According to data from Colliers, a trend called Shell & Core is gaining momentum in the Czech Republic. This is a strategy where developers construct and build out industrial buildings to the stage of providing basic structures and infrastructure. However, the interior elements remain unfinished and will be completed only according to the preferences of a particular tenant. As of the end of Q1 2024, there was approximately 360,000 sqm of space in this state or set-up available on the market. Growth in this trend is mainly linked to recent supply chain disruptions and the need for developers to respond flexibly to current demand. For tenants, this strategy delivers significant time savings.
The project will not be completed, despite record-low vacancy rates
Although the Shell & Core model appeared on the market in the past on a limited scale, it is only now that more and more major players are joining the trend. This allows them to respond flexibly to market demand and reduce risks associated with market fluctuations. “When a developer prepares a project, they can respond more flexibly to demand. Clients don’t have to wait a year for the construction of a new hall: only a few months, and they can adapt it to their ideas and needs,” explains Miroslav Kotek, Head of Industrial Real Estate at Colliers, adding that Shell & Core buildings are not counted in market statistics and therefore do not affect the vacancy rate. The vacancy rate in the first quarter of 2024 was only 2.00 percent, but if all these projects were completed without secured tenants, the vacancy rate in the Czech market would reach almost 5 percent.
Completion is pending with a specific tenant
Developers usually wait until a future lease agreement is in place to complete Shell & Core projects. This is because clients may require superior fit-outs for halls or other buildings, and it is more efficient and easier to implement these fit-outs in the as-built state. The building is most often finished without, for example, floors, fitted docks and completed utility lines. This makes possible modifications significantly more flexible. A completed building of a certain standard might not suit all potential tenants, which could in turn slow down the leasing process.
On the other hand, some parameters such as clear heights, building shape or column spacing are already set and cannot be adapted to the tenant’s needs. “Thus, the tenant has to adapt to the already prepared space and consider whether the layout of the hall allows them to run their activities optimally or whether it is better to choose another project in the preparation phase. However, in such a case, the risk of time delays is significant given that permitting processes in the Czech Republic are often lengthy and unpredictable. Commonly, planning and construction procedures can take several years, even in the case of brownfield regeneration,” explains Miroslav Kotek.
Declining demand and uncertain economic development will slow down construction
Given the current market situation and steadily declining demand due to the Czech Republic’s increasing inability to compete in the construction market (a trend Colliers has observed continuously since the end of 2022), no further significant growth is expected in the Shell & Core area. Developers will focus on occupying and completing existing projects under construction (approx. 1.3 million sqm) as quickly as possible. Future speculative development will be subject to in-depth market analysis and the forecasting of future demand trends. “Major speculative construction is unlikely to return anytime soon. All market players will remain cautious and minimising risks will be their priority,” concludes Miroslav Kotek.
