Q1 2023 saw a recovery in the Prague office space market. Growing demand may be met with lower availability of new premium space in the coming years, as only a smaller number of new projects are currently under construction. This may affect the currently stabilized price level of rents. Serviced office centres and ESG-compliant projects are on the rise. These findings come from a quarterly market survey conducted by Colliers.
The office market in Prague reached 3.85 million sqm of total floor space at the end of Q1 2023. In the first three months of 2023, only 38,000 sqm of new office space was built. Only two projects were completed: PORT7 by Skanska in Prague 7, which added 30,900 sqm of offices and also extensive retail space, and Red Court by J&T Real Estate with 7,100 sqm. At the end of the first quarter, another 145,000 sqm were under active construction, but only 90,000 sqm are expected to be completed this year. Almost half of this volume has already secured tenants. "For the third consecutive quarter, no new construction began and the outlook for the coming period is not optimistic either. There are currently 15 projects under construction, but only 5 are planned for 2024. This will translate into a significant shortfall in office space supply in approximately 15 to 24 months," comments Josef Stanko, Senior Analyst at Colliers.
Office vacancy in Prague is decreasing, demand is growing
The vacancy rate fell by 22 basis points to 7.5% in Q1 this year. This represents approximately 289,100 sqm in absolute terms. The vacancy rate has decreased in all districts except Prague 1 and Prague 7, where it increased due to the completion of the PORT7 project. The situation in individual submarkets varies; for example, the vacancy rate in Prague 8 is only 4.2% and in Prague 4 it is 5.8%.
"The Q1 take-up volume exceeded our expectations, although the share of renegotiations was significant. Gross realized demand including renegotiations or subleases reached 137,800 sqm, which is the second-highest volume achieved since Q4 2019. In terms of net volume, which excludes renegotiations and subleases, 74,900 sqm was achieved; also one of the highest volumes in the last three years. The share of renegotiations is approximately 45% of the gross volume," says Josef Stanko. According to him, a big portion of new demand has been absorbed by established submarkets. Most of the newly occupied space is located in Prague 5 (approximately 24,000 sqm) and Prague 8 (13,200 sqm). The highest number of renegotiations took place in Prague 8 (16,300 sqm) and Prague 4 (14,000 sqm). The share of pre-leases is optimistic at 14.5%.
The largest transaction in Q1 was the renegotiation of the lease for e-commerce giant Amazon in Rustonka (approx. 11,800 sqm), followed by the renegotiation of Accenture’s lease in the Visionary building. The largest new lease was 4,000 sqm to LEGO Production in Aviatica in Prague 5.
Serviced office centres on the rise
Serviced office centres are also experiencing a boom and are steadily increasing their market share, as evidenced by the last few quarters when local operator Scott.Weber expanded or acquired several new centres in established office locations. Serviced office offers are based on flexible-lease terms, allowing even the smallest of companies or start-ups to enjoy the convenience of high-end office buildings. For large companies and corporations, these services are a welcome option for short-term and project-oriented expansion.
The good news: prices are not rising yet
Prague's main prime benchmarks remained at roughly the same levels as in the previous quarter. Prime offices in the city centre can be purchased for around EUR 27.00 per sqm per month. Some projects or specific small-size units may ask for more, but these are mostly one-off transactions that occur rarely. Prime office space within the wider city centre has risen by €0.25 at the upper end of the range to around €18.25 per sqm per month, and prime rents in the outer city have stabilised at €16.00 per sqm per month. "It is only a matter of time before rents in the wider city centre start to reach €20.00 per sqm per month," adds Josef Stanko.
A slowdown in net demand can be expected in the coming quarters of this year. Given that 2017 and 2018 were marked by strong demand, a higher volume of renegotiations can be expected as standard five- or seven-year leases come to an end. "Problems may arise though due to the low number of new projects planned. There are only five planned for 2024 and 10 for 2025, some of which are not even destined for the open market and others do not even have planning (building) permits. Given average 18 to 24-month construction timelines, this means they may not be completed until 2026. As a result, vacancy rates and especially the supply of premium space may decline," says Josef Stanko, adding that the larger office projects that will come to the market will be of high quality and fully ESG-compliant, as developers in the Czech market fully understand the necessities and requirements of the emerging non-financial reporting.
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