Numerous newly constructed storage facilities built without confirmed tenants have experienced extended vacancies lasting for six months or longer. This phenomenon, unheard of for years in the Czech Republic, has even led to a slight dip in average rents in some regions. After factoring in the lengthening rent-free periods, rising vacancy rate, and a growing trend towards subletting, everything points to the third quarter confirming a slowdown in momentum on the domestic industrial property market. This is the finding of an analysis conducted on indicative data by the Czech real estate and consulting company 108 Real Estate. In the reporting period from July to September, gross demand totalled 158,867 sqm, with net demand at a mere 122,186 sqm. This record-low quarterly result is the worst in at least four years.
One figure remains surprisingly constant: the activity of developers, who are continuing to report that they have 1.31 million sqm of logistics and production halls under construction. The total area of industrial space to let came to 11.75 million sqm after 319,000 sqm of new premises were completed in the third quarter.
“We are seeing a great deal of caution among tenants because of the uncertain state of the automotive industry in both the Czech Republic and Germany. Part of this has to do with the transition to electric vehicles, where traditional carmakers are up against intensifying competition. This is reflected in the fact that industrial space around Mladá Boleslav has been vacated for the first time in quite a while,” says Jakub Holec, director of 108 Real Estate.
The consultants observed that, in the third quarter, developers were even prepared to split halls among multiple tenants or to accept shorter lease terms, perhaps in response to the sizeable volume of industrial space under construction. “We are seeing the market subdivide larger spaces into units of around 2,000 sqm and three-year leases. That’s a significant change,” says Matěj Indra, head of industrial leasing at 108 Real Estate. When it comes to subletting, it is mostly logistics companies that are making space available to third parties.
In recent months, landlords have been hit by a mix of negative factors, chief among them a steady slide in demand from domestic consumers and customers. This has translated into a decline in net demand, with almost 54 percent less industrial space leased quarter on quarter in the third quarter, 42 percent less than in the same period last year.
The consultants have also detected a drop in the volume of tenders from logistics companies. “By all accounts, the Czechs are the biggest penny-pinchers in the EU. At the moment, we are unable to gauge whether they are putting off purchases until later or whether this is a long-term trend where products will no longer have any buyers,” explains Michal Bílý, head of market research at 108 Real Estate. Another adverse factor is the stiff competition from the Polish market, which is more flexible, more attractive in terms of both space and rental costs, boasts a transport infrastructure that is not only modern, but is benefiting from continued investment, and has a large workforce.
All this is pushing up the industrial vacancy rate in the Czech Republic. While the increase has not yet been drastic, it is another sign that the market is in flux. The vacancy rate at the end of September stood at 2.68 percent, including shell & core space, accounting for 314,827 sqm of modern industrial space. Excluding shell & core space, the vacancy rate was 2.20 percent and totalled 258,563 sqm. Landlords’ concerns are also reflected in their more accommodating pricing policy, even though borrowing costs remain high.
In the Czech Republic, rent increases have essentially come to a standstill, but even so, the market is currently unable to compete with Poland on price. The average rent in the Czech Republic was €6.07 per sqm. The highest rents in Prague are as much as €8.00 per sqm. “However, there are considerable regional and qualitative differences. In some places, we have seen a dip in the highest rents, while elsewhere – notably in the South Bohemia, Karlovy Vary and Pardubice Regions – the lowest rents have gone down. On the other hand, the areas around places such as Plzeň, Olomouc, and Ústí nad Labem have seen a slight increase in prices,” says Michal Bílý.