In line with the global trend, the core CEE markets recorded reduced demand levels, but rents have seen only a modest fall in comparison to other European markets. Office yields remained close to their 10-year low however, restrictions on travel and market uncertainty have impacted on investment volumes.
Czech Republic: Prague office market has recorded the lowest quarterly net demand in the last decade together with the growth of the available space for sublease. On the other hand, current vacancy rate kept relatively low, with a high volume of renegotiations and a reasonable new supply.
Hungary: Q3 demand levels in the Budapest office market were restrained compared to the same period of previous years. As new supply is continuously delivered to the market, vacancy rate has increased but remained one of the lowest in the region. Whilst the pipeline for the 2020-2022 period shows an increased level compared to the amount seen in the last ten years, the impact of WFH in Budapest remains to be seen on future demand and design. Large-scale transactions, however, have proceeded and we have seen large occupiers are committing for long term leases.
Poland: The lockdown period and the uncertainty of the economic impact of the coronavirus pandemic pushed some office tenants to temporarily withhold their decisions regarding lease negotiations. Gross take-up in Warsaw showed a decrease of 35% YTD 2020 on the same period in 2019, which was record-breaking in terms of demand. Given the current situation and subdued occupier activity, we expect a limited number of new projects coming onto the market in 2022-2024, which is likely to result in a supply gap in that period.
Romania: Bucharest prime office rents remained stable with a solid pipeline being under construction. After a record low Q2, the demand levels slightly improved during the third quarter as many companies have come to an agreement in renewing or renegotiating their existing contracts. Large occupiers have put several sublease options on the market and, we have recorded expansion options if returning to the office required extra space due to social distancing measures.
Slovakia: The total office stock should increase by 61,000 square meters by the end of the year, which is likely to increase the overall vacancy rate. Office demand in Bratislava remained in line with the 2019 levels. Due to the coronavirus crisis, a significantly lower share of net demand (which abstracts from renegotiations) was recorded in the third quarter, reaching only 31.6% (a record low in recent years). Only about 3% of net demand consisted of lease extensions. Tenant market will remain in the foreseeable future.
The CEE market is booming with record high demand levels recorded in YTD 2020. The region has seen the strongest growth for logistics demand in Europe overall with the demand is predominantly driven by logistics and e-commerce, albeit the latter is evolving from a relatively low basis in comparison to WE. The acquisition of the Goodman portfolio by Gazeley is the largest logistics transaction seen in the last decade in the region and reflects the growing importance of the sector. Prime yields remained at their 10-year low levels.
Czech Republic: The demand for industrial space decreased by about 18% year-to-date in comparison with the previous year, more significantly in regions dominated by manufacturing spaces. E-commerce and logistics have been clearly driving the market. However, majority of leases came from production companies expanding their spaces in Pilsen region in 2020, which recorded the highest annual growth of take-up in the Czech Republic. Renegotiations accounted for half of the take-up this year and we expect that the higher share of renewals will continue in the following period as well.
Hungary: The Budapest industrial and logistics market is buoyant with record high demand levels and an apparent under-supply of modern space, pushing the vacancy rate further down. YTD demand level reached a massive 30% increase on the already strong 2019 levels. This has attracted some newcomers to the market intending the delivery of new stock on speculative and BTS basis alike as continued low vacancy and reasonably stable demand levels are expected going forward.
Poland: The year 2020 is marked by lower activity of developers in the Polish warehouse market, but demand remains very strong. This market is currently the fastest growing commercial property sector. The very strong results recorded on the demand side were due to factors such as the need to maintain higher inventories by companies willing to secure uninterrupted supplies, as well as the further development of the e-commerce sector and the multichannel sales strategy, which is gaining in importance under the restrictions on physical retail. This is confirmed by the record volume of leases, of which new leases and expansions accounted for 71%. Poland is gaining in importance as a production and logistics hub of Western Europe. Companies, both those already present on this market but also those planning to invest in the CEE region, will secure additional space to prepare for the risks of potential disruptions in the supply chain in the future.
Romania: Logistic demand hits new records in Romania with 94% growth registered y-o-y. Bucharest is perceived as an important regional hub as an increasing number of retailers investing in major distribution centres around the capital city of Romania. The Covid-19 pandemic boosted the e-commerce market, reason why both the online retailers and the delivery (courier) companies searched for new warehouses inside the largest urban poles; the market is expected to develop going-forward, as 62% of the take-up during Q1-Q3 period is represented by pre-lease agreements.
Slovakia: Continuous growth of net absorption levels show a healthy industrial market in Slovakia. Industrial asking rents remain mostly unaffected. The total industrial stock in Slovakia increased by 52,200 sq m to 2,725,700 sq m in the third quarter, which represents a quarterly growth of 2%. The total volume of leases reached 85,800 square meters. This represents a year-on-year decrease of 35%. Companies that needed warehouse and distribution space (e-commerce in particular) had the most demand. We expect the industrial stock to grow by 113,000 square meters in the next two quarters, which would result in a year-on-year increase in total stock of up to 9%.
The retail sector is facing the most negative consequences due to the governments-imposed restrictions and lockdowns. Prime high street rents decreased by 20% y-o-y in the region which is in line with the contraction other EMEA regions have reported.
Czech Republic: Sales in shopping centres, especially those in regions, were at comparable levels in Q3 as in the last year, although the footfall was perceptibly lower. While regional shopping centres are expected to recover fast after the crisis, Prague schemes will struggle with the lack of tourists, office employees and people in traffic hubs and their way back to sales growth will be slower.
Hungary: Retail sales were reaching pre-pandemic levels in the summer with online sales seen a significant improvement with a 40% growth rate registered on 2019 levels. Shopping centres however are experiencing some decrease in footfall since September after a brief recovery period seen in the second half of the summer. Prime Budapest high street locations, which are much dependent on international tourism have recorded decline in prime rents in response to the strong decrease measured in turnovers recently reported by retailers. The retail warehouse sector was less effected by the COVID – 19 pandemic and some profiles such as furniture and sports have even experienced an increasing turnover compared to the last quarter in the previous year.
Poland: Footfall in shopping centres was rising steadily after the spring lockdown, reaching a record 90% of last year’s level in the last week of August. The overall picture in September was very positive, but due to rising infections throughout Poland, the shopping centre footfall began to fall in early October. Research shows that customers appear to favour visiting small and mid-sized retail schemes while large shopping centres are seeing a trend towards quick and pre-planned shopping and reduced in-store dwell times. Given the current situation and uncertainty regarding the future, tenants are exhibiting a lot of caution with regard to making long-term commitments, opting instead for short-term leases for pop-up stores.
Romania: Prime shopping rents are currently under pressure after the lockdown period, as renegotiations have started on decreased rental levels with more consistent incentive packages. The development market continued to improve with three shopping centres being delivered whereas the pipeline for 2021 consists of small retail parks and extensions of existing schemes only.
Slovakia: Supply & demand in retail property market remains suppressed while retail prime rent and prime yield hold steady for now. However, common rental levels have continued to decrease since the beginning of this year – firstly due to a high retail saturation in the capital city and currently due to lower mobility & spending of consumers as anti-COVID measures tighten. Many of the announced brand entries were postponed along with the new retail schemes until H2 2021 with the expectations of market stabilization and higher achievable footfalls.