In Q3 2022, domestic demand was still the driving force of the Slovak economy. Although rising inflation is expected to reach 12.4% in 2022, the economy should grow by 1.8%. Nevertheless, the industrial sector exceeded expectations in Q3 and kept growing at a rapid pace. In the office market, we can see restored demand in many cases and the increased leasing activity should persist towards year-end, Cushman & Wakefield published its Marketbeat Analysis for Q3 2022.
Industrial market
The industrial sector did everything but slowed down. Once again, it exceeded expectations and kept growing at a rapid pace, borne by the delivery of 113,500 sqm split into 5 buildings across all regions. Another 21 buildings with a total area of 305,900 sqm are underway. Speculative construction accounted for 45% of the development pipeline indicating that developers are more prone to commence build-to-suit projects. In addition, the built-to-own concept is gaining interest among developers. In this quarter, the growth rate of construction material costs slowed down and their availability improved allowing developers to deliver new assets in no more than 12 months. Despite the uncertain situation and rose of headlines in almost all submarkets, we are witnessing ongoing high demand. Driven by the need to secure the production and supply of car parts and components, demand consists mostly of 3PL and the automotive sector. Therefore, take-up even surpassed the previous quarter and amounted to 204 800 sqm, representing a 154% increase over the five-year average of the same quarter. Net take-up figures of 161,900 (79% of total leased space) illustrate strong interest in new spaces. Presumably, the highest number for net absorption in the last decade (186,600 sqm) only underlines that demand is powering ahead. Consequently, the vacancy rate was pushed down over 2 pp quarter-to-quarter to a value of 3.15% implying market cycles have shifted from tenant to developer market.
A combination of increased construction costs, elevated energy prices, unceasing demand, and low vacancy resulted in a substantial increase in headline rents across submarkets. Consequently, prime rent rose to €4.25/sqm/month. Further rent growth is not only possible but inevitable. It is backed by numerous ongoing deals on both existing and future development. In general, developers are searching for new opportunities for land acquisitions to ensure the growth of their portfolios (for the next period). Accordingly, we see increased interest in lands in Eastern Slovakia and previously unattractive locations. Despite upward pressure on yields, prime yield remained at 5.25% with the possibility of growth in Q4.
Office market
After a minor slowdown in the summer, the situation regarding leasing activity was cleared up and, in many cases, we witness restored demand. Therefore, take-up reached 38,800 sqm representing a 53% quarter-on-quarter increase. In addition, net take-up figures stand at 32,400 sqm with new leases accounting for more than 26,700 sqm. We expect the increased leasing activity to persist towards year-end. However, due to the rising costs of projects, even in the case of refit outs, we noticed that the office market is moving towards longer required rental contract periods by landlords, which is more and more in contrast to the flexible requirements by tenants. A major decrease in vacancy in the South Bank submarket was offset by a slight increase in vacant stock in all other submarkets. As a result, the vacancy rate rose mildly to 11.87%. In favour of vacancy was the completion of Lakeside Park 02, which brought fully leased space of 14,000 sqm. Pipeline development consisting of 6 buildings with 146,700 sqm now stands at almost one-third occupancy rate. Altogether, development activity is muted this year, as only about 3,500 sqm of leasable space will be added next quarter, bringing the year’s total to 28,600 sqm. On the other hand, most of the projects will come on stream in 2023 representing 48% above the five-year average, so the supply levels throughout the years will be balanced.
To cope with elevated energy and input costs, landlords continued in increasing service charges. Less energy-efficient buildings, mostly older B and C-class buildings, were affected the most. Therefore, the competitive advantage will go to the higher-end buildings with better energy efficiency. Still, many buildings have energy contracted only until the end of the year exposing themselves to the risk of purchasing energy at spot prices. As a result of high costs combined with popularity-gaining home offices, the trend of reducing space is ever more visible on the market. Therefore, the usage of workplace and space optimization strategies is sought after. Prime rent and prime yield remained unchanged at €17/sqm/month and 5.00%. However, an increase in yield is expected in 2023 and, due to indexation, we do not exclude the possibility of rent growth in 2023
Retail market
Cautiousness among retailers keeps increasing as they are facing an unprecedented situation. Increases in construction costs resulted in delays in the delivery of projects under construction and/or postponement of planned ones. Despite this fact, developers have been announcing new projects in less saturated regions. Although we did not see any new completions in Q3, more than 109,000 sqm of retail space is scheduled for completion in 2022-2023. Retail parks dominate the current pipeline and account for 11 out of 17 projects under construction. The rest consists mostly of extensions of existing schemes including the Eurovea II with 25,000 sqm in Bratislava and OC Madaras with 10,000 sqm in Spišská Nová Ves and several small schemes of regional significance. Slovak market currently comprises more than 2 mil sqm of retail space, whereas shopping centres make up more than 67%, retail parks account for 27% and the rest goes to mixed-use schemes.
We saw persisting high levels of footfall and turnovers induced by deferred consumption at the beginning of the quarter. Nevertheless, the turnover figures decreased for the first time after 17 months in late summer, reflecting changes in consumer sentiment. Additionally, service charges costs are rising hand in hand with energy prices putting both landlords and tenants in an uptight situation. Prime rent remains unchanged at 65 €/sqm/month for shopping centres and €9.5/sqm/month for well-established retail parks. Yields remain unaltered at 6% for prime shopping centres and 7% for retail parks and warehouse units, however, an increase is generally expected reflecting rising interest rates.
