INDUSTRIAL PROPERTY MARKET - Q4/2022

Rental costs of warehouses and production halls in the Czech Republic have hit a new high of €8.5/sq m. Economic uncertainty, coupled with record construction, halted the dynamic growth in rents which lasted from the first half of 2020. In some locations there was even a slight decline of around 5 to 10%. However, this is where the good news ends from the point of view of the tenants'. According to results from the 4th quarter of 2022 firms are having to deal with a jump in rent indexation, lower customer consumption, growth in service charges and, of course, increased energy costs.

"In practice, we see that a number of tenants did not deal with indexation to the extent that it affected their strategic planning. According to Eurostat, however, the inflation-copying increase now amounts to 9%, which is a noticeable rise in costs. Tenants with contracts in Czech crowns are even worse off. In addition, service charges also increased year-on-year by an average of 25% to €0.85 per month per square metre." says Matěj Indra, Head of Industrial Agency.

Additionally, the cost of bank guarantees for tenants have rapidly increased, and interest rates of 7-8% are not unusual. This works in combination with the stricter requirements of developers on the credibility of clients. The European Central Bank also plans to gradually increase interest rates. When the numbers are added up, domestic industrial areas may now be closed for some interested parties and existing tenants, regardless of the location. 108 AGENCY have received several active requests for new leases or relocation possibilities to Slovakia or Poland, where the tenants can enjoy more favourable conditions.

As 108 AGENCY predicted throughout the second half of 2022, the transformation in the market for industrial space is happening. In the final quarter of 2022, it was evident that efforts were being made to subleases, especially in areas used by e-commerce entities. Falling household consumption will be reflected more significantly in the coming months in terms of vacancy rates and a greater movement of tenants away from this segment.

Tenants who decided to completely leave their premises were flexibly replaced by others. This is why the situation has not yet been significantly reflected in the vacancy rate – it hovered around 1.39% at the turn of the year, which marks the first increase after decreasing for eight quarters in a row.

"However, it is very likely that we will see further growth in this indicator in the coming months. This is mainly because there are currently over 1.2 million square metres of new industrial space under construction, where a significant part of the implemented projects do not have fixed tenants in advance. These projects will then come to the market at a time of increased caution by companies," believes Michal Bílý, Head of Research. According to his calculations, by the end of 2023 it is likely that in excess of 12,000,000 square metres of modern industrial areas will be available in the Czech Republic. However, from 108 AGENCY's point of view, it is only a matter of time before these spaces are occupied. Despite the slight increase in vacancy rates, the overall level is still very low and demand is still strong.

This is also confirmed by the current analysis of 108 AGENCY: the total area of leased premises has been decreasing since the first quarter of 2022, and in the 4th quarter of 2022 the net take-up reached 210,028 sq m, which is significantly the smallest volume for 2022. However, last year still showed positive results, with more than 1.3 million sq m of new leases. This is better than 2020 and 2019, with the record number of leased areas remaining in 2021.

However, the described cautious or even defensive strategies do not apply to all tenants. There are many who do not need to sublease unused areas - for example, with the vision of an early recovery of the economy. Signals of successfully weathering difficult times appear more and more often, even from respected institutions such as the International Monetary Fund (IMF) or Goldman Sachs. This is especially due to falling gas prices and economic recovery in China after strict lockdown during the COVID-19 epedemic.

More recently, lease agreements have also been concluded reflecting increased rents, mainly in fields which continue to grow rapidly. In general, however, it should be stated that, if tenants have the opportunity to prolong the lease, they try to maintain the conditions stated in their existing contracts. It is a given fact that newly concluded contracts are, at least from a financial point of view, less advantageous than the older ones. "Negotiations regarding contracts and pressure to reduce rent and service fees will continue to be prolonged. However, it will not apply to regions where demand is still higher than supply," concludes Matěj Indra.