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Companies rather renegotiate than relocate

11/04/2024

The five largest lease transactions on the Prague office market last year were renegotiations of existing contracts. Increasingly, companies whose lease contracts are expiring prefer this to moving to new premises. One of the reasons are the high office fit out costs – which in Prague are the highest in the CEE region and similar to those in Paris. Last year they averaged EUR 1,252 per square metre in Prague, an 8% year-on-year increase. The analysis of fit out costs is presented in Cushman & Wakefield’s annual EMEA Fit Out Cost Guide.


The cost of fitting out new offices is one of the factors companies consider when deciding whether to stay in their existing premises or move to new ones. At the current level - in Prague, it is an average of EUR 1,252 per square metre - it is a significant item that often contributes to the decision to extend a current lease. This was also the solution chosen by tenants in last year's five largest office transactions in Prague.

 

Table 1: Five largest office transactions in Prague in 2023

 Building name  Tenant  Sector  Leased type  Leased area (sq m)  
 Brumlovka Delta     MIcrosoft     IT  renegotiation     16,050 
 The Park - building 5     DHL Information Services     IT  renegotiation  14,800 
 Enterprise  Avast Software  IT  renegotiation  12,200 
 Rustonka R1  Amazon   Retail/E-commerce     renegotiation  11,800 
 Five  MSD Czech Republic  Pharmaceutical  renegotiation  11,300 


Radka Novak, Head of Office Agency CEE, Cushman & Wakefield: "Our statistics show that tenants more often choose to stay in their existing premises and renegotiate their leases. Most are now downsizing their offices - but it also depends on the business and the size of the company. Financial institutions are the most likely to downsize their offices, especially shared service centres, which are most affected by the remote work model. Conversely, technology firms are often expanding, as are professional business services firms."


Staying in the present offices doesn't necessarily mean preserving their shape. Companies are looking to ensure their spaces are used efficiently and meet current trends. The expansion of working remotely entails a reduction in the number of workstations and desk sharing, but on the other hand it also requires the creation of new zones for video conferencing, community spaces for collaboration or, conversely, those for focused individual work. The environment should also encourage employees to spend at least some of their time in the office.


Glyn Evans, Head of Design + Build EMEA, Cushman & Wakefield: “Employers are looking to create environments that meet current workplace trends and provide an attractive alternative to working from home. It needs to be flexible enough and offer conditions for different types of work activities, provide quality technical equipment, and allow for relaxation or socialisation. Sustainability, diversity and inclusion requirements also play an important role. All of this is now reflected in office design, fit out quality and the choice of the building itself."


Thus, even office building owners have to motivate tenants to choose their scheme - whether new ones to move in or existing ones to stay. One incentive is fit out contributions which are given to both new tenants and those renegotiating their leases in their existing spaces.


Radka Novak, Head of Office Agency CEE, Cushman & Wakefield: “In the past two years, the fit out contribution almost doubled, which also applies to renegotiations. Landlords understand the need to invest in remodelling existing premises, which can help to keep tenants in older buildings. If a completely new fit out is built, the landlord is able to cover up to 40% of the tenant’s costs with their contribution. In case of rebuilding existing premises, the costs can be as much as 40% lower; still, the landlord’s contribution is necessary.”


The biggest item is construction costs

In the EMEA cities compared, construction costs alone represent the largest item of fit out costs, reaching 50% in Prague. However, the cost of furniture and technical equipment is also significant, typically accounting for around one fifth, in Prague exactly 20%. The cost of technical (AV and IT) equipment is an equally high item in the local budget, with consultancy services related to the design of new offices and its implementation accounting for 10%.

chart, office equipmnet costs


High construction costs are driven by increases in the price of construction work and materials. According to Eurostat data, construction prices across the eurozone and in the Czech Republic increased by around 12% year-on-year in 2022, and by a further 6% in 2023. The COVID-19 pandemic and the war in Ukraine have caused shortages of many construction materials and therefore a rapid increase in their prices. According to data from the CRS price system, the aggregate materials price index in the Czech Republic has risen by around 40% between the beginning of 2021 and the end of 2022. In 2023, there is a gradual decline, but in early 2024 prices are still above pre-pandemic levels.

 

Prague: the most expensive in CEE, comparable to Paris or Amsterdam


In Prague, office fit out costs averaged EUR 1,252 per square metre last year. Within the CEE region, Warsaw and Budapest followed (EUR 1,250 per sq m and EUR 1,200 per sq m, respectively).

Table 2: Total fit out costs in CEE

 

City 

 Total fit out costs (EUR/ sq m) 

Year-on-year change  (2024 vs. 2023)

 Prague     1,252  +8%
 Warsaw  1,250  +8%
 Budapest     1,200  +9%
 Bratislava  1,140  +10%
 Bucharest  943   n/a
 Belgrade  880  -21%
 Sofia  750  +7%


Across the EMEA region, London came top with an average fit out cost of EUR 2,629 per square metre. In other Western European cities, these costs are slightly lower than London, but remain above Prague in majority of them. Amsterdam (EUR 1,200 per sq m) or Paris (EUR 1,190 per sq m) reach levels similar to those in the Czech capital.

Glyn Evans, Head of Design + Build EMEA, Cushman & Wakefield: “It is the combination of sharp inflation and rising material prices, in addition to the low unemployment and high levels of construction activity in recent years, that have driven fit out costs in Prague up to levels comparable with some Western European cities.”

Table 3: Europe's "most expensive" cities, with total fit out costs exceeding eur 2,000 per sq m

City     Total fit out costs (EUR/ sq m)
 London     2,629  
 Hamburg     2,463
 Munich  2,385
 Frankfurt  2,361
 Berlin  2,287
 Manchester     2,231
 Birmingham  2,165
 Dublin  2,060
 Glasgow  2,055



Glyn Evans, Head of Design + Build EMEA, Cushman & Wakefield: “Whilst in the Czech Republic we don’t expect any significant decrease in construction costs in the near future, we are already seeing flattening material prices with improved availability. In addition, labour is also becoming more available in the construction industry due to the slowdown in development, which should also help increase competitiveness within the industry.”

Media Contact

Michaela Sedlbauerov
Michaela Šedlbauerová

Head of Marketing Czech Republic • Prague

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