Offices: Tenants staying
Prime office yields in Europe could move out by on average of 30 basis points in 2023, where yield decompression is expected in the majority of markets. Growth of prime headline rents could act against the anticipated yield decompression, as prime rents have also been growing across Europe throughout 2022. Rental growth is also forecast for 2023, albeit at a slower pace. At the end of 2022, prime office headline rents in Prague have risen to €28 /sq m/month.
Tenant demand persists despite the worsening economic situation. The coming months will bring challenges to some tenants due to cumulatively rising occupancy costs. A strong rise in service charges, as well as energy prices, is expected and will significantly impact total costs for tenants.
Throughout 2023, we might see an increase in the subletting of excess space, as well as an increasing share of renegotiations. In comparison to new leases and relocations, these are becoming more costly for tenants. The majority of office leases include a full indexation clause, and HICP expect a 10% increase on Euro based leases in 2022. An even higher indexation will occur for Czech Crown denominated leases, with indexation linked to the inflation published by the Czech Statistical Office.
Industrial & logistics: back to normal
While European office rents have risen modestly this year, logistics rents have witnessed significant increases, predominantly in the United Kingdom (+59% in London Heathrow) and in Central and Eastern Europe, in Poland (in excess of +30%), in the Czech Republic (+21%). In the coming year we expect rents to stabilise and do not expect any major increase in prime headline rents, which currently stand at €7.50/sq m/month
As a result of the worsening economic situation, demand is expected to cool down in certain market segments. However, companies will be pushed further into optimising and streamlining their operations, which can bring opportunities and demand for space. No major rise in vacancy rates is expected. In the Czech Republic it currently stands below 1%, and demand is therefore still expected to outpace supply.
Prime yields have adjusted upwards, most notably in the most liquid European markets of Great Britain, France and Germany. In smaller, less liquid markets, yield decompression was more modest due to a freeze in investment activity. As in the office sector, revaluations and further yield decompression is still expected in 2023, with yields forecast to shift by about 30 basis points next year.
Retail: retail parks resisting
The retail market is in a different situation than the office and industrial markets. Prime high street headline rents have been decreasing in the UK, France and Scandinavia, and stagnated on the high streets of the largest German cities. According to predictions by BNP Paribas Real Estate, similar patterns are also forecast for 2023. The retail sector was the subject of significant revaluations back in the covid-period of 2020, therefore, current and future predicted yield decompression is less profound. We are witnessing very diverse performance within the retail sector by asset type. Retail parks continue to be an attractive asset class.
ESG and impact on property values
Older properties, with expected higher costs for renovation, insulation and energy efficiency improvements, will be under stronger pressure to take into account lower levels of sustainability and the fulfilment of ESG criteria in their value. On the other hand, ‘prime’ and sustainable properties in top locations will be more resistant to price fluctuations.