Prague's office market grew by 4 attractive, new buildings in Q2, offering nearly 44,000 m² of modern class A office space. Despite the fact that a large part of these properties found tenants before completion, the overall vacancy rate has slightly increased and currently stands at 7.9%. Demand and rental prices have also grown. Although the volume of office space under construction has increased significantly to 166,300 m², 14,700 m² more will be added through 4 new projects by the end of 2024. This is according to the regular quarterly office property market survey published by Colliers, a leading provider of diversified professional services in commercial real estate and investment management.

"In terms of completions and starts, the Prague office market recorded a relatively active quarter. The modern office market grew by a total of four buildings and construction has finally begun on several more. Although the situation in the area of new office construction is far from ideal, we can definitely talk about positive signs," says Josef Stanko, Director of Market Research at Colliers, commenting on the survey results.

Vacancy and demand are growing

Thanks to new completions, market volume at the end of Q2 2024 increased to 3.95 million m², representing steady year-on-year growth of 2%. The vacancy rate increased by 40 basis points quarter-on-quarter and currently stands at 7.9%. The vacancy rate within existing buildings has thus reached 311,200 m² and is distributed very unevenly across Prague. Of the established office centres, Holešovice has the highest vacancy rate (approximately 44,600 m²) with a vacancy rate of 16.7%, followed by the city centre with 34,200 m² and a vacancy rate of almost 6%. Well-established locations such as Karlín, Nové Butovice, Chodov or Smíchov offer between 10,000 and 15,000 m² each and Brumlovka has the lowest vacancy rate with only 8,200 m² immediately available.

Net absorption, which we calculate as the difference in the volume of occupied space between two different periods (Q2 2024 vs. Q1 2024), ended up positive with approximately 20,300 m² for the entire market. Expansion of the supply of new space is then linked to the enormous demand. Gross demand volume amounted to 220,600 m² and net demand volume reached 130,700 m².

It doesn't get any cheaper

Prime rent benchmarks on the Prague market increased slightly in Q2, with rents in prime locations in the city centre reaching approximately EUR 29.00 per m²/month. Rents in the wider city centre (e.g., Karlín, Brumlovka, Smíchov) remained at EUR 19.00 per m²/month and rents on the outskirts of the city (e.g., Nové Butovice, Chodov, Stodůlky) increased slightly to approximately EUR 16.50 per m²/month. "It is interesting to observe price development in new construction. The average asking rent for upcoming projects, regardless of whether they have already started or not, was approximately EUR 20.3, ranging from EUR 15 to EUR 30 per m². 12 months ago, it was approximately EUR 18.75 per m²; 24 months ago, it was only EUR 18.30 per m². That's an 11% increase in just two years," adds Josef Stanko, adding that the average offer price for existing B-class properties has risen by 4.1% in 24 months and by a staggering 7.1% for A-class properties over the same period. Asking prices for rents in Class AAA buildings, the crème de la crème of the market, have increased by 7.6% compared to two years ago.

The future of the market lies in adaptation; older class A, B or C buildings should be renovated

As the volume of available planned projects is severely limited by lengthy permitting processes and a complicated economy, it will be crucial for the market to think about how to adapt some of its current buildings to modern standards in the future. Much of the modern office market is ageing and many buildings are 15 to 25 years old; with some having undergone little or no refurbishment.

"Modern standards in HVAC, user comfort, connectivity or sustainability have already evolved considerably and have been enhanced by new ESG requirements. Some office centres have not been built with such complexity in mind. If refurbishment is to be an option, it needs to be approached very thoroughly," concludes Josef Stanko, noting that the more landlords commit to such an approach, the more it will help the Czech market remain competitive within the region.