The European commercial real estate market is starting to recover. Inflation is well below 2022 levels and the end of the cycle of high central bank interest rates is also approaching, which will start to have a positive impact on all major property market indicators. Real estate consultancy Cushman & Wakefield provides an outlook for the commercial property market named EMEA Outlook 2024: The tide is turning.
Jonathan Hallett, Head of Central and Eastern Europe, Cushman & Wakefield, commented: “As we look ahead to 2024, our forecasts indicate commercial real estate markets are approaching an inflection point after a turbulent period. Though economic growth remains subdued, for now, the tide seems poised to turn.
“While risks like persistent inflation remain, baseline forecasts point to measured expansion rather than recession in Europe. The diminished level of transactions in numerous markets has led to a slower phase of price determination, particularly for the office sector. But we are beginning to witness swifter price adjustments taking place in the more liquid markets, such as in the UK and the Netherlands. As rate hikes end and cuts commence around Q3 2024, we expect to see a bottoming out of the market.
“Whilst 2023 presented challenges, 2024 is shaping up as the early stages of recovery in certain EMEA markets. Investors with a medium-term outlook should feel increasingly confident deploying capital as markets stabilise. Nevertheless, it is paramount to have a thorough understanding of the sector to capitalise on opportunities for both occupiers and investors.”
Offices: Quality over quantity
Despite overall reduced demand across the European office market, over half of leasing is now for Grade A space. As companies embrace hybrid models, buildings with the trifecta of good location, excellent facilities, and sustainable credentials continue to be favoured, highlighting the divergence towards quality. Over the coming years, buildings with strong ESG credentials will become the standard, not the exception. However, with 76 percent of offices potentially obsolete by 2030 on ESG grounds, there exists a value-add for investors willing to transform offices to match the new paradigm. Looking to the future, space needs continue to evolve, and flexibility remains paramount.
Radka Novak, Head of Office Agency, Central and Eastern Europe, Cushman & Wakefield, said: “We are also seeing a rapid increase in demand for flexible office solutions in Prague, even though this type of space still accounts for only about 4% of its total modern office space. Tenants are also intensively addressing sustainability, which can easily eliminate office projects that do not adapt to the new legislation in time from the competition of sought-after projects. For example, about half of the office space in Prague now has no sustainability certificate.”
Logistics: Demand in Europe is expected to return to pre-pandemic levels next year
After exceptional growth during the pandemic, European logistics occupier activity notably decelerated in 2023, with economic uncertainty prompting caution from businesses. However, the ongoing retail shift to online and nearshoring of manufacturing will continue to fuel medium-to-long-term demand, especially for sustainable warehousing and manufacturing space. The expectation of a more meaningful recovery in investment activity is tied to overall confidence in the sector.
Jiří Kristek, Head of the Industrial & Retail Warehousing team at Cushman & Wakefield, said: “The Czech logistics market remains resilient and stable, which is reflected in low vacancy rates and the construction of high-quality space. The slight overheating of the market has caused rental growth in some locations, which will naturally be offset by the market environment. Early next year, we expect demand to slow somewhat and vacancy to rise slightly to healthier levels. Rents should be stabilised.”
Retail: Robust demand for prime assets amid challenging landscape
Retailers in Europe face ongoing economic challenges with stagnant sales volumes not expected to recover until late 2024. As consumers grapple with higher essential costs, discretionary spending has been reduced and tourism still lags pre-pandemic levels, especially from long-haul visitors.
Jan Kotrbáček, Head of Retail Agency, Central and Eastern Europe, Cushman & Wakefield, commented: “The retail market in the Czech Republic is generally in good shape, with retailers still showing interest in further expansion, albeit with caution. Many see the opportunity to acquire quality and dominant retail space that has historically been unavailable, particularly on Prague’s high street and in premium shopping centres. The trend is to optimise stores, focusing on prospective spaces with perfect layouts and in excellent locations – fewer spaces, but larger and more dominant. We expect to see expansion mainly in lower-priced fashion, homeware and drugstore concepts in regional cities, and in the fast food sector.”
Living: Sustained demand in Europe
Demographic factors including an ageing population, declining home-ownership rates, and urbanisation continue to support robust demand in Europe for rental housing, which also includes senior living and student accommodation. While rising construction costs have hampered development, forecasts suggest easing inflation in 2024 could mark a turning point. Though investment declined in 2023 mirroring other sectors, living transactions consistently comprise 20-25 percent of volumes in EMEA.
Erik Müller, Head of Residential Advisory Services, Cushman & Wakefield, said: “The situation is different in the Czech Republic, where the institutionalised rental housing market is not nearly as developed as in Western Europe. The development is mainly influenced by high-interest rates due to the central bank policy. The number of flats whose construction was commenced is therefore extremely low, which, combined with deferred demand, will result in a shortage of apartments to buy in the coming years. The situation is particularly bad for young households, who often cannot afford their own homes even with the help of their parents. The combination of rising rents, a higher number of development projects available for purchase and expected value growth in the long term creates an opportunity for conservative institutional investors, which is already reflected in the growth in the share of residential investment from 3 percent in 2022 to almost 10 percent in 2023.”
Hotels: Sector to capitalise on 2024 optimism
Hotels have shown greater resilience than other commercial real estate sectors, despite economic and geopolitical challenges. Their 10 percent annual drop in YoY transactions outpaced the 54 percent decline across broader real estate. Investors continue targeting hotels for their flexible income potential, countercyclical dynamics, and long-term structural shifts around experiences over goods.
David Nath, Head of Hospitality, CEE & SEE, Cushman & Wakefield, commented: “The hotel market is performing even better in Central Europe and also in the Czech Republic, with investment activity in the first half of 2023 outperforming the previous year by 52 percent. With the improving performance of the overall market, we expect optimism to continue through the rest of this year and into next year.”