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Nearly a third of buildings on Prague’s office market are over 20 years old. This has posed a problem for many occupants because, in terms of buildings’ sustainability, they are not meeting their ESG targets.
Building owners have been offered a solution in the form of comprehensive renovations but, according to Colliers experts, this is hampered by a low vacancy rate in the Prague office market which currently offers few alternative spaces. Still, it turns out that renovating old buildings can be less demanding than building new ones. A well-planned and well-executed strategic renovation can bring long-term benefits to owners, including higher rents.
The modern office market in Prague offered approximately 3.91 million sqm at the end of Q1 2024. Some properties have undergone a certain degree of transformation, but that often involved purely superficial changes that did not improve or boost the buildings’ functioning technologically.
Although domestic legislation does not yet require specific solutions regarding energy efficiency, sustainable building operations, or the application of modern technologies, these issues already play a significant role in building choices for many clients. More and more companies are taking sustainability and ESG targets into account in their operations and therefore also reflect on them in the context of negotiating building leases. It is only a matter of time before property owners in the Czech capital will begin to demand proactive solutions.
In the future, the range of services, building amenities, and compliance with ESG criteria will be crucial in assessing the competitiveness of office buildings. "It is obvious that those who take the appropriate steps in time will gain a considerable competitive advantage. The solution consisting of refits is well known," points out Josef Stanko, Senior Analyst at Colliers, and adds: "As a result, tenants have little opportunity to find temporary replacement space. They usually need them for 12-15 months, which is the average length of a standard building renovation."
However, it is not only the low vacancy rate for offices in Prague, but also the financial aspect and the fear of losing long-term clients which make the decision to renovate so difficult. Owners should therefore consider their exit strategy, specify target tenants, and make a good assessment of their building’s current state. An analysis of operating costs is also important to ensure that refurbishment will have a long-term impact and not just involved cosmetic (superficial) changes.
Overall, renovating old buildings can be less expensive than building new ones, as long as the core structure has not been significantly affected. Properly planned and executed, strategic renovation can bring long-term benefits. Retrofitted buildings often offer more efficient operations and modern services, which can be reflected in rental rates. Of course, the actual cost of refurbishment also always depends on the location and the current market situation.
"Older refitted buildings often try to compete with lower prices. But if they are well maintained, the difference between them and new buildings may not be significant. If you add to this the offer of an established location and stable operating standards, older buildings can be highly attractive to tenants," comments Josef Stanko, adding: "The disadvantages of refitting older buildings include the property’s technical limitations and the need to deal with regulatory restrictions; for example, from the historic preservation authority. Even so, renovation can be quicker and cheaper than new construction."
Investing in refurbishing older buildings seems to be an effective way forward. However, the whole process requires strategic planning and courage. "A good example is Building B in Prague's Brumlovka district, where the refit took place about 10 years ago and the rent level increased by about 25%. Now the property at Náměstí Republiky 7 is undergoing reconstruction and will become a modern, high-quality building with rents of around €30 per sqm/month, which would be up to double the rent charged before the reconstruction," says Jana Vlková, Director of Office Agency and Workplace Advisory at Colliers. "In Western Europe, refurbishments of old buildings are common practice due to established legislation and high competition. The development that cities in the West have gone through shows the necessity of renovating old buildings in Prague to maintain their competitiveness," concludes Jana Vlková.