The volume of construction completions in Q1 2021 ranked among the lowest quarterly levels in the history of the Prague market, with only 3,500 sq m added to the office inventory. This is the least since Q1 2016 and demonstrating a 82% drop compared to the previous quarter. The decline is even more significant in a year-on-year comparison, showing a 85% drop.
The new supply in Q1 2021 consisted of two refurbishment projects, Hybernská 1 in Prague 1 bringing additional 1,500 sq m to the office stock, and the Olbrachtova 5 in Prague 4 with 2,000 sq m of new office space. Total modern office stock in Prague stood at 3.69 million sq m in Q1 2021. The largest office districts were Prague 4 (965,000 sq m), Prague 5 (636,000 sq m) and Prague 8 (579,000 sq m).
The development pipeline of under construction and refurbishment projects increased from 136,000 sq m at the end of 2020 to 200,000 sq m in March 2021. The annual new supply in 2021 is expected to reach 91,300 sq m, which would be 40% less than in 2020 and the lowest annual volume of new completions since 2016.
The overall office leasing activity in Q1 2021 came to 90,200 sq m. Despite a 30% y-o-y rebound in gross take-up levels, the volume of new transactions reflected a 9% decline compared to the previous quarter and a 17% drop against the 12-quarter average.
With 45,100 sq m of net demand recorded in the first quarter, Prague's market deal volume remains below pre-pandemic levels, specifically 15% down on the largely pre-pandemic Q1 2020. However, tenants were slightly more active as evidenced by the 3% increase in transaction volume compared to the previous quarter.
Overall vacancy rate in the Prague office market rose to 7.60% in the first quarter of 2021 from 6.98% in the fourth quarter of 2020. In a year-on-year comparison, vacancy increased by 220 bps and reached the highest level since Q2 2017. This vacancy rate translated into 280,600 sq m of office space immediately available for lease.
The volume of office space offered for sublease grew by 17% compared to the previous quarter and totalled 75,500 sq m. Adding these sublease opportunities to the officially unoccupied premises, the citywide vacancy rate would reach 9.6%, being the highest since the end of 2016. The lowest occupancy levels can be found in Prague 6, where the vacancy rate increased to 14.5% and the highest occupancy levels were registered in the districts of Prague 3 and Prague 8, however, even there the vacancy rate exceeded 5.0%.
Pavel Novák, head of office agency, Savills CZ&SK, adds: “Last year, low net demand in the office market was registered almost continuously, related to the low volume of actual relocations of companies. Many companies have reduced their leased space, but many have postponed decisions about their office space needs. In addition to the increase in vacancy, there was also a relatively large market of premises, which are in fact under contract, but are physically empty spaces (sublease market). With the gradual release of restrictions and return to offices, we expect, and are already registering, a recovery in demand associated with the implementation of deferred needs of companies. However, demand during this year will also be stimulated by the supply of attractive premises for abandoning a contract or sublease in a number of cases, often on favorable terms.“
Data source: Prague Research Forum