News Article Rising construction costs impact office development in Prague
by Property Forum | Office

In Q2 2022, Prague's current office space volume reached 3,75 million sqm and 215,700 sqm is under construction. It is expected that the construction volume will increase by 74,000 sqm of office space by the end of 2022. Rents grew by 18% y-o-y and further growth in coming periods is also expected, JLL's Prague Office Market Q2 report says.


Office space in square metres

JLL data suggest that compared to the same period last year, net demand increased by more than 50% with tenants leasing 83,800 sqm of modern office space. Companies from the information technology, pharmaceutical and professional services sectors were particularly active. The current volume of Prague's office space stands at 3.75 million sqm, with 215,700 sqm currently under construction.

The total volume of office space in Prague at the end of June 2022 reached 3.75 million sqm. Two completed buildings were the main contributor to this increase. The largest completed office project was the Dock in Five (20,500 sqm) in Prague 8, backed by developer Crestyl. The second completed office building was a smaller multifunctional building Košířská brána (2,200 sqm) in Prague 5 by the developer RS Development.

There are currently 215,700 sqm of office space under construction, of which more than 30% is already contracted. If we compare this data with the same period last year, construction has increased by 63% year-on-year. By the end of the year, the total construction volume is estimated to increase by almost 74,000 sqm of office space.

Demand for new office space

JLL suggests if we compare the total volume of demand (including renegotiations) with the same period last year, we recorded a growth of 41%. Net demand (excluding renegotiations, i.e. without renegotiating leases in existing space) increased by 52% year-on-year to 83,800 sqm. Tenants from the information technology sector were particularly active, accounting for 33% of total leasing, followed by companies from the pharmaceutical industry (11%) and companies from the professional services sector (8%).

"It is increasingly evident that the covid shock is wearing off and companies are now beginning to focus on creating an attractive working environment that better enables the current hybrid operation of companies and their employees. As a result, despite the high cost of construction, we are seeing a significant number of office occupiers starting to look for new space that will not only allow them to lure existing employees back into their offices but also attract new talent. One such example is the international law firm Bird & Bird, which has decided to relocate to the new modern Missouri Park building in Prague 8. In the future, we expect that a large number of tenants will also consider the possibility of relocation with regard to setting standards under their ESG policy," Josefína Rybářová from JLL's Office Leasing Department comments.

Rents in the city centre

The highest achieved rent in the city centre is €26 per sqm/month. Year-on-year, rents have increased by 18% and we expect them to continue to grow in the coming periods. It should be added that these rent levels relate to new office projects in prime locations. Andrew Peirson, Managing Director of JLL, comments objectively on the market situation: „The rise in construction costs is having a clear knock-on effect on new developments, with their viability now requiring 10-15% rent increase on where levels sat only 18 months ago. At the same time, we aren’t witnessing much change in existing buildings, with tenants not prepared to increase their rental costs to remain in occupation, especially given the increase in energy costs now being faced. The challenge therefore for new developments is to entice tenants to relocate, which would require a rather large hike in their occupational costs.

The largest asking rental increases we are witnessing is the prime markets of Prague 1 and the Florenc and Karlin areas within Prague 8, whilst most suburban areas are still relatively stable.” On the other hand, it should be noted that rents in existing older office buildings are not growing as significantly and therefore the gap between rents in new projects and existing office buildings is widening.