The office market in Prague reached 3.85 million square meters at the end of the first quarter of this year. In the first 3 months of 2023, only 38,000 m2 of new office space was created. Only two projects were completed, Skanska's PORT7 in Prague 7, which brought 30,900 m2 of offices as well as extensive retail space, and J&T Real Estate's Red Court with an area of 7,100 m2. An additional 145,000 m2 was under active construction at the end of the first quarter, but only around 90,000 m2 is expected to be completed this year. Almost half of this volume has already secured tenants. "For the third quarter in a row, no new construction has started, and the outlook for the next period is not exactly optimistic either. There are currently 15 projects under construction, but only 5 are planned for 2024. This will translate into a significant shortfall in supply in approximately 15 to 24 months," comments Josef Stanko, senior analyst at Colliers
Office vacancies in Prague are falling, demand is growing
The vacancy rate fell by 22 basis points to 7.5% in the 1st quarter of this year. In absolute terms, this represents approximately 289,100 m2. Vacancies decreased in all districts except Prague 1 and Prague 7, where there was an increase due to the completion of the PORT7 project. The situation in individual sub-markets differs, for example in Prague 8 the vacancy rate is only 4.2%, in Prague 4 it is 5.8%.
"The volume of realized demand for the 1st quarter exceeded our expectations, although the share of renegotiations was significant. Gross realized demand, including renegotiations or subleases, reached 137,800 m2, which is the second highest volume achieved since the 4th quarter of 2019. In terms of net volume, which does not include renegotiations and subleases, 74,900 m2 was achieved, which is also one of the highest volumes for last three years. The share of renegotiations is approximately 45% of the gross volume," says Josef Stanko. According to him, most of the new demand has traditionally been absorbed by established partial office markets. The most newly occupied premises are located in Prague 5 (approximately 24,000 m2) and in Prague 8 (13,200 m2). The most renegotiations took place in Prague 8 (16,300 m2) and in Prague 4 (14,000 m2). The share of pre-leases is optimistic and amounts to 14.5%.
The largest transaction of the 1st quarter was the renegotiation of the e-commerce giant Amazon in Rustonka (approx. 11,800 m2), followed by the renegotiation of the consulting company Accenture in the Visionary building. The largest newly occupied area was the lease of 4,000 m2 to LEGO Production in Aviatica in Prague 5.
Serviced office centers on the rise
Serviced office centers are also experiencing a boom, which are constantly increasing their market share, as evidenced by the last few quarters, when the local operator Scott.Weber expanded or acquired several
new centers in established office locations. Serviced office services are based on flexible lease terms, thanks to which even the smallest companies or start-up entrepreneurs can use the comfort of top office buildings. For large companies and corporations, these services are a welcome option for short-term and project-oriented expansions.
Good news: prices are not rising yet
The main Prague prime reference indicators remained at roughly the same levels as in the last quarter. Prime offices in the city center can be purchased for approximately €27.00 per square meter per month. Some projects or specific small-scale units may request even more, but these are mostly one-off transactions that occur rather exceptionally. Prime office space within the wider center increased by €0.25 at the upper end of the range to around €18.25 per m2 per month, and the highest rents in the outer part of the city settled at €16.00 per m2 per month. "It is only a matter of time before the rent in the wider city center starts to reach the level of EUR 20.00 per square meter per month," adds Josef Stanko.
A slowdown in net demand can be expected in the following quarters of this year. With 2017 and 2018 marked by strong demand, a higher volume of renegotiations can be expected as standard five or seven year leases come to an end. "The problem may arise due to the low number of newly planned projects. There are only 5 planned for 2024 and 10 for 2025, some of which aren't even slated for the open market and some don't even have planning permission, meaning they may not be completed until the 18-24 month average construction phase 2026. Thanks to this, the vacancy rate and especially the supply of premium spaces can decrease," concludes Josef Stanko, adding that the larger office projects that come to the market will be of high quality and fully in line with ESG principles, as developers on the Czech market fully understand the necessity and the requirements of the upcoming non-financial reporting.