The Slovak economy should reach the pre-crisis level in the second half of this year. According to the National Bank of Slovakia, the economy should grow by 4.5% this year, and the growth should accelerate to 5.9% in 2022. Foreign demand, which was driving the economy, should weaken slightly due to shortages of components. The global shortage of semiconductors has adversely affected, in particular, motor vehicle production. Production in the industrial sector was thus unable to meet growing demand. However, the growth of industrial production remains strong compared to the first wave of the COVID-19 pandemic as the global trade operates without major restrictions. The consumption shift from services to goods further supported by the large amount of excess savings reinforced industrial sector’s critical role in the pandemic. This year's growth might be jeopardized by a low vaccination rate which currently lags behind neighbouring countries, staying far below the 60% threshold needed for gaining herd immunity. This might lead to a possible reintroduction of anti-pandemic measures and additional lockdowns, affecting the projected growth.
Office
In the second quarter, total take-up reached 37,000 sq m which represents a year-on-year increase of 19.5%. The highest leasing activity (51% of total take-up) remains in the Central Business District. New projects in prime areas drive relocations of tenants who benefit from the competitive leasing market. Renegotiations remain low in absolute terms, which might be one of the manifestations of this sentiment. Net absorption is positive again, reaching 8,200 sq m. Tenants are recognizing the need for a professional office space planning, therefore are increasingly seeking workplace strategy advisory services.
In Q2, we saw the completion of Metropolitan Star by Archikód, delivering 2,700 sq m of office space to the City Centre. By the end of the year, office stock should grow by another 41,000 sq m, with the biggest project, Galvaniho V, adding almost 16,000 sq m to the Outer City. Higher volume of pre-leases will be needed to prevent rising vacancy rate. However, due to the postponement of some major office projects, 2022 will be somewhat calmer than expected in terms of new supply and the resulting vacancy growth, with only one project scheduled for completion.
Retail
Although vaccine rollout across the world heralds the slow return to normal life, the pandemic has also clouded the outlook for retail properties, given the increasing adoption of online shopping and work-from-home. However, in the second quarter, retail was no longer burdened by prolonged lockdowns, which resulted in an increase in leasing activity. We should also see some significant project completions by the end of this year. Refurbished Tesco department store opened under a new name, OD PRIOR Nitra, with the total leasable space of more than 10,000 sq m in June. Another iconic building, the original Prior department store, was opened in the centre of Košice after an extensive reconstruction under the new name OD Urban in April.
This year, we expect the arrival of up to eight new foreign brands in Slovakia, while up to three of them will move to the new Novum Prešov shopping center - Women's Secret, Springfield and Regatta.
The deadline for a rent subsidy application for the period during the 2nd wave of the pandemic ended on 30 June and this deadline was also final for any corrective submissions. The subsidy could be provided to the tenants in the amount in which the discount from the rent was provided on the basis of an agreement between the landlord and the tenant, but not more than 50% of the rent for the period of difficult use. Despite this measure, however, some tenants had to terminate their leases.
Industrial
Total industrial stock grew by 6% year-on-year while the adoption of online shopping accelerated the built-to-suit development for e-commerce companies seeking to expand their distribution centres. The total leasable space under construction was 343,300 sq m, which represents more than 94% year-on-year increase and more than 12% of the existing stock. There are currently 13 buildings under construction, 9 of which are situated in the Western Slovakia.
Vacancy rate decreased by 0.30 percentage points to 8.40%. Majority of the vacant stock is in new speculative properties built since 2019. Quarterly net absorption reached 24,900 sq m and was positive in all four main regions. We do not rule out the possibility of vacancy rate surging higher in the near-term since the majority of the stock to be delivered within the next 12 months is speculative.
Total quarterly take-up recorded a strong 22% year-on-year growth, reaching 146,300 sq m. Almost 75% of total take-up was in the Bratislava region, while only 4.4% was in the Central and Eastern Slovakia. Pre-leases saw a significant increase and represented about 42% of take-up in the second quarter.
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