by Ákos Budai | Interview

The pandemic has caused a lot of change on the market but these changes can easily be viewed as an opportunity for further growth as Jonathan Hallett, Head of Central & Eastern Europe at Cushman & Wakefield demonstrates. He talked to Property Forum about the results of the last year and shared his expectations for the future of work and the CEE advisory market.


How was the year 2020 for C&W globally and in CEE?

Last year our income was down by about 15% globally as real estate was one of the sectors hit hardest by COVID-19. Our income in CEE went down by 13% and our EBITDA only decreased by 5% compared to what was a record year in 2019. This is because we were very fast to react to the market. We took some really quick decisions in terms of which areas we need to invest in and which areas we need to make cost cuts in. I think what's fairly positive about the Central & Eastern European region is that labour laws are flexible to allow you to be adaptive to the current market.

Were there any significant differences between the CEE countries in terms of performance last year?

In general, the impact of the pandemic was stronger in the bigger markets, where we have a bigger exposure. Poland, the largest market in the region, saw the largest decline in offices and the strongest growth in the industrial market. In Hungary, on the other hand, which is a smaller market, we had a fantastic year in 2020 with the income level pretty much unchanged from 2019.

Jonathan Hallett

Jonathan Hallett

Partner | Head of Central & Eastern Europe
Cushman & Wakefield

Jonathan Hallett as a Head of Central & Eastern Europe oversees Cushman & Wakefield’s operations across the region, with over 1500 staff in 6 countries (Czech Republic, Slovakia, Hungary, Poland, Russia and Turkey), and involved in all aspects of property services. He is also overseeing the Cushman & Wakefield Alliance partners in further 11 countries across the CEE region. Jonathan is a member of the EMEA Management Leadership Team and the Managing Partner of Cushman & Wakefield in the Czech Republic. He became a Partner in 2001 and is a member of the RICS and the ICSC. Jonathan has international retail experience gained over 30 years working in Brussels, Paris, London and Central Europe. More »

What are your expectations for 2021? Do you expect a strong rebound in market activity?

Our income and EBITDA across the whole region for Q1 2021 is actually higher than it was in Q1 2020 when COVID-19 hadn't disrupted the market yet. I get that it's only the first quarter and it's not a measurement of the whole year, but it still tells you something. Our capital markets sector is not far behind where it was in Q1 last year and the growth is being driven by transactions across offices, shopping centres, industrial and residential - all the asset classes. I think that we won't see for this year a significant reduction in volumes compared to last year unless there's a real issue with the vaccination going forward. We are off to a very strong start to 2021.

The most popular topic of the year so far has been predictions about the office market. What’s the office of the future going to look like in your opinion?

I think the office of the future is no longer going to be that headquarters building where everyone works. That headquarters building is going to be the key location for innovation, collaboration and decision-making but the office of the future is going to be the flexibility of working in three or four other places, whether it's a café, a satellite office, a co-working hub, a hotel lobby or something else.

Flexibility is key and recognizing this is very easy but actually understanding the impact is a lot more difficult. The physical reality is that if you are a 1,000 sqm occupier and you've got several years left on your lease, downsizing today is very, very difficult. Getting rid of some of the space and providing access to another tenant might not be physically possible in most cases. And even if you do these adjustments because you have to lay off some staff, you might have to increase the staff again in a few years and then you've got no space to grow. Let's not forget that tenants that occupy 1,000 sqm or less probably make up 90% of the market in our region. The impact has been different and more significant for the major multi-level occupiers that have the physical possibility to sublet a floor without access issues. That's where we are seeing that some corporates are taking decisions to make immediate changes to their real estate footprint, which will have an impact on the office market in the short term.

So is it safe to say that demand for new office stock will decrease in the short term?

I don't think demand will change significantly. In the office sector, there is a certain number of leases that expire every single year and with all of those lease agreements, there is some activity – a renewal, a renegotiation or a relocation. Even lease renewals mean that there's some sort of market movement in play, be that a simple refurbishment or the realignment of the space.

Do you expect the gap between older and brand new stock to widen because of changing workplace regimes and tenant requirements?

I think it depends on the level of quality of the building. We see a big opportunity in buildings that are 10 to 15 years old because they've probably been rented at slightly lower rents than brand new buildings but they have the best opportunity to upgrade the technology in line with today's trends and such refurbishments have already been priced in by the investor. We actually see a great opportunity in being able to drive rents upwards in a lot of these older buildings. Buildings that are maybe 5-10 years old are in a more difficult situation because they probably have got technology that's okay for today but will suffer over the next few years.

What are your demand expectations for the other asset classes?

Logistics is definitely looking at a strong growth period. There are two different trends fuelling this growth, which have both been accelerated by COVID-19. One is that companies are nearshoring as the pandemic highlighted the issues around current supply chains. The second trend is the rapid growth of e-commerce. I must add that logistics yields during the past three months in our region have gone down by 20-25%. Investors are starting to realize that a big box with a 10-year lease to an international company in Prague shouldn't be so differently valued from a similar asset located in Munich only less than 5 hours away.

Even though COVID-19 has accelerated the move to online in retail by about five years, it has become clear that the physical store is here to stay. What we're seeing is that a lot of retailers are now taking the opportunity to get prime locations such as Prague’s Na Příkopě that they couldn't get before the pandemic. We've got a lot of transactions going on in the high streets today, not with lower rent compared to the past but with incentives (rent reductions) for the next few years. I think the shopping centre business will be hit slightly harder. Local service orientated shopping centres have actually been functioning pretty well, but large regional centres that have adapted global trends such as a focus on F&B and entertainment are going to take longer to come back. Also, on the occupier side, we have seen a number of international retailers, particularly in the fashion sector, that have pulled out of the market so that's going to create a bit of change.

As for the hotel sector, I expect a very quick return in terms of tourism and a slow return in terms of business travel. We're doing fewer hotel capital markets transactions in the market today, but we're doing more operator selections than we've ever done. So interestingly, there are a lot of new hotel brands looking to enter the market, a lot of them from the lifestyle sector. A lot of these operators are normally looking for buildings, which are going to be ready in a year or two and I think that the market will have improved by then.

I should also mention residential, which is set to grow significantly. In markets like Germany, the sector already accounts for 10% of the total investment volume and that's expected to triple over the next 10 years. Residential is going to be a major play in the future, across Europe. We're already seeing that in the core markets of the region, such as Poland and the Czech Republic, capital is really looking at the residential sector even though the available stock is still quite low.

The real estate advisory market in the region has seen a lot of movement in recent years with new ventures and strategic affiliations. Are you sensing that the market is getting saturated?

I think one of the things that COVID has done is that it has made people reflect a lot on themselves. Not only companies but individuals have significantly reflected on the well-being of their lifestyles, the wellbeing of how they do business and the opportunities they see in their lives. I think that this has been part of the drive behind these changes within the market. Some people have realized that they might not want to work for a corporate company for the rest of their lives, or maybe they do want to work for a corporate company when they haven't before. So, all in all, I think the movement of people that we're seeing on the market is really about wellbeing and it represents potential growth.

At Cushman & Wakefield, our attrition rates have been very healthy. If I'm looking at our leadership across the region, the only changes that have happened have been changes that we have made. We took every single one of those decisions because change in our view is very positive and I think it drives energy into the business. We're in an industry that will never ever sit still and if you're ahead and you sit still for a moment, you fall behind.