Demand for new offices in Prague is rising, but limited to selected locations

The area around Masaryk railway station, the area of Smíchov up to Stodůlek or modern office buildings in Karlín and Hagibór. And Prague 4. These are the most frequent preferences of companies currently looking for new offices in the metropolis. Demand is concentrated on locations where the tradition on the office space market is linked to the construction of modern office buildings. Other city districts or specific locations remain in the background, even with regard to the limited supply of modern working space. According to the real estate consultancy 108 REAL ESTATE, it can even be said that sufficient capacity is currently as important as the reputation of the address and availability for employees.

Despite a partial resumption of construction, the Prague market is not getting enough prime space to meet the relocation or expansion needs of certain types of tenants.

"These include, for example, companies from the pharmaceutical and general healthcare sector, IT companies, and more often schools or state organisations and public administration, for which the issue of acceptable rental costs is also crucial." Lena Popová, Head of Office Leasing at 108 REAL ESTATE, calculates.

The limited supply of modern workspaces is thus reflected in the balance of leases in Q2, which continued during the summer: about 60% of signed contracts are renegotiations. Gross demand reached 220,600 m² in the second quarter. This represents an increase of 36% compared to the first quarter and 4% year-on-year. However, it should be noted that the result was affected by the lease of 75,000 sqm by Česká spořitelna in the Smíchov City complex.

The stabilization of the office market in Prague is evidenced by the data on completed or commenced buildings. By June, several office buildings were completed in the wider centre of Prague: Hagibor 01 (13,100 m²) and Hagibor 02 (15,800 m²) in Prague 10, Rohan City A1 (8,600 m²) in Prague 8 and the reconstruction of Palác Dunaj (6,400 m²) in Prague 1. The construction contractors then started the construction of the Hila project (19,700 m²) in Prague 4 and two projects in the new office park in Prague 5 - Smíchov City South (three buildings with a total area of 44,200 m²) and the aforementioned Česká spořitelna HQ (75,000 m²).

According to 108 REAL ESTATE, this indicates a renewed confidence of developers and financing banks in further growth of tenant demand: tenants are occupying modern offices despite rising rents. The only limiting factor is therefore availability in selected neighbourhoods.

Both gross and net realised demand in Q2, which were the highest since the end of 2018, are reflected in the slight upward pressure on prime rents. This had stabilised in the range of EUR 28 - 29 per sqm/month by the summer. The fact that vacancy rates are gradually rising does not change this trend. Currently, there are over 311,000 sqm of office space in Prague with no tenants under contract, which corresponds to a 7.9% vacancy rate.

The highest vacancy rates are in Prague 3 and Prague 7."It can be said that these locations are still waiting for their visibility on the office map of the metropolis. However, due to the rapid construction of residential buildings, the demand will synergistically reflect on the offices in time," is convinced Michal Bílý, head of the market research department at 108 REAL ESTATE.

According to him, however, it cannot be ruled out that some developers will take advantage of the delays caused by problems with the effectiveness of the new building law and the digitalization of permitting procedures to re-evaluate their plans and change their plans from office to residential use in less demanded locations. However, this will concern more solitary buildings and reconstructions of older buildings.