In 2020, the office market in Brno saw a decline in all indicators that Cushman & Wakefield has monitored in the long-term perspective: the number of projects completed and under construction decreased, as did the absorption rate and demand for space. The culprit is largely the impact of the coronavirus crisis: forced expansion of work from home, reassessment of companies’ future needs for space, waiting and overall uncertainty. This year should bring a change, however: after a year of home office, it is proving untenable in the long run, so companies will certainly not get rid of offices on a mass scale. They will have to address their needs which they put off last year. At the same time, Brno is witnessing the preparations for the development of the largest number of new office schemes in the recorded history.
The market dropped year-on-year last year
Last year was characterised by stagnation on Brno’s office market: companies had their employees work from home on a large scale and started reassessing their plans for the future use and size of their office premises. The wait for the decision of the management teams, often international, of shared service centres that prevail in the tenant structure in Brno, was inevitably reflected in a downscaling of the activity in terms of relocations and expansion of premises. The relocations that did take place were primarily the results of activities commenced in the previous year 2019. As a result, no new demand was generated in Brno in 2020 (except for cases of necessity) and the overall take-up decreased in year-on-year terms.
Lukáš Netolický, Head of Regional Cities CZ, Cushman & Wakefield: “The principal reason for the large year-on-year difference in take-up is that both of the years compared were exceptional. Whereas 2019 was a record-breaking year in terms of leased space, because three major companies were relocating at a time, the year 2020 was in turn affected by an extreme trend related to the uncertainty caused by the coronavirus crisis. This is why it is more fitting to compare it with a long-term average – the decrease is about 20 per cent compared with 2014 to 2018. ”
Supply of space to grow in the future
The supply of new office space in 2020 was lower than in the preceding year – the number of completed development and refurbishment projects was one-third lower. The reason is not just the coronavirus pandemic, though – projects are often delayed due to complex and lengthy permission procedures. As a result, we will see a further decrease in terms of completed projects this year, but a record-breaking number of projects are now at the preparatory stage. The supply of space should increase again in the years to come: as of now, we can confirm an increase by 93,000 sq m of office space by the end of 2023, and in 2024 – if all projects are developed – it could even exceed the long-term maximum volume of 2019 thanks to the potential for the development of up to 131,000 sq m.
Brno will build its way out of the crisis
It is primarily smaller Czech companies that are currently building new office stock in Brno. Eight projects are under construction, with a total area of up-to-date office space of 58,600 square metres, of which about one-third should be completed this year.
Some of the initially planned projects were put on the back burner – mostly by large international developers – with many postponed until after 2024. According to the currently available information, many of them should get going again this year. At this point, projects with a total area of about 200,000 square metres are planned for the period until 2024, but their completion should be expected with a grain of salt – it is likely that not all of them will come to fruition.
Lukáš Netolický, Head of Regional Cities CZ, Cushman & Wakefield: “We can confirm now, though, that the Brno office market is likely to grow by 13 per cent of the current volume by 2023. This figure could eventually be even higher, since some of the projects planned for 2024 could progress to the construction stage earlier, further increasing the total development volume, though this depends on the developments in take-up, in particular completed pre-leases, if the situation is favourable. The past crisis showed that fortune favours the bold: those who developed projects during a crisis benefited from an advantage during the economic recovery.”
An increase in the supply of flexible space is an interesting trend currently observed in office space development in Brno: each large office scheme currently plans on using some of the space for flexible offices.
Vacancy rate not to drop below 10 per cent
At the end of 2020, there were 78,600 square metres of vacant modern office space in Brno, increasing the vacancy rate to 11.9 per cent. This year, we expect the vacancy rate to decrease to approximately 10 per cent as a result of the small amount of newly completed stock. For the future, it will depend on whether the demand exceeds the long-term average – if not, vacancy rate may exceed 13 per cent by 2024, and as much as 17 per cent if new development grows.
Lukáš Netolický, Head of Regional Cities CZ, Cushman & Wakefield: “Our prediction for the vacancy trend expects that the demand for office space this year will be greater than the average for 2014 to 2018, but with a higher rate of renegotiation than in that period; in the next two years, vacancy will settle on the average of those years. We expect new development to get the market going, though it will clash with companies’ prudence with regard to investments and the flexibility of commitment.”
Take-up in 2020
The gross take-up (including renegotiations) reached 19,800 square metres in the latter half of 2020, a decrease of five per cent compared to the preceding half-year and 62 per cent in a year-on-year comparison. The highest share (31 per cent) in the take-up is attributable to IT businesses, a traditional segment in Brno.
Lukáš Netolický, Head of Regional Cities CZ, Cushman & Wakefield: “When speaking to companies, I have noticed that, given the current situation, they tend to renegotiate their existing contracts to obtain more favourable terms rather than considering relocations to new premises on a large scale. All businesses seek to streamline the use and size of their offices following the home office outburst, but the earlier assumptions to the effect that offices will no longer be needed have definitely not been confirmed. After a year of working from home across the board, it has been confirmed that relying exclusively on this model is not desirable – management teams do not endorse it because of reduced performance and employees do not favour it due to a lack of contact with colleagues. Certain types of work will most likely relocate to home offices, however, with companies offering their employees flexible solutions combining work at home and in the office. The specific forms of such solutions will be highly individual: to a great extent, this will depend on the company’s field of business, though other aspects such as the employees’ average age will play a role as well.”
Relocating to new premises will only be acceptable for companies if it does not result in an increase in operating costs, and the cost of furnishing new premises will always have to be borne by the landlord. At any rate, considering the continuing economic uncertainty, we cannot expect firms to expand considerably or new companies to arrive on the market in Brno this year.
Rents will decrease, becoming accessible to more companies
The pandemic has affected the prime rents on Brno’s office market too. A decrease from the initial 16 to 15 Euros per month per square metre was observable in particular in the latter half of the year, and we expect a further decrease this year. The initial amount was slightly exaggerated and untenable in the long run anyway, elevating Brno among the top comparable cities in other Central and Eastern European countries.
As the case was during the past crisis, the effect of the decrease in rent on the market may be that the lower price will allow property owners to attract new occupiers who could not afford to lease modern office spaces at the former prices.