CBRE summarizes the development of the commercial real estate market in the first half of 2022 and expectations for the rest of the year. How has the current macro-economic development been reflected in the commercial real estate market? All this is described in the latest CBRE analysis.
Logistics drags on – and breaks records in the process:
Activity in the logistics and industrial real estate market surpassed in the 1st half of 2022 expectations: 900,000 sqm were newly leased, which represents a 33% year-on-year increase. 130 leases were signed, of which 24 were concluded for an area of more than 10,000 sqm and 6 for more than 20,000 sqm. The main activity on the market mainly concerned pre-rentals, which accounted for 59% of all demand. CBRE expects the total volume of newly leased premises to reach 1.4 million sqm by the end of the year. This puts this year in second place in the historical tables right after last year. At the same time, international tenants continue to reassess their strategies in terms of global supply chains, which the Czech Republic could benefit from in the near future.
The current vacancy rate is only 1.5%, and CBRE experts do not expect a significant change in this direction even in the second half of the year. Jan Hřivnacký, head of industrial real estate leasing at CBRE, comments: “Sustainability is starting to become a priority for logistics tenants, which affects current development to an extent like never before.” At the end of June, almost 1.3 million sqm were under construction. By the end of the year, approximately 940,000 sqm of new space is expected to be added to the market, with speculative construction accounting for only 20% of this. The result of high demand and record low vacancies (combined with rising material prices, construction costs and also rising inflation) is a 43% year-on-year increase in premium rents, with pressure on for further growth.
Newly completed premises are no longer offered for less than 5 euros per square meter per month, while rents in Prague have already reached the 8 euro mark. The current growth rate of rents in the Czech Republic is thus among the five fastest in Europe.
This year, 11,200 sqm will be added to the market – one new shopping center (OC Javor) will be completed and Atrium Palace Pardubice will be expanded. And even if in 2023 and 2024 several other shopping areas will open across the country (e.g. OC Galerie Pardubice, but there will also be an expansion of the Černý Most Center in Prague, Šantovka in Olomouc or Varyády in Karlovy Vary), in the retail segment there will be in the following period, most retail parks will be built. They did very well during the covid era, and this trend will continue due to rising inflation along with the expansion of discount chains. On the contrary, the gastronomy sector, which was one of the most affected segments at the time of the lockdowns and the associated anti-covid measures, will face major challenges: all of this has had an effect on it and may result in the closure of some establishments and thus a reduction in supply.
After the meteoric rise of online shopping during covid, its growth rate will slow down slightly. Even so, e-commerce has already reached another historical milestone, when on a global scale it currently accounts for almost 20% of all retail sales (domestic share is 18%). “The success of brick-and-mortar stores will largely depend on their ability to apply omnichannel strategies. This means making available to customers the widest possible spectrum of interconnected sales channels – from a ‘physical’ experience in a brick-and-mortar store to digital applications and online shopping,” explains Jan Janáček, head of the retail sector and retail leasing department at CBRE. Anyway, as for the 1st half of the year, shopping centers did well. Attendance was 10% below the 2019 level, but turnover was 10% higher. It is expected that retail sales in the Czech Republic will increase by 2% year-on-year.
However, the post-Covid recovery is currently hampered by inflationary pressures on both customers and retailers, combined with supply chain disruptions and staff shortages. On the other hand, the positive news is the unceasing interest of investors registered by CBRE. Hopes for large-scale investment activity are high as there have been no dramatic swings in returns. Until now, retail transactions have largely been on hold mainly due to the difference between the price offered by investors and the price expected by retail property owners.
The office market is increasingly leaning towards tenants. Flexibility and sustainability are paramount
The demand for new office projects in attractive locations will continue to rise (in the first half of the year it increased by 41% year-on-year in Prague), while changes in the way offices are used towards a hybrid work model will lead to greater interest in flexible offices. According to the “EMEA Office Occupier Sentiment Survey 2022” study, this is due, among other things, to efforts to limit capital expenditures companies, to respond flexibly to current changes and also the possibility of entering new markets. At the same time, the difference between the rents in the new premium offices and in type “B” offices will also increase.
From the beginning of the year to June, 47,880 m2 of new offices were completed in Prague (of which 56% have already been pre-leased), and another 28,800 m2 in 6 different projects will be approved by the end of December. Quite a few new and attractive office buildings are expected to enter the Prague market in 2023. This, combined with the slowing demand and the fact that almost no new companies are entering the Prague market, may lead to an increase in overall vacancy next year – it is currently around 8% (8.5% in class “A” offices and class “B” offices 8%). So even though new premium office spaces are no longer offered below 14.50-15 euros per square meter per month, the market is becoming a “tenant’s market” in many locations and especially in Prague, when landlords have to come up with incentives in a number of projects. According to CBRE, vacancy in high-quality office buildings should remain low as these buildings are increasingly sought after by tenants. Simon Orr, Head of Tenant Representation in CBRE’s Office Leasing Department, says: “Hybrid working styles and ESG are now the focus of the entire office sector. And administrative projects are adapting to this – to provide a more flexible and sustainable work environment.”
ESG is not only a priority for foreign investors.
Buildings are responsible for producing around 40% of the world’s greenhouse gases. According to the January 2022 CBRE European Investor Intentions Survey, more than two-thirds of European investors have adopted ESG criteria in their investment practices and processes. This commitment to ESG is now becoming the “new normal” in Europe and the importance of ESG in the real estate industry is growing significantly. Jiří Stránský, head of the sustainability team at CBRE, states: “The entire Czech market is trying to understand in depth what the ESG acronym means and what effect it has on business. An ever-increasing inclination to fulfill ESG principles leads not only to a more responsible approach to the environment and to the communities that live in it. In the long term, it also increases the competitiveness and value of real estate.”
In the first half of the year, investment transactions reached almost EUR 1.16 billion.
The first half of the year was relatively strong from the point of view of investments, so in a year-on-year comparison, their total volume reached 35% higher values. It has traditionally led the office real estate sector, which represents 45% of all investments. The second highest volume belonged to retail real estate, which reached a 34% share. Industrial and logistics properties took third place with an 18% share.
In general, it can be stated that the market has even more potential, but the supply is limited by the lack of premium products caused by limited construction and slow permitting processes. The second half of the year will therefore be slightly lower in terms of investments, with CBRE expecting that the total volume of investments will reach EUR 2 billion by the end of the year, i.e. similar to last year or the year before. Jakub Stanislav, head of the investment department at CBRE, describes: “The investment market in the Czech Republic is now driven by supply, not demand. Supply is currently tight, especially when it comes to premium properties and properties nearing completion. Czech investors are taking advantage of the fact that foreign investors have somewhat cooled their interest and are waiting for the right premium product to appear on the market.” The strong demand for investments among Czech investors continues and their share already makes up more than half of the capital invested in the country. However, due to the slow pace of new construction, some of them are also looking at assets in Slovakia and Poland. For others, the trend of investing in secondary properties is growing. In any case, Czech funds will grow in the following years.
Industrial and logistics parks attract the most investors, followed by retail parks and offices. Similar interest can also be expected in the second half of the year, while due to the limited supply of new buildings, even older properties will be sold. The market is currently struggling with rising inflation and the search for a stabilized price among property owners and potential investors. CBRE assumes that the convergence of these expectations could occur already at the end of this year and be fully manifested at the beginning of the next one. Real estate yields will rise by 25-75 basis points across segments during H2 2022.
