"The pace of delivering new projects to the market is lower than we expected. Compared to the assumptions that counted on the delivery of approximately 300,000 m2 each quarter of this year, only 653,200 m2 were delivered in the first three quarters," comments Josefína Kurfürstová, an analyst at Colliers, adding: "However, the reason for the smaller number of completed and delivered projects is not only the slowing down of the market and the postponement of some projects by both tenants and developers, but above all the increasing number of speculatively built projects, where the building is often preserved in an advanced stage. Completion is awaiting a suitable tenant."
Some of these trends stem from the previous two years, during which developers and tenants have had to deal with supply chain and energy crises, inflation and more difficult financing due to higher interest rates and declining investment returns. While the demand grew in 2021 and 2022, the supply stagnated due to unexpected global crises such as the shortage of building materials, their increased price and the increase in the price of other inputs due to inflation. Therefore, developers are currently trying to create a flexible offer, thanks to which they could respond quickly and satisfy the demand of investors and tenants without long delays.
Vacancy remains below 2%
Although vacancy increased slightly during 2023 and reached a 2-year high at the end of 1H, it fell again by 22 basis points to 1.49% in the past quarter. To a large extent, this is related to the changing construction strategy and the aforementioned effort to preserve buildings under construction until suitable tenants are found for them. So vacancy will most likely continue to hover between 1 and 2%. "The Czech market has one of the lowest vacancies in Europe. Given that there are almost no modern spaces available for immediate rent, this is unfortunately not a sign of a healthy market. If the amount of speculatively built premises delivered to the market does not increase or there is no economic crisis that forces tenants to leave their premises, the situation will not change in the near future," explains Josefína Kurfürstová.
Realized demand indicates an approaching period of uncertainty
Demand fell sharply in the 3rd quarter of this year and reached a total of 181,600 m2, which is a 62% drop year-on-year. Net realized demand amounted to 141,000 m2, which is a year-on-year decrease of 60%. “In
in the second quarter, we recorded an increased amount of renegotiations, which helped to keep the total volume of realized demand relatively high, but in the third quarter, their amount dropped dramatically," adds Josefína Kurfürstová. Contract renegotiations accounted for only 19% of all activity in the 3rd quarter, the majority of which was new leases and pre-leases. The slowdown seen in the market can be caused by a number of factors, the most significant of which is probably the slowdown in the global economy. This results in longer decision-making processes and increased caution on the part of companies, which are thus trying to protect themselves from a possible crisis, reduce costs or input prices.
Rents are stabilizing
The highest achieved market rent in the Czech Republic has skyrocketed over the last 3 years from around 5 euros per m2 per month to the current more than 7.5 euros per m2 per month. We do not expect significant downward or upward fluctuations in the near future. Rents for the most sought-after locations ranged between 7.50 - 7.70 euros per m2 per month for warehouse and 9.50 - 12.50 euros per m2 per month for office space in the 3rd quarter of 2023. Service fees vary between 0.75 - 1.00 euro per m2 per month.
Developers still see potential in the Czech market
Despite the worse results of the third quarter, it is evident that developers continue to see potential in the Czech market, which is evidenced, among other things, by the constantly growing stock of projects for new construction. There is no clear indicator of a crisis and market conditions remain largely stable and the Czech market is performing well compared to other European markets.