The size of the office market in Prague was approximately 3.85 million m2 at the end of the 2nd quarter, with another 143,600 m2 under construction, of which 47% will be delivered within 7 projects this year. At the same time, the order of division into the traditional ten sub-markets has not changed. Prague 4 remains the largest sub-market, followed by Prague 5 and Prague 8. On the opposite side of the scale, we have Prague 10, Prague 2 and Prague 3, which make up the smallest part of the modern office portfolio. However, no construction of a new office building has been started in Prague for a full twelve months. This will inevitably lead to a significant shortage of new areas in the course of 2025.

Vacancy decreases

However, the vacancy has changed, and this change was not only cosmetic. Compared to Q1 2023, it decreased by another 30 basis points in Q2 to the current 7.26%. The decline was recorded for the fifth time in a row, and overall market vacancy decreased by 103 basis points from the most recent peak in Q1 2022. In absolute terms, vacancy represents 279,600 m2 of office space immediately available for tenants. The most sought-after sub-market is still Prague 8 with a vacancy rate below 4% and with only 24,400 m2 of immediately available space scattered throughout Karlín.

“Some additional vacancy, we estimate 1.5% to 2.0%, is hidden in the sublet market. We occasionally register that new units are added to this market, however, only some of them are suitable for subletting," explains Josef Stanko, senior analyst at Colliers.

Demand still high

Gross realized demand in Q2 2023 was the highest for that quarter in the last five years, which only underlines the continued high activity in the leasing market. With a gross traded volume of 148,800 m2, it almost surpassed the volume from the 4th quarter of 2022, which was the highest since 2018. The share of net realized demand is 45%, including pre-leases.

In terms of the largest transactions in the past quarter, several exceptional renegotiations lead the table, with DHL Information Services and Microsoft by far the largest. Of the ten largest transactions, six were renegotiations. DHL renegotiated a contract of 18,000 m2 in The Park complex in Prague 4. Microsoft renegotiated a contract in the Brumlovka Delta building in Prague 4 and currently occupies approximately 16,100 m2. The largest new lease was that of the pharmaceutical company Sandoz from the Novartis group, which leased 5,700 m2 in the Enterprise building in Prague 4 and will be located right next to the Novartis headquarters in Prague.

Prices of top rents are not increasing, equipment costs are pushing up ESG and modern standards

The main reference rent prices in the center of Prague, in the inner city and in the outer city remained at the same level as in the last quarter, the rest of the market is slowly growing slightly. In general, rents were less dependent on inflation in the past period and responded more to the market situation.

Prime premises in the center of the capital could be rented for approximately 27.00 euros per square meter per month. Spaces in the inner city that form a ring around the center are available for rents up to around €18.25 and spaces in the outer city up to €16.00. All of the above rent amounts apply to well-located Class A office spaces of more than hundreds of meters in size and cannot be applied to small or specific units, where the price may be significantly higher. The inner and outer city will inevitably come under pressure if the announced projects in these locations take off in the foreseeable future, which will inevitably come at the price of higher rents.

"When we talk about the affordability of offices, we must also mention their equipment. The accelerated development of the work environment has increased the demand for various modern materials and advanced AV equipment and, thanks to ESG, also for the revision of the operating procedures of companies. All this together can bring the budget for the fit-out of a new office to over 1,000 euros per square meter," explains Josef Stanko. However, many tenants are already aware that the attractiveness and functionality of offices 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 in favor of Poland or, for example, Slovakia. The current difficulties probably lie mainly in expensive financial costs, which make it impossible to implement projects. However, the entire market is still under pressure from unpredictable, bureaucratic and lengthy permitting processes and public aversion to new construction, populistically fueled by some municipal politicians. This unpleasant and unrepresentative state of the Czech construction environment is on the way to improvement, but realistically it will take years. "On the other hand, thanks to this state, the market will remain predictable and St