The Czech industrial property market grew by 269,100 sqm in H1 2023, reaching almost 11.3 million sqm. This is a year-on-year increase of more than 11%. Thus, despite higher interest rates, more complex financing, a slowing economy and fluctuations in industrial production, the local industrial property market continues to accelerate its growth: currently at its highest level in five years. This is also linked to a slight increase in vacancy rates and the stabilisation of rental prices according to findings in a recent survey by Colliers.
The industrial real estate market has experienced steady growth since the Covid-19 pandemic. In the last two years alone, the market has added almost 2 million sqm. Rising rents have been an important factor that has fuelled investor interest in this type of property. Prime rents, i.e., rents in the most desirable locations, have increased by 72% compared to five years ago and by 50% since 2021, making this market very attractive. "Construction activity is riding the wave of increased interest in Czech industrial property. Nearly 1.5 million sqm of new, modern industrial space is currently under construction and is expected to be made available on the market in the next 6-18 months," explains Josef Stanko, senior analyst at Colliers, adding: "Traditionally, the capital city and its surroundings have been the most active region in terms of construction, but now activity is waning. This is mainly due to a shortage of land and a more complex, lengthy permitting process. In contrast, all other regions are experiencing a construction boom, even though demand for space is not as high this year as in previous years. 26% of all construction is taking place in the Karlovy Vary Region; with the Pilsen Region accounting for 13% of new projects, and the South Moravian, Ústí nad Labem and Moravian-Silesian Regions with 12% each."
Rising vacancy - a market trend suggesting recovery
This strong construction activity is also associated with a slight increase in vacancy rates. It has increased for the third quarter in a row and currently stands at 1.71%, which is still significantly low compared to other European markets. "A healthy vacancy level is around 4-5%. The last time the Czech market was at these levels was in 2019 and 2020, when vacancy rates started to fall from around 5% to below 1% at the end of 2022. The Czech market still has a long way to go before it reaches levels of around 4-5% again," explains Josef Stanko, adding that the rise in vacancy rates is not detrimental. There has been an extremely low amount of vacant space offered on the market in the last two years. With increased vacancy and space available for immediate letting, tenants have more options to consider.
Demand one-third higher than the five-year average
Overall demand in Q2 was strong compared to previous quarters at approximately 597,000 sqm. This is almost a third more than the five-year average and will help make up for the market's slow pace in the previous two quarters. Net take-up represented 46% of the total (278,800 sqm) and is therefore at a similar level to the previous two quarters. The volume of new lettings, pre-lets and expansions was therefore unchanged and the current increase in total demand was due solely to renegotiations.
In terms of sectors, as in the last three quarters, manufacturing companies dominated net take-up with over 60% of all transactions, followed by logistics companies with 23%.
Rental prices stabilise
After huge rent increases in the last two years, prices in the most important locations on the market have slightly decreased. Current prime rents in Prague are in the range of €7.50-7.80 per sqm/month, like the previous quarter. "This development shows a shift towards the stabilisation of rent levels on the market after a period of rapid growth. We expect this trend to continue and that rents in Prague in the best categories will stabilise at around €7.00-7.50 per sqm/month in the foreseeable future. Regions outside Prague are a different story and there is still some room for rent growth," comments Josef Stanko, adding that rents for mezzanine office space are between €9.50-12.50/sqm/month. Service charges are typically around €0.75-1.00 per sqm/month.
Speculative construction can further affect the market
The market could be further affected by the growing share of speculative construction. In H1 2023, developers increased their volume of speculative construction, with the share growing by 4% to 38% overall in Q2. "In our view, however, the increasing pace of speculative construction is unlikely to last if adverse economic conditions persist. It is always good to remember that industrial property is much more flexible than other assets in the real estate sector. It reacts quickly to both favourable and unfavourable market conditions," concludes Josef Stanko.
