as changes to the employment structure are the reason behind this. Calculations by Cushman & Wakefield suggest that since 2004, the number of office employees has grown by 10 % while the volume of occupied stock increased by 75 % in the same period. It is hence evident that replacement of office stock is an important element of market dynamics.

Around 105,000 sq m of new office space is expected to be delivered in Prague this year, with further 131,000 sq m set to hit the market in 2013. Currently the bulk of development activity is focused on established locations – Prague 1, Karlín and the Pankrác/Budějovická area. The popularity of these submarkets is driven by their proximity to the city centre, with metro access playing a critical role.

Office projects totalling around 500,000 sq m could be ready to be built in two to three years, with developers having outlined plans for further 1 million sq m in the pipeline. Given the real absorption capacity of the market, only a fraction of these volumes are likely to succeed with occupiers and investors. These projects will most likely be located in established locations and built by experienced developers.

Offices in Prague traditionally represent the most sought after product in the domestic investment market. Buildings worth more than €5 billion have been traded in the last decade, while their share on the total market volume reached almost 50 %. Office buildings in Prague worth of €330 million traded so far this year. Cushman & Wakefield estimate the total 2012 result to be close to €600 million, on par with last year’s volume.