Prague is acutely running out of modern offices: limited construction is driving rents to record highs even above EUR 30/m2

The contrast could not be greater: it has been a long time since so many cranes have been seen on large construction sites above Prague. And yet the market shows a chronic shortage of modern offices. According to real estate consultancy 108 REAL ESTATE, the explanation has several levels. The first is that many of the office developments being built are for a pre-secured tenant and are not getting to market. The second is that even the current frenzied construction will not cover the demand from companies deferred from the covid period. Finally, the third is that the construction in many cases is for residential types rather than office. "Developers and landlords are dictating the conditions, and rent growth is matching this. The EUR 25 per square meter per month threshold is becoming the norm for modern office buildings, not the exception," Lena Popová, Head of Office Lettings at 108 REAL ESTATE, summarizes the current state of the office market in Prague.

The described situation is illustrated by the data. The supply of new offices, which is very quickly occupied, reached a maximum of 60,000 sqm last year and this year. Next year it will not be much more, a total of about 40,000 sqm. REAL ESTATE expects a leap in 108 REAL ESTATE's growth in 2028, when more than 130,000 sqm of modern office space is expected to be completed.

"We see a number of office developments being built to suit large tenants or future owners. If companies are planning to move into larger or modern space, it is essential to start exploring options two to three years in advance. This applies to enquiries from 2000 sqm and upwards,"

says Jakub Holec, CEO of 108 REAL ESTATE. Although the Prague office market still shows a vacancy rate of around 6.5%, smaller offices in particular remain without tenants.

The cautious approach of developers and financing banks to the office segment was due to the post-covid expansion of home-office and remote working. It was mainly coworking spaces that benefited from this situation. However, in the last year, there has been a noticeable change in the attitude of employers, and not just traditional corporations: workers are returning to the office. However, what awaits them is mainly hot desking and other forms of efficient use of space, where two or more employees share one space. Collaboration spaces, shared spaces, meeting rooms are expanding.

"We see few tenants in the market expanding. The key is flexibility, which even in times of rising rents is holding back overall corporate costs,"

says Lena Popová, describing the market situation. It is the rents that significantly illustrate the transformation in the new office sector: while not long ago rents of EUR 25 per square metre per month were considered exceptional, they are becoming the norm in many new office projects. Developers' expectations are going even higher in some cases. This is especially the case for brand new or completely renovated buildings in the centre of Prague - Hybe, Vinohradská or Kotva.

The threshold of EUR 25 / m2 is not reached or surpassed across the whole of Prague. The most common examples can be found in Karlín, which has long been one of the most sought-after addresses.

"Not so long ago, companies seeking to relocate to the IT heart of Prague, Karlín, refused to accept asking rents of around EUR 20. Currently, the level is 20 to 25% higher and in Karlín, bidders sometimes compete in auctions for retail or service space,"

adds Martina Nielsen from 108 REAL ESTATE's Office Lettings team.

However, Karlín, and Prague 8 in general, is not the place with the highest concentration of new office construction. It is mainly in the Pankrác area with the Isola - Generali buildings, the complete reconstruction of the Generali headquarters, KEY or the Boka building. Brumlovka will be expanded with office Orion and Hila buildings, the largest project so far is the Sequoia building near Roztyly metro station. The Florence or Masaryk railway station area is undergoing (and will undergo) a significant transformation with an impact on the supply of office space.

The development of the left bank of the Vltava River is mainly determined by the construction of Smíchov City. In Prague 6, however, Penta Real Estate is gaining a stronger and stronger position: from the 4th quadrant on Vítězné náměstí to the new surroundings of the Cube and Argo buildings on Evropská třída.

"In the case of the office market, we cannot limit ourselves to premium new buildings. In the coming years we can expect announcements of redevelopments, modernisations or extensions of many older office buildings. Due to relocation or consolidation, large tenants, mainly from financial or business groups, will gradually leave them,"

Jakub Holec points out.

The current shortage of larger office space also has an impact on the decreasing willingness of owners of older buildings to provide significant discounts or investments in fit-outs as part of renegotiations. They are not excluded, but the owners make them conditional on a longer lease agreement. Landlords continue to prefer to extend leases of existing tenants, but given market conditions they are in a stronger position - and often in the advance of demand from other prospective tenants.