With just 18 employees, DTZ Zadelhoff Tie Leung may not take up as much office space as some of its competitors. But when it comes to securing offices for its clients, the company boasts a healthy 20 percent of Prague's market share. Along with office space, the company has teams devoted to logistics and investments, with additional staff working on emerging areas such as property management, valuation and research.

Managing Director Jaromír Smetana, who joined the company in 1994, just two years after the Czech branch of DTZ Central Europe opened, sat down for a talk with The Prague Post about the office market's expansion beyond the capital, why location is everything, and why the industrial sector benefited from European Union accession more than any other segment of Czech real estate market.

The Prague Post: The office space market slowed in 2004. How did 2005 measure up?

Jaromír Smetana: We haven't closed our figures for 2005 yet, but we expect to end up with a figure of close to 180,000 square meters [1.9 million square feet] of takeup. That is certainly better than the previous year, which was about 136,000 square meters. The market went down from 2003 to 2004, but 2005, by the looks of it, was better than the year before, which is an encouraging sign.

TPP: What are the most notable trends in the current office space market?

JS: We can see three main trends right now. First, companies have become more cost-cautious. They are looking for more cost-efficient solutions and moving to areas with better car access, good parking and good public transport access. This is why projects like The Park, developed by AIG Lincoln, and BB Centrum are so successful.

We're also seeing a number of companies establishing their back-office functions, such as call centers, in Prague and elsewhere in the Czech Republic. This is driven by labor cost, which in comparison to Western countries is still significantly lower here. That's why you have companies like DHL taking up 15,000 square meters in The Park for their shared service center, for example.

That leads to a third trend: This particular segment of the Prague labor market is becoming saturated, so companies are looking at opening centers outside of Prague. This is encouraging, because so far the office market has been mainly Prague.

TPP: What factors will influence further expansion in that area?

JS: It will very much depend on labor costs in the Czech Republic compared to other countries in the region. Each time you close a deal of this nature, you are talking to a company that has been looking at Hungary, Poland, maybe Bucharest.

To secure these types of lettings, the Czech Republic will have to be competitive on total cost. While politicians in the Czech Republic always argue that our tax rate is actually not that high, they tend to forget about the tremendous extra cost of social and health security that we pay on top of salaries here. That will have an impact, and we'll see these kinds of companies looking further east in the future.

TPP: Is there much room in Prague for the office market to expand?

JS: Yes, and it certainly will. Prague has something like 1.8 million square meters of what we could consider reasonably modern office stock, and we could easily have a multiple of that.

TPP: What are the market drivers in the Prague office market?

JS: In Prague you expect to see financial services in the center, or on the fringes of the center. Then you have those companies that do not need to be in the city center, be they IT, telecoms, fast-moving consumer goods, pharmaceuticals and so on, most of whom will go to decentralized offices, typically in Prague 4 and 5. German-speaking companies perceive a location near the D5 motorway as an advantage, because of the connection to Plzeň, Nuremburg and so on.

TPP: The current office vacancy rate in Prague is around 13 percent. Does this make it easy for a company to find suitable premises?

JS: Two things affect vacancy rates: new supply, and space that is difficult to re-lease. If you calculated 13 percent of the total available stock here, you'd think there would be no problem finding an office in Prague, but that would be very misleading. If you look at available vacant premises, putting aside new buildings that haven't been let yet, there may not be much available that would suit a company's needs.

Bigger companies that require a lot of space will typically have to look at pre-lease, taking a commitment before a building is completed, or sometimes even before construction begins. Someone who needs 10,000 or 30,000 square meters will hardly find that readily available in a modern building. It's just not there.

TPP: So most of the empty offices are too small to meet the market's needs?

JS: There are many refurbished buildings that were originally residential buildings converted into offices. Most of them are limited in terms of the layout of the floor; their internal walls have to stay in place, which limits what you can do with the space.

TPP: Let's move on to the logistics market. Why is it growing so rapidly?

JS: Obviously, companies have to move and store their goods. With EU accession, there is a higher volume of goods being delivered, and companies want to do that in the most cost-efficient manner. If there is one single segment of the market that benefited the most from EU accession, it should certainly be the industrial sector, or warehousing.

The amount of warehouse space in the Czech Republic is close to a million square meters; I believe it will be a million by the end of the year. Over the last couple of years, takeup has been growing. In 2004 it was about 125,000 square meters, and in 2005 it was closer to 250,000 square meters.

TPP: What are the vacancy rates like in the logistics market?

JS: You actually have next to zero vacancy rates in terms of new warehouse premises, because most of the space, especially for the large requirements, is built to suit clients' particular requirements. So you can certainly see more demand coming to the market, and that trend will continue.

TPP: How is this market growth affecting cost?

JS: There is a lot of pressure on the developers to deliver a cost-efficient product. While we were talking 5 or 5.50 euros ($6–6.70/145–160 Kč) per square meter per month over the last couple years, net of service charge and VAT, for large requirements the rates are dropping. Nowadays, they are closer to 4 or 4.50 euros. Obviously, this depends in part on specifications, size and lease terms.

TPP: Where are these facilities being built?

JS: Because there is a link to road infrastructure, you would expect large projects to be concentrated on the main road connections, and that is exactly what is happening. Most are outside of Prague on motorways D1, D5 and D8. We're also beginning to see more development in Brno, and in some other areas such as Humpolec, which is about halfway between Prague and Brno.

TPP: What makes good warehouse space?

JS: Location is the single most important element, obviously. Then you have technical factors such as eaves height, loading docks and sufficient space to accommodate the trucks' turning radius — technical things. It has to be designed well, in technical terms, and it has to be located well.

Then the space has to be customized for the client. How will the company store its goods? Do they have racks and use forklifts, or will they put the goods on the floor? What will they store? For example, if they store chocolates they will need thermal installation to cool the space. So there are a number of technical issues that need to be considered.

TPP: What factors will influence the continuing growth of the logistics market?