The Prague office market has frozen. The crisis will hit older buildings harder
High construction and relocation costs are behind the marginal movements on the Prague office market in recent months. Even if companies want to change their location, it is currently very difficult to secure a lease of around 5,000 sqm, especially in attractive locations such as Karlín, Anděl, Pankrác or Smíchov. Although buildings are gradually being completed (mostly pre-leased), which started to be realised at a time of cheaper bank financing, there is a noticeable lack of premium office space on the market. In fact, no new office buildings have started construction since spring 2022. These are the main outputs of the analysis of the office market development prepared by the Czech real estate consultancy 108 REAL ESTATE.
If a company decides to relocate, complete premises are available practically only on the outskirts of Prague. Thus, consulting firms focus mainly on renegotiating older contracts and subleasing space that tenants no longer need to use.
"Every situation brings new business challenges. We are currently preparing for the movement that will take place in this segment also in connection with the green transformation and the obligation of larger companies to report ESG. This will mainly affect older, inefficient office buildings," believes Jakub Holec, Director of 108 REAL ESTATE.
The costs associated with moving and building alterations to new office space have doubled since 2019. This is why the vast majority of tenants prefer the option of renegotiating and extending the lease in the existing space. Also, the large renegotiations in the second half of this year indicate that even established tenants with high reputations are getting rid of some space and looking for subtenants to join them.
"If someone is already looking for new premises, they want them to be equipped and renovated so that the renovations cost them practically nothing. This is typical for companies demanding space of around 4 to 5,000 sqm," explains Lena Popová, Head of Office Leasing at 108 REAL ESTATE.
According to her, most of the current demand is concentrated on the centre and the wider centre of Prague. Only a certain part of companies - for example, those with frequent trips around the country or those connected to a larger town in the Central Bohemian Region - are looking for the outskirts.
However, the overlooked position of the peripheral parts of the metropolis may soon change. To the benefit of development in parts such as Stodůlky, Opatov or Vysočany, for example. Analysts at 108 REAL ESTATE expect a shortage of modern offices in the second half of 2024 - no new office buildings have started construction since the spring of 2022. Even if interest rates on developer loans fall next year, this will not be reflected in new supply until the turn of 2025 / 2026 at the earliest.
Meanwhile, the market should be preparing for the movement of tenants that will be affected by the ESG reporting obligation. The premises they occupy will become increasingly important to this calculation. Indeed, office landlords are also due to start disclosing their carbon footprint from the New Year. Owners who fail to do so, and overlook even the possibility of sustainable certification, are likely to continue to lose tenants.
"Those of the larger companies that could have, have already moved into modern buildings. So far, we have not seen any major efforts to operate in a sustainable and responsible way in older buildings. The biggest problem in older buildings is insulation, air conditioning and heating, which are not sufficiently efficient," Jakub Holec summarises.