Office-space glut spurs discounts

In a city that is still saturated with office space, often from development projects conceived pre-crisis, landlords are under increasing pressure to fill their buildings with tenants, meaning 2012 could be the year for businesses to upgrade their offices at a sizeable discount.

Actual office rental prices have remained stable in Prague, but because of the still high vacancy rate, especially in less popular quarters of the city, landlords are now offering significant rent-free periods for office tenants. Depending on the location and the quality of the office building, landlords are offering rent-free periods of six to nine months in some cases for tenants who sign long-term lease agreements, which are typically for five years, according to real estate advisers.

"Every [landlord] has been under pressure, and this is the case probably now more than at the beginning of 2011," said Bert Hesselink, associate director and head of office agency at CBRE, who explains that the overall amount of vacant office space in Prague actually came down slightly last year to 12 percent after a year of strong leasing activity. Still, owners with projects that are not full more than a year after completion are having to make concessions.

The high amount of leasing activity last year, which saw deals made on more than 320,000 square meters of office space, the highest amount since 2006, is a sign office tenants are taking advantage of market conditions to either renegotiate existing lease agreements or move offices into a nicer space.

The historically popular commercial neighborhoods of Prague 1, 4, 5 and 8 continue to attract the most office tenants and have a healthy balance of supply and demand, Hesselink said. After the crisis of 2008-09, he says, it's really "back to basics" for office tenants who want to be in established commercial districts and are less likely to take a risk on locating their company in a less frequented part of town.

Owners of office projects in districts like Prague 7 and 9, where the vacancy rates are among the highest and competition for tenants the toughest, have had to make the most sacrifices with rent holidays and free or discounted customizations to the premises.

This year, developers should deliver just over 111,000 square meters of new office space to the Prague market, according to CBRE, among them the B3 Pankrác project in Prague 4. Though the project is under construction in one of the most sought-after parts of the city, business director for developer Pankrác a.s. Vít Ulmann says it has not been exactly easy to find tenants. He says the project is already 30 percent leased, which is about average since most projects don't fill up before construction is completed. He characterized the market expectations for rent-free periods as "a little unfair."

"We must come down as much as possible with the price," said Ulmann. "But there is the basic rent and then the effective rent with incentives. When you sell a building you tell the new owner the basic rent that is charged but you don't say anything about all of the incentives that have had to be used to attract tenants."

Hesselink says that despite the new space in the pipeline, if tenants continue to take up space at the same rate, then the market should remain stable.

"I hope there will be a time of stagnation and there won't be too many new investors who want to start new buildings," said Ulmann.

For the time being, it is still a renters' market, and by all estimations companies will continue to take advantage of this environment in 2012.

"It's an opportunity for tenants to improve the quality of their space at a very low cost," said Hesselink.

Emily Thompson can be reached at
ethompson@praguepost.com