High demand and a lack of new projects have caused the vacancy rate in Prague offices to fall, which currently stands at 7.26%. At the end of Q2 2023, the volume of new construction and refurbishment amounted to approximately 143,600 sqm and the total market size was 3.85 million sqm. The benchmark rental prices did not change from the previous quarter, however, the price of office fit-out is increasing due to ESG and modern standards. It can easily exceed EUR 1,000 per sqm. This is according to a survey conducted by Colliers, a leading provider of diversified professional services in commercial real estate and investment management.

The size of the Prague office market was approximately 3.85 million sqm at the end of Q2, with a further 143,600 sqm under construction, 47% of which will be delivered in 7 projects later this year. The ranking in the traditional ten submarkets has not changed. Prague 4 remains the largest submarket, followed by Prague 5 and Prague 8. On the other side of the ranking we have Prague 10, Prague 2 and Prague 3, which form the smallest part of the modern office portfolio. However, no new office construction has been started in Prague for a full twelve months. This will inevitably lead to a significant shortage of new space during 2025.

Vacancy rates are falling

In contrast, the vacancy rate has changed and this change was not just cosmetic. Compared to Q1 2023, it fell by a further 30 basis points to 7.26% in Q2. This is the fifth consecutive decline and the overall vacancy rate has fallen by 103 basis points compared to the last peak in Q1 2022. In absolute terms, the vacancy rate represents 279,600 sqm of office space immediately available to tenants. Prague 8 is still the most desirable submarket with a vacancy rate below 4% and only 24,400 sqm of immediately available space scattered throughout Karlín.

"Some additional vacancy, according to our estimates of 1.5% to 2.0%, is hidden in the sublease market. Occasionally we see new units coming on the market, but only some of them are suitable for subletting," explains Josef Stanko, senior analyst at Colliers.

Demand still high

Gross take-up in Q2 2023 was the highest for the quarter in five years, underlining the continued high activity in the leasing market. With a gross take-up of 148,800 sqm, it almost surpassed the Q4 2022 volume, which was the highest since 2018. The share of net take-up is 45%, including pre-lets.

In terms of the largest transactions in the past quarter, several exceptional renegotiations topped the table, with DHL Information Services and Microsoft transactions by far the largest. Of the ten largest transactions, six were renegotiations. DHL renegotiated an 18,000 sqm contract at The Park in Prague 4. Microsoft renegotiated a contract at Brumlovka Delta in Prague 4 and currently occupies approximately 16,100 sqm. The largest new lease was that of Novartis pharmaceutical company Sandoz, which leased 5,700 sqm in the Enterprise building in Prague 4 and will be located next to Novartis' Prague headquarters.

Top rental prices not rising, equipment costs pushed up by ESG and modern standards

The main rental benchmark prices in Prague city centre, inner city and outer city remained at the same level as last quarter, with the rest of the market slowly increasing slightly. Rents in general have not been as dependent on inflation over the past period and have been more responsive to the market situation.

Prime space in the centre of the capital could be rented for around EUR 27.00 per sqm per month. Inner city space, which forms a ring around the city centre, is available at rents up to approximately EUR 18.25 and outer city space up to EUR 16.00. All of these rent levels apply to well located class A office space in the upper hundreds of metres and cannot be applied to small or specific units, where the price can be significantly higher. The inner and outer city will inevitably come under pressure if announced projects come on stream in these locations in the near future which will inevitably price rents higher.

"When we talk about the affordability of offices, we must also mention their equipment. The accelerated evolution of the working environment has increased the demand for various modern materials and advanced AV equipment and, thanks to ESG, for a review of companies' operating procedures. All of this together can bring the fit-out budget of a new office to over 1,000 euros per square meter," explains Josef Stanko. However, many tenants already realise that office attractiveness and functionality is an important tool in the fight against low employee engagement and do not hesitate to invest these costs. Every bit of added comfort counts.

Problematic construction in Prague may threaten some investment opportunities in the Czech Republic

Problematic construction in Prague is not only unpleasant for local tenants, it can also represent the loss of some investment opportunities, most often to Poland or Slovakia. The current difficulties are probably mainly due to expensive financial costs, which make it impossible to implement projects. However, the whole market is still under pressure from unpredictable, bureaucratic and lengthy permitting processes and public reluctance to new construction, populistically encouraged by some municipal politicians. This unpleasant and unrepresentative state of the Czech building environment is on the way to improvement, but realistically it will take years. "On the other hand, thanks to this state of affairs, the market will remain predictable and stable, with an emphasis on renegotiations, a limited number of options for relocating tenants and opportunities for potential renovations of aging developments, as many buildings on the market are already in their third decade of operation," says Josef Stanko in conclusion, adding: "Optimistically, developers are preparing to implement many interesting projects in various locations and we are confident that these projects will become a reality in the next 5 to 7 years. Experienced and committed local developers are well on their way, and thanks to some local authorities, some of Prague's brownfield sites are starting to improve after years of stagnation, even without a new master plan."