Companies in Prague are moving less and less: seven out of ten contracts are renegotiations, rents have risen by half
A shortage of affordable space, rising rents and an uncertain outlook are behind the slowdown in office lettings in Prague. Currently, seven out of ten signed leases are renegotiations, i.e. renegotiating or extending the existing relationship between the landlord and the tenant. According to real estate consultancy 108 REAL ESTATE, the main reason among those listed is the rise in rents, which have increased by 50% or more over the past five to seven years for the same location and comparable offices.
“Although last year it still appeared that companies would abandon the hybrid working model en masse, rental levels have prompted employers to continue using home working. There are not enough companies on the market willing to take on the costs associated with moving and the required rent levels. This is also why we are seeing several plans to convert older office buildings into rental or owner-occupied housing,” comments on the development Lena Popová, Head of Office Leasing at 108 REAL ESTATE. Based on her team’s experience, the current psychological threshold for tenants is around EUR 23/m² per month.
However, new high-quality office space is most commonly offered even in Prague’s wider city centre at EUR 28–30/m² per month. In addition, an initial investment in fitting out the premises (capex) of EUR 1,000–2,000/m² must be taken into account. High rents are the logical result of rising costs of all inputs, from development land, energy and financing to construction work and materials, as well as the impact of the inflationary spiral. As a result, pre-lettings are also falling sharply – companies are considering the considerable costs associated with moving and fitting out new premises.
Tenants’ cautious approach is further increasing the caution of developers and financing banks. Those that can are focusing on the more liquid residential segment. This applies both to locations attractive from tenants’ perspective (primarily Karlín) and to development areas defined by the Metropolitan Plan – especially transformation areas in Prague 3, 8 and 9 or the vicinity of the new metro line D in Prague 4, mainly in Krč. In the short term, however, according to 108 REAL ESTATE, the market could gain momentum thanks to greater competition and pressure on rent levels – approximately 300,000 m² is expected to be added in new and previously unfinished buildings.
Looking at Prague’s Smíchov, where several large office buildings are springing up around the railway station, it may seem that Prague is experiencing an unprecedented boom in the office market. The reality, however, is different: the vast majority of space in the Smíchov City complex was pre-let in previous years. Current interest in additional space in this part of the city is rather lukewarm. According to the office leasing team at 108 REAL ESTATE, the consolidation and relocation of major tenants such as ČEZ and Česká spořitelna have not generated a knock-on effect in the form of interest from other companies in this Prague district.
With the exception of Karlín, which remains the most popular office district in terms of demand, new and older buildings alike must compete for tenants in virtually all parts of Prague. The situation is complicated for building owners by the fact that new lettings mainly concern relocations, while company expansions are rather the exception. “Tenants’ very cautious approach is also being driven by uncertainty over how the number of employees will change following the arrival of new AI tools. This is also affecting what has so far been the most optimistic segment, namely information and communication technologies. The only sector that is growing despite all external influences is the pharmaceutical industry,” summarises her experience Lena Popová.
Despite the trends described above, according to 108 REAL ESTATE there is a shortage on the market of high-quality offices at a price tenants are willing to pay. The issue is therefore not a shortage of space as such, but a mismatch between the required quality and the price. This particularly concerns spaces of more than 3,000 m², for which tenants are willing to pay a maximum of EUR 23/m² per month. Such premises can only be found in buildings that are several years old, and only exceptionally in new ones. According to 108 REAL ESTATE, the market could be invigorated by new companies entering Prague. However, there are very few such companies. Prague must also compete with cities such as Bratislava, Bucharest and Sofia, where employee wage costs are lower.
According to 108 REAL ESTATE, with few exceptions tenants are still not prepared to accept rents of around EUR 28–30/m² per month. Developers say this reflects rising costs, leaving landlords little room for significant discounts. If they do agree to incentives, these usually take the form of rent-free periods or a contribution towards moving and fitting out the premises to meet the specific tenant’s needs. The same applies to existing leases. “Office building owners are well aware of this situation, and it is also reflected in the incentives offered during renegotiations. Landlords are not particularly willing to offer contributions and rent discounts – compared with previous years, these incentives are approximately 30–40% lower. This applies especially to buildings with high occupancy in sought-after locations,” adds Lena Popová.
The situation described does not only affect the Prague market – tenant consolidation is also evident in Western Europe, albeit with the difference that tenants in the United Kingdom, Germany and the Benelux countries are prepared to accept higher rents. They focus on the quality of the space, the building and its surroundings, and offset the higher price by leasing smaller office areas.
If the Prague office market fails to gain momentum even with the new supply, the functional use of a number of development locations earmarked for office construction under the new Metropolitan Plan could change over the longer term. These include Prague’s Opatov, the area around Krč railway station and the sites around the new railway connection to Václav Havel Airport and Kladno. According to 108 REAL ESTATE, new office districts or centres are unlikely to emerge in the foreseeable future – developers will focus much more on the residential segment. And where will the residents of the new apartments work? Probably from home or in community coworking centres, which are also becoming increasingly popular in Western Europe.