The commercial real estate market in Europe is on the verge of recovery and it can be assumed that it will come with a delay in the Czech Republic.
The Czech economy is expected to develop the slowest in Central Europe compared to the economies of other European countries. Rent growth is expected to continue across all sectors in Europe, with logistics rents increasing on average by 3.4%, office rents by 2.1% and retail rents by 1.2%. Commercial real estate revenue growth is expected to peak in the middle of next year.
The commercial real estate market in Europe is starting to show signs of improvement. As a result of inflation being much lower than in 2022 and the end of the period of high-interest rates imposed by the central bank coming to an end, all the key indicators of the property market will start to turn positive. A view of the commercial real estate market is provided by real estate consulting company Cushman & Wakefield. The name of this outlook is https://www.cushmanwakefield.com/cs-cz/czech-republic/insights/european-outlookEMEA view 2024: Trends are reversing.
Jonathan Hallett, CEE Managing Director, Cushman & Wakefield:
“Our forecasts suggest that commercial real estate markets are finally approaching an inflection point after a more tumultuous period. Although economic growth remains moderate, trends appear to be reversing.
Of course, risks such as longer-term inflation remain, but the underlying forecasts in Europe point to moderate economic growth instead of recession. Lower transaction activity in many markets has led to slower pricing, particularly in the office sector, however in more liquid markets such as the UK or the Netherlands we are already beginning to see faster price adjustments. The market should bottom around the third quarter of 2024, when we expect interest rate hikes to end.
From a commercial real estate perspective, 2023 was a very challenging year. But for the next one, we see good prospects for recovery in some markets in the EMEA region.
The market will stabilize and medium-term investors will again be able to confidently invest their capital in real estate, however, it is necessary to familiarize yourself with the specifics of individual sectors and understand the opportunities for tenants and investors."
"Quality over quantity" in the workplace
Although overall demand in the European office market is falling, more than half of the leases are now for Class A office space, which is made up of higher quality space. As a result of the trend towards hybrid working approaches, companies are putting more emphasis on the development of quality office space. The result is a greater demand for buildings that meet three basic criteria: good location, excellent amenities and sustainability. In the future, high environmental, social and governance (ESG) ratings will be the norm rather than the exception. As a significant number of workplaces, up to 76% in Europe, would become obsolete by 2030 due to insufficient ESG compliance, there is a significant opportunity for investors to transform and capitalize on these offices. Success will also require finding office space that is flexible enough to adapt to the ever-evolving demands of tenants.
We see similar trends in the Czech Republic. Radka Novak, head of the office space leasing team for Central and Eastern Europe, Cushman & Wakefield: "We also see a rapid increase in demand for flexible office solutions in Prague, despite the fact that this type of space still accounts for only about 4% of the total modern office space in Prague . Tenants are also intensively dealing with sustainability, which can easily eliminate from the competition of in-demand office projects those that do not adapt to the new legislation in time. For example, about half of the office space in Prague now has no sustainability certificate.”
Logistics: Demand in Europe is expected to return to pre-pandemic levels next year
Next year, demand in Europe is expected to return to pre-epidemic levels.
A significant reduction in demand for logistics space in Europe occurred in 2023 following an unprecedented surge in demand that occurred during the pandemic. This was due to businesses being more cautious due to economic instability. Further strengthening of e-commerce and nearshoring in 2024 will continue to support the medium to long-term need for sustainable warehouse and production space in particular. This demand will continue to be supported by the above factors. There is also an expectation that investment activity will revive more strongly, which is related to the general optimism that prevails in the industrial real estate market.
Jiří Kristek, head of the leasing team for industrial areas and shopping parks, Cushman & Wakefield: "The Czech logistics market remains resilient and stable, which is reflected in the low vacancy rate and the construction of high-quality premises. A slight overheating of the market has caused rents to rise in some locations, which will naturally be offset by the market environment. At the beginning of next year, we expect rather some slowdown in demand and a slight increase in vacancy to a healthier level. The rent should be stabilized.'
Retail: Steady demand for quality assets in an environment that is difficult to navigate
European retail continues to struggle with persistent economic difficulties and sluggish real sales, neither of which is expected to improve until the end of 2024. As consumers experience increased spending on essentials, they are becoming more cautious and spending less for excess goods. In addition, travel, especially tourism to international destinations, is lagging behind pre-epidemic levels.
Residential properties: demand remains constant across Europe
The rental housing market in Europe, which includes retirement homes and student housing, is still significant. This need is fueled by demographic reasons such as an aging population, declining home ownership rates and urbanization. It is possible that the trend towards weak construction, held back mainly by rising construction costs, could be reversed if inflation moderates around 2024. Although housing investment saw a decline in 2023, which in effect affected the entire property market, it continues to account for approximately 20-25% of total investment in Europe.
Erik Müller, head of the residential advisory services team, Cushman & Wakefield: "The situation is different in the Czech Republic, as the institutionalized market for rental housing is not as developed here as in Western Europe. The development is mainly influenced by the high interest rates given by the policy of the central bank. The number of apartment starts is therefore extremely low, which combined with pent-up demand will result in a shortage of apartments to buy in the coming years. The situation is particularly bad for young households, who often cannot afford their own housing even with the help of their parents. The combination of rising rents, more development projects being offered for purchase and, over the long term, expected appreciation in value creates an opportunity for conservative institutional investors, which is already reflected in the share of residential property investment rising from 3% in 2022 to almost 10% in 2023. "
Optimism in the hotel industry will persist even in 2024.
The hotel industry has demonstrated better resilience than other commercial real estate sectors regardless of the challenges posed by the economy and geopolitical situation. Although their transaction activity decreased by 10% year-on-year, the market as a whole decreased by 54%. Hotels continue to be a popular investment target due to their ability to provide flexible income, counter-cyclical dynamics and long-term structural changes that favor experiences over goods.
David Nath, head of the hotel team for Central, Eastern and Southern Europe, Cushman & Wakefield: "In Central Europe and also in the Czech Republic, the hotel market is doing even better: investment activity in the first half of 2023 exceeded the previous year by 52% and thanks to the improving performance of the entire market, we expect optimism to persist through the end of this year and into next year.”
