Prague office vacancy is inching downwards while physical “occupancy” is up. At the same time, supply is dwindling as net rent figures rise. So, it’s no surprise rents are pushing upwards.
What is surprising is that so few office developers are willing to break ground on new projects. 2025 could see less than 25,000 sqm of new supply.
All of the agents I spoke with over the past week warn that with vacancy now at 7%, companies who need larger space can struggle to find quality space. Historically, though, Prague’s vacancy rate has tended to be rather boring. It’s never been a boom & bust market like Warsaw or Budapest with huge rent swings. New space would almost always appear before vacancy fell too far, egged on by low interest rates and aggressive occupiers. So, what’s going on?
Petr Florian (Avison Young) says building costs are at the heart of the current development dilemma: “Construction costs mean you’d need to push asking rents higher than the market is ready to accept.” The math just doesn’t work for developers, at least not in combination with the risk.
Radka Novak (Cushman & Wakefield) spreads the blame more broadly. “Lack of financing and high construction costs would be on the top of the list, but there is also uncertainty whether tenants can pay the rental levels that are needed to make the new development feasible.”
Prague’s traditional office development model depended on predictably expansive tenant dynamics. But bigger no longer means better. Companies are asking different questions, says Florian. “Today’s occupiers aren’t chasing square meters. They want efficiency, flexibility, and performance. Growth is no longer about more space—it’s about using space better.”
Along those lines, Milan Kilik (iO Partners) points out the average space per lease transaction has dropped from 1,100 sqm to 600 sqm.
What’s changed, in other words, is that in the past, companies were growing so quickly, they had to find new buildings to move into. On the supply side, cheap development finance and the prospects for rising capital values gave developers plenty of incentive to make those moves possible.
That world is now gone, replaced by one in which developers think extremely carefully before risking their equity. Tenants count their people and CAPEX budget several times before committing to anything. In fact, tenants now seem to suffer from something you could call Relocation Resistance Disorder.
RRD can be brought on by a variety of concerns that were largely ignored in the past. Even things as basic as the complexity of moving. The fit-out process can take 9-12 months, creating operational disruptions and productivity losses if not handled well. Additionally, landlord contributions don’t cover the actual costs of a complex fit out.
But tenants have also become risk-averse thanks to constant waves of uncertainty. Whether it’s because of geopolitical tensions, tariff threats, or the coming AI transformation, companies are now far more cautious about spending money.
“Many businesses choose to negotiate lease extensions or adjust their current spaces, which allows them to avoid the significant financial and operational costs of moving,” according to Pavel Novák at Savills.
Milan Kilík (iO Partners) has watched this dynamic intensify. “With fit-out costs so high you really, really don’t want to over-estimate the amount of space you need,” he said. He described a recent example where fit out costs in Prague exceeded those in Luxembourg for a comparable 550 sqm unit.
“After COVID, companies are trying to be as cost effective as possible,” says Kilik. “You can see it in the number of companies who do not want to build fit outs.” This is leading some owners to install a basic fit out themselves just to get potential tenants in the door.
But Colin Glover (MD of the contractor SIS Systemy) rejects the idea that fit out costs have blown out of control. “I don’t believe that they’re any more expensive than they’ve been in the past,” he says. “I think a good, organized tenant who understands what they want to build and understands their budget can get a fit out for that budget. You can get good, competitive prices.”
“I think there’s a naivete on the tenant side. You don’t move every year, so companies will often just leave it to the office manager to handle. It’s unfair to blame the fit-out market. Costs for me are very stable because there’s a lot of competition. If you spend too much, it’s really your own fault.”
It’s a different story though for the wider building sector. “General contracting is in quite an inflationary cycle because of demand – there’s a lack of supply,” claims Glover. As he sees it, the booming residential sector is outstripping the industry’s ability to keep up. “Contractors are just overwhelmed. Concrete companies, window companies, they’re all in a very strong position to drive prices up.”
Glover complains that he even has to order cranes ahead of time these days – the first time he’s ever seen this in Prague. “You never used to have to worry about it before,” he says.
The implication is that that a spike in demand for new residential space is crowding out new office investments. And with margins higher for residential than for office, it’s no wonder.
At the same time, it’s contributed to a peculiar limbo in which office landlords have pricing power over existing tenants, but developers with projects struggle to find enough demand to justify new construction.
Prague’s office market is stuck in a holding pattern — it’s healthy enough to sustain existing, well-located buildings, but too constrained for developers to justify taking the risk to build new ones. Czech GDP is expected to reach 2% this year, but it’s doubtful this will drive employers to start a new wave of hiring.
“I believe we’re between cycles,” said Florian (Avison Young). “Developers are waiting for clarity—on rates, regulation, demand, and ESG expectations. Until then, no one wants to be the one stuck with empty floors and expensive debt.”
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