British-born Andrew Thompson, 34, is a partner in the Prague office of Cushman & Wakefield, Healey & Baker, one of the foremost international players on the office market scene. The head of the company's office leasing team, Thompson sat down with The Prague Post recently to review trends in the market in 2005, Prague's ranking on the "Most Expensive Office Space" charts, and what he expects from the market in the future.

The Prague Post: Looking back, what trends did you see in the commercial real estate market in 2005?

Andrew Thompson: In Prague, takeup and supply have remained generally in balance in the last few years. Last year it tipped a little more in favor of the landlords, in that there was more takeup than supply. That was particularly evident in the city center, where there was no new supply and there won't be any until 2007, when new buildings are completed. There are up to 20,000 square meters [215,300 square feet] of new takeup every year in the city center, but there's no new supply, and that puts pressure on rentals to increase. The market is effectively set by the city center rates in that the top rents are always payable there. So if the pressure on the city center rents increases, then that effects the rest of the market. We haven't seen that upward pressure yet, but it's there, because there is no supply. And that will continue through the rest of 2006.

At the edge of the center, which means Smíchov and Karlín, particularly, and out of town in Chodov and Nové Butovice, supply and demand remain in balance. The rents there are relatively static. The total vacancy rate went down a bit because there was more takeup than new supply, so it dropped from around 15 percent to 12.5 percent. That's encouraging for landlords — until the development cycle comes back into play. Because it takes 14–18 months to complete a building, and a longer period before that for the planning and building-permit process, there's always a lag period in the development cycle between recognizing when there is a shortage of supply and the demand is there and actually accommodating that with new buildings.

TPP: What were the biggest areas of development?

AT: For the last few years, about 70 percent of the takeup has been in new builds. Tenants are moving out of refurbished, low-quality buildings into new buildings. I think commentators looked at the market five years ago and said there wasn't much more of a market. But what's actually happened is that as developers have built new buildings, the tenants have filled them.

Interestingly, two of the biggest deals last year were financial companies that both took space in Prague 8. Now we have Deloitte, KPMG and Allianz all in the area from Millennium Plaza in Prague 1 up toward River City Prague. Over the last few years, the area that has been marked by financial services, real estate agents, banks and lawyers has been Na Příkopě. But there are no development sites in that area. So there have been a multitude of development sites gearing up in Prague 8, which is becoming almost an extension of the existing city center.

Out of town, there are two main areas of development. Chodov is on the metro's red line and on the D1 motorway that goes down to Vienna and Bratislava. That's where Sun took space, as well as Computer Associates. And the other area is up by Nové Butovice. SAP went up there. These companies are opening shared service centers for back-office functions, like administration or payroll or IT, ideally in one cheaper center where the infrastructure is still good — and the Czech Republic is one of those areas. So are Slovakia, Hungary and Poland, but the Czechs have done particularly well with shared service centers. Prague and Brno are both benefiting from this trend.

TPP: Is the availability of modern office space a significant factor in leading international companies to establish centers in Prague?

AT: Yes, it's a key factor. A lot of these shared service centers and call centers make very quick decisions. Some of these companies think for two or three years before they decide to open one, but once that decision is made, any delay is a loss of cost-savings. So they just want to be up and running as soon as they decide they're going to move to Prague. DHL had a phenomenal completion requirement in terms of the size of the new building, which was designed for them with a specific underground IT center. It was phenomenal that they managed to get the thing completed. But they wouldn't have come here if they didn't have the confidence. While all these guys talk about labor skills, unemployment rate and labor cost, if there isn't a facility for them to move into, none of that makes any sense. So it is a key factor.

TPP: How is the market outside of Prague developing?

AT: We started seeing a lot of demand for Brno three or four years ago, and the developers were quite slow to react. But finally, about a year and a half ago, the developers started to get sites together with infrastructure. As they've started to build, we've seen a lot of new interest. For example, Lufthansa is looking at opening a call center in Brno to deal with calls from all over Europe. If you go to their office, everyone's got different newspapers out from Afghanistan or Uzbekistan, or the Moscow Times. There's enough of a skill set with languages that they can actually run something like that from a place like Brno. And there's also a cost-saving in terms of running it from Brno instead of Prague, because salaries are lower there.

Regional centers have started to develop. Brno has been the first, but we're starting to see development in Plzeň, Ostrava, Olomouc and a little bit in České Budějovice. We're taking calls every week about the regional market, and I think it will continue to be a trend as long as the infrastructure is there and companies are making cost savings and don't have to be in Prague.

Of course, some companies choose Prague despite the other advantages in terms of cost savings and such in Brno, because Prague is where it has already happened. It's tried and tested. And that's an issue to get around for the regions; once one or two companies go there, then we'll probably see other companies following them.

TPP: Prague recently dropped down the list on the World's Most Expensive Office Space ranking. Who does this benefit?

AT: It's good for Prague. Office space usually represents about 15 percent of any service company's total costs. Labor is the highest and maybe transport or IT come in, but typically office space is the second-most expensive item on the balance sheet, so it's an important element. Therefore, if we're cheaper than our competitors, who typically are Budapest, increasingly Warsaw, and the regional markets in Poland as well as Bratislava, then it's an advantage for us in terms of securing new investments.

Landlords would obviously rather see rents increasing, but that comes with demand. As long as we can remain competitive and make money from a landlord perspective, then it works. And as long as there's more takeup than new supply, that pushes the price up.

The reality is that it's a marketing issue more than anything else. Companies definitely do look at office space as an issue, but the difference between Hungary, Poland and the Czech Republic isn't so huge. It will finally come down to the costs and skill levels of employees. But it is another marketing edge — and it depends how we use it, as a city or a country.

TPP: How does Prague compare to other cities in terms of making quality office space available when it is needed?

AT: I think it's very strong. We have a very strong network of offices and a very strong public transport infrastructure in Prague, so I think we compare very favorably, and that's one reason companies come here. The shared service centers have favored the Czech Republic. The call centers have, in the past, tended to favor slightly more Slovakia and Hungary. Exactly why that is, I really couldn't tell you, but it seems to be the feeling that a couple of bigger call centers with less skilled labor have gone to Slovakia and Hungary, and the shared service centers, which require a bit more specifically skilled labor, come to the Czech Republic.

TPP: Where would you guess we'll be in the rankings next year, and more speculatively, in five years?

AT: Next year will be about the same. The last four or five years have been kind of similar — Poland has come down in the rankings, pressures on the rents have brought it down so it's a cheaper location than it was previously. Five years from here, I think there's an argument to say that places like Romania will become more important centers. Romania has fantastic language skills, so some of the investment coming here may well move to Bucharest. But I don't really see us jumping in five years to becoming much more expensive or less expensive. Some countries might move around us, but even in another five years I don't see a big change.

TPP: What were some of the major deals in 2005, and why were they successful?