Is it time to panic? As Prague’s office pipeline begins to go dry, that’s a question corporations with large office space needs may start asking. It’s no secret that it’s been nearly two years since a major new office development got underway. The only major projects expected to complete this year are Roztyly Plaza (Passerinvest), Rohan City A1 (Sekyra Group), Hagibor 01 and 02 and nam. Republiky 7 (both Crestyl). But large portions of these buildings are already spoken for, says Radka Novak (Cushman & Wakefield).
Source: Prague Research Forum, Cushman & Wakefield
“The majority of the empty space will be absorbed by the end of the year,” she warns. Anyone who currently needs more than 3,000 sqm is going to run headfirst into the problem pretty quickly. “There are some opportunities, but for large occupiers it could be quite challenging to find a compact space. Especially since we don’t expect any larger new office space to be completed in 2025.”
It’s not that developers have given up on Prague’s future. It’s simply that conditions today aren’t right – and tomorrow comes with too many unknowns. “There are a lot of projects on paper, but developers can’t start on a speculative basis because financing is very tricky. They have a lot of question marks, including what the yield going forward will be. They’ll have to check their numbers twice, so they have to wait for a prelease to make it work and to achieve financing.” Novak counts around 100,000 sqm of new space that developers could begin work on immediately – if they had a final user.
One thing that must frustrate developers as they wait in vain for preleases is that there’s significant demand for newer, well-located office buildings. Along with their ESG obligations, companies understand that to get as many people as possible back in the office, they need to offer the highest quality space possible. “Companies are downsizing, but they’re also trying to attract employees to come to the office, meaning location and an attractive interior is more important than usual,” says Novak. During the financial crisis, suburban office locations became popular with employers because they were relatively cheap. Today, companies are holding out for better located projects. What’s still unknown is what they’ll be willing to pay for the privilege.
Non-central rents used to go for around €16. “Today, the rents that would make the project feasible are about 25% higher, even after rent indexation. So, it’s a tough decision to make. You can’t be sure if the market will stay at this higher rent level. For sure rents won’t go down, but we don’t know how far they can rise.” It’s a fair point. Large companies who are determined to move into smaller, but better space may be prepared to pay €24 per sqm. But how deep will demand be at that level?
Developers are dealing with a shrinking pie as the long-term damage wrought by the pandemic becomes clearer. Even last year, many market players thought the return to the office was still happening – it was just delayed. Now, things aren’t looking as rosy. “It’s not happening to such an extent as we expected,” admits Novak.
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