ECONOMY: Domestic demand once again as the driving force of the economy
Rising interest rates, conflict in Ukraine, persisting supply chain issues and high fluctuations in energy prices are challenges anyone has to navigate through these days. Rising inflation, which is expected to reach 12.4% in 2022, is no longer driven only by rising energy or oil prices but extends to most goods and services. Almost 60% of the average consumer basket has seen a year-on-year price increase of 5% or more, which should impact the purchasing power, retail spending and investment activity. Despite the inflation pressures, domestic demand remained the main driver of economic growth in past months, offsetting lower exports and decreasing investments. Although there is a significant economic slowdown, the economy should grow by 1.8% in 2022, according to the latest estimate of the National Bank of Slovakia. The performance of the economy in 2023 depends mostly on future energy prices and interest rates as well as its impact on both companies and the general public. Steps taken by the EU and the local government to address soaring energy prices might limit the negative impact on the economy. The situation in the labour market, like in other countries, remains optimistic and shows signs of overheating. In the 2nd quarter, 16,000 people found employment, almost half of which were refugees from Ukraine. Unemployment keeps on falling and reached 6%. Increasing interest rates and rising bond yields are creating pressure on yields investors are willing to pay for commercial real estate. Although we see a yield increase already taking place in more mature markets, prime yields remain stable in Slovakia. Across all segments, in the case of more risky assets, yields are rising just mildly up to 25 bps. Further yield increase is expected in 2023 and might already materialize in Q4 2022.
Office
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 sq m representing a 53% quarter-on-quarter increase. In addition, net take-up figures stand at 32,400 sq m with new leases accounting for more than 26,700 sq m. We expect the increased leasing activity to persist towards year-end. However, due to the rising costs of projects, even in the case of refitouts, 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 sq m. Pipeline development consisting of 6 buildings with 146,700 sq m now stands at almost one-third occupancy rate. Altogether, development activity is muted this year, as only about 3,500 sq m of leasable space will be added next quarter, bringing the year’s total to 28,600 sq m. 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.
Retail
Despite the uneasy situation associated with the ongoing war and flaming inflation, the new shopping centre Promenada opened its gates in the second quarter of this year. It became the sixth shopping center in Nitra and brings a total leasable space of 26,000 square meters. Due to consistently growing construction materials costs and delivery length, we see fewer projects under construction. Eurovea 2, which opening date is set for April 2023, is still the only large-scale retail project under development, accompanied by several smaller retail projects – retail parks NC Sabinov and OC Island or the extension of shopping center OC Madaras. Worth mentioning is also OD Prior in Piestany, one of the most successful among Priors, that is undergoing extensive reconstruction. Several Ukrainian brands were forced to close part of their operations in Ukraine and are looking for an alternative to relocation, one of them being Slovakia. In addition, the food & beverage is seeing increased interest from foreign concepts that would like to enter the market.
Industrial
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 sq m split into 5 buildings across all regions. Another 21 buildings with a total area of 305,900 sq m 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 automotive sector. Therefore, take-up even surpassed the previous quarter and amounted to 204 800 sq m, 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 sq m) 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.
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