The first quarter tested the resilience of the Czech industrial space market - tenants dictate conditions
The first three months on the domestic industrial space market were tenant-driven, after the last few years when there was a virtual lack of availability of modern warehouse and production space. In the first quarter of this year, the supply of subleases accelerated significantly: data from real estate consultancy 108 REAL ESTATE show that new contracts from January to March covered just under 92,000 sqm, a record low. However, some of the tenants rented space under subleases, which are not monitored. Meanwhile, another 1.07 million sqm of new industrial space is under construction. After turbulent times, the Czech industrial market will have the capacity for further growth.
It is the end tenants who are beginning to set the market conditions. This is also influenced by the fact that they can choose from newly completed or being completed halls and complexes, but also from an increasingly wide range of subleased space. "As a result, rent growth has stopped. In some regions there has even been a decline. Developers and owners are also more willing to provide benefits and shorten lease contracts. Demand and supply will therefore come into balance this year," Jakub Holec, Director of 108 REAL ESTATE, summarises the results of Q1 2024 on the industrial space market. He is referring to a vacancy rate of 2.65% excluding shell and core (S&C) space, including a total of 5.36%. Almost 500,000 sqm in total is now in S&C status, i.e. just before completion, most of which is available for lease.
The weaker Q1 results are due to the receding inflation shock and uncertainty in the automotive segment in Germany, on which many domestic entities are also dependent. This may also explain the low activity of logistics (3PL) companies. The latter have stopped their expansion and even sublet part of their space. But they have the flexibility to increase capacity: falling inflation and interest rates and, at least in some areas of the economy, a noticeable recovery give a chance for higher consumption by households and companies. And thus a boost for the logistics segment in the near future.
The first months of this year have tested the resilience of the domestic industrial space market. The shift in the centre of gravity towards tenants is evidence of a cyclical development. However, what can be seen as a new challenge, according to 108 REAL ESTATE, is foreign competition. The level of rents, operating and labour costs, the complexity of the process of obtaining building permits and other factors are leading to a weakening of the Czech Republic's position in foreign tenders for tenants and clients in the industrial segment. Poland, Hungary or Romania are currently more successful.
"We have repeatedly said that the local industrial segment is very resilient and flexible. It is not building headlong and a significant proportion of new properties are fully or partially occupied. However, we feel there is room for further preference for tenants, even international ones, who are deciding between several destinations," believes Matěj Indra, Head of Industrial Leasing at 108 REAL ESTATE. According to his team, we will see further adjustments in rents during this year, which currently average between EUR 5.50 and 6.50 per square meter per month in the Czech Republic.
Although the first quarter of this year was the weakest period in the last ten years in terms of concluded leases, a stabilisation is already visible during the beginning of the quarter. The relationship between landlords and tenants is also changing due to the robust new construction taking place over the last three years. This is evidenced by a comparison with 2018. Back then, 7.25 million sqm of modern industrial space was available on the market. Currently, there are 11.93 million sqm of completed space. There would be even more, but some of the "A" space has been reclassified due to its age. If the projects were included S&C projects, the supply would rise to 12.41 million sqm. It is this stock that absorbs a part of the demand in the form of subleases: they can obtain much more attractive terms and rent levels than owners or developers of newly completed or under construction logistics centres.
The consultants from 108 REAL ESTATE remain slightly optimistic in their forecasts for the further development of the industrial space market in the Czech Republic. Several stimulating factors are evident: the continued expansion and improvement of transport infrastructure, the shortening of supply-customer chains, the negotiation of several strategic investments, and the impact of the entry of Chinese automakers into the European market with a number of (sub)supplier relationships. On the one hand, this may help the demand for warehouses and production facilities, but at the same time it may weaken the position of traditional European carmakers, which are facing a number of problems at the level of electromobility.
At the same time, the 108 REAL ESTATE team highlights potential risks that affect the whole of Europe. Behind it are the real estate crisis and deflation in China, large investments in AI and chip infrastructure in the United States, and more. The common denominator of most of these trends is deglobalisation and the desire to protect one's own market and security interests. Large investment groups may see this as a major opportunity, and may be attracted to it significantly more than the real estate market in Europe.
"We could not be surprised if the decision-making processes of many investment and real estate groups dropped expensive Europe, with its ageing population, to the bottom of the list of where to direct capital now. On the scales, where the opportunity is now, Europe is slowly weakening and something needs to be done about it in time. Increase competitiveness, boost innovation and simplify bureaucracy." he concludes Michal Bílý, Head of Research at 108 REAL ESTATE.