Trend in Office Leasing in Europe: Companies Are Seeking Smaller Spaces but Are Willing to Pay Higher Rent for Them

Hybrid work arrangements and remote work are among the main reasons for the weaker performance of the office space market in Europe during the first half of this year. However, the decline in the volume of lease transactions is also influenced by tenants’ cautious approach due to economic uncertainty. Another factor is the shortage of larger, high-quality spaces available for rent, especially in attractive parts of European cities. While demand for prime office space is growing in Barcelona, Brussels, and Dublin, traditional markets in London, Paris, Milan, and Germany’s largest cities are seeing a double-digit year-over-year decline in leasing activity. According to the real estate consulting firm 108 REAL ESTATE, tenants’ needs are clearly changing—there is a prevailing interest in smaller, higher-quality spaces in attractive locations, for which companies are willing to pay higher rents. The highest rents have risen by nearly 5% year-over-year.

The situation in the Czech capital is somewhat different, although a shortage of available modern office space exceeding 1,000 m² persists, particularly in Prague’s 1st, 4th, and 8th districts.

“Structural demand for high-quality office space remains robust. It is driven primarily by technology companies, the healthcare sector, the pharmaceutical sector, and the financial sector—banks and insurance companies. However, there is a growing number of older office buildings whose owners are considering alternative uses—especially given the significant investments required for modernization. This also applies to some office buildings that have lost or are likely to lose their anchor tenants,” notes Lena Popová, head of office leasing at 108 REAL ESTATE.

A certain shift was also evident in the first half of this year among startups, which—partly due to tighter financing—are collectively seeking space in coworking centers. The Prague office market in particular, characterized by a 5.8% vacancy rate, could gain greater momentum by 2028 thanks to more than 300,000 m2 of space in buildings currently under construction. The high demand is confirmed by the fact that roughly 60% of the space currently under construction has already been pre-leased. All of this is creating conditions for steady rent growth, not only in central Prague but also in the inner city.

Remote work and hybrid work arrangements are among the main factors contributing to subdued demand for new office space in Europe. In the Czech Republic, employers began returning to in-person work as early as last year, but in the European context, this is more of an exception. Hybrid work—involving either partial in-office attendance or predominantly remote work—is transforming the role of offices: they are no longer automatically the daily workplace for everyone, but are instead becoming spaces for team meetings, presentations, and hosting clients. As a result, even large companies are opting for smaller, high-quality spaces.

“This is a key signal: it’s not just a cyclical economic slowdown, but also a change in the way companies use offices,” adds Michal Bílý, head of market research at 108 REAL ESTATE, which drew on a study by the BNP Paribas Real Estate alliance for its analysis.

Many tenants are using their reduced space requirements to improve the quality of their offices—both interiors and entire buildings. ESG is the standard; BREEAM and LEED certifications are now a basic requirement, not a competitive advantage. This also applies to the Prague office market and highlights the major advantage of new buildings with excellent accessibility—not by car, but primarily via public transportation.

“We’re increasingly encountering requests for a distinct sense of place where prospective tenants want to move. This means a sufficient range of services, dining options, and high-quality public spaces. We can also include leisure activities such as fitness or personal development as part of employee amenities,” Lena Popová shares from her experience.

An overview of the European office market shows a noticeable decline in large transactions. This is another difference compared to the Czech Republic, where—at least in Prague—demand at the corporate level remains high, in part due to the need to locate headquarters. This is due to its ideal location in the heart of Europe, with connections to all markets. As a result, the trend from last year continues, when gross absorbed demand in Prague reached the second-highest level in history: 573,400 m². In European capitals, the reason for tenants’ cautious approach is not only the transformation of work organization but also the uncertain development of local economies.

However, this caution does not necessarily translate into financial savings. On the contrary, despite weaker demand in European cities—with the exception of Prague—rents for premium office space are rising. As mentioned, companies prefer the quality of the environment over quantity. They want to motivate remote employees to come into the office; thus, within their office spaces, they offer facilities that foster social interaction, team energy, a creative environment, corporate culture, mentoring, and informal communication. The office is thus evolving from a standard workplace into a strategic tool for managing people and fostering corporate culture.

“In this regard, the situation in Prague is similar. Older or less accessible office buildings that do not offer a compelling alternative to working from home or remotely are finding it increasingly difficult to compete in the market. Here, on the contrary, we are seeing tenants leave and a decline in interest. As a result, lower rents are the only incentive owners have to fill their spaces. I’d describe tenants’ thinking in the era of remote work as a shift away from more square meters toward higher-quality square meters,” notes Lena Popová.

The 108 REAL ESTATE team believes that low rent alone will not be enough to attract tenants. Office buildings in secondary or tertiary locations, in particular, will face pressure to offer incentives and undergo modernization. ESG standards, good accessibility with established infrastructure, and the quality of the space are crucial for maintaining occupancy rates. New buildings outside the city center or in specific Prague neighborhoods will need to offer transportation accessibility, amenities, and a distinct sense of place. Even so, it cannot be ruled out that, as the supply of new office space in attractive locations grows, projects converting office space into residential units will emerge —such considerations apply to the former Česká spořitelna headquarters in Prague 4 or the 4D Center on Kodaňská Street in Prague 10.