Total take-up on the Bratislava office market reached 37,000 sqm which represents a year-on-year increase of 19.5%. As the pandemic slowed down, retail leasing activity also returned and with it the surge in footfall and turnovers. Total quarterly industrial/logistics take-up recorded a strong 22% year-on-year growth, reaching 146,300 sqm. Cushman & Wakefield published its Q2 2021 industrial, office and retail market reports focused on the Slovak market.
Office market
In the second quarter, total take-up reached 37,000 sqm which represents a year-on-year increase of 19.5%. The highest leasing activity (51% of total take-up) remains in the Central Business District. New projects in prime areas drive relocations of tenants who benefit from the competitive leasing market. Renegotiations remain low in absolute terms, which might be one of the manifestations of this sentiment. Net absorption is positive again, reaching 8,200 sqm. Tenants are recognizing the need for professional office space planning, therefore are increasingly seeking workplace strategy advisory services.
In Q2, we saw the completion of Metropolitan Star by Archikód, delivering 2,700 sqm of office space to the City Centre. By the end of the year, office stock should grow by another 41,000 sqm, with the biggest project, Galvaniho V, adding almost 16,000 sqm to the Outer City. A higher volume of pre-leases will be needed to prevent a rising vacancy rate. However, due to the postponement of some major office projects, 2022 will be somewhat calmer than expected in terms of new supply and the resulting vacancy growth, with only one project scheduled for completion.
The increase in larger leasing deals (we record 12 deals sized over 1,000 sqm) and the ongoing negotiations that target prime clients had a stabilizing effect on rental levels. Prime rent remained at €16.50/sqm/month in the second quarter. The pricing on the investment market shows confidence in the sector and combined with the availability of capital, the prime yield narrowed further, reaching 5.50%. Adopting a more flexible approach to office leasing and office space planning is now key to securing long-term rental income by attracting and retaining tenants.
Retail market
Although vaccine rollout across the world heralds the slow return to normal life, the pandemic has also clouded the outlook for retail properties, given the increasing adoption of online shopping and work-from-home. However, in the second quarter, retail was no longer burdened by prolonged lockdowns, which resulted in an increase in leasing activity. We should also see some significant project completions by the end of this year. Refurbished Tesco department store opened under a new name, OD PRIOR Nitra, with the total leasable space of more than 10,000 sqm in June. Another iconic building, the original Prior department store, was opened in the centre of Košice after an extensive reconstruction under the new name OD Urban in April.
This year, we expect the arrival of up to eight new foreign brands in Slovakia, while up to three of them will move to the new Novum Prešov shopping centre - Women's Secret, Springfield and Regatta.
The deadline for a rent subsidy application for the period during the 2nd wave of the pandemic ended on 30 June and this deadline was also final for any corrective submissions. The subsidy could be provided to the tenants in the amount in which the discount from the rent was provided on the basis of an agreement between the landlord and the tenant, but not more than 50% of the rent for the period of difficult use. Despite this measure, however, some tenants had to terminate their leases.
As the pandemic slowed down, retail leasing activity returned and with it the surge in footfall and turnovers. We saw a stabilization in rents which boosts the confidence of investors who are reliant on the performance of retailers. Prime rent for shopping centres remains at €65/sqm/month with a neutral near-term outlook. The retail sector is gaining liquidity in the investment market, where we saw four transactions during the first half of the year. By the end of the year, we expect at least three more transactions, which should put this sector at the forefront of the investment market in 2021. Prime yield for shopping centres remains at 6.00% with a stable near-term outlook. In the segment of retail parks and retail warehouse units, we are seeing a yield compression pushing the prime yields down to 7.00%, while projects with strong covenant strength and WAULT of 10 years can attack pricing of 6.25% to 6.50%
Industrial market
The total industrial stock grew by 6% year-on-year while the adoption of online shopping accelerated the built-to-suit development for e-commerce companies seeking to expand their distribution centres. The total leasable space under construction was 343,300 sqm, which represents more than 94% year-on-year increase and more than 12% of the existing stock. There are currently 13 buildings under construction, 9 of which are situated in Western Slovakia.
The vacancy rate decreased by 0.30 percentage points to 8.40%. The majority of the vacant stock is in new speculative properties built since 2019. Quarterly net absorption reached 24,900 sqm and was positive in all four main regions. We do not rule out the possibility of the vacancy rate surging higher in the near term since the majority of the stock to be delivered within the next 12 months is speculative.
Total quarterly take-up recorded a strong 22% year-on-year growth, reaching 146,300 sqm. Almost 75% of the total take-up was in the Bratislava region, while only 4.4% was in Central and Eastern Slovakia. Pre-leases saw a significant increase and represented about 42% of take-up in the second quarter.
The assumed shift from unknown risks to known risks, as well as the easing of government restrictions, supports the ongoing negotiations which now indicate tightening yields across the commercial real estate landscape. Prime industrial and logistics properties in Slovakia have consistently offered comparatively higher returns than those generated in the neighbouring countries while showing low volatility during the current cycle, which led to a steep decrease in prime industrial yield in 2021. Strong covenant combined with longer WAULT to break/expiry remains key to pricing. While we are quoting the current prime yield at 5.75%, we see a potential for a decrease to 5.25% since several ongoing transactions are aiming to attack more aggressive pricing territory.
In the case of well-located Class A industrial properties, rents of around €4 per sqm should still be expected for large leases lasting 5 years or more. In the segment of city logistics within Bratislava, the headline rent can exceed €5 per sqm. With the recent influx of demand into logistics and distribution, we might see a rise in the prime rent this year, however, the speed of construction in the range of 6 to 12 months and the availability of land in the hands of experienced developers allows a flexible response to the market needs and at the same time reduces the pressure on rental growth.
