Stabilization of Demand for Industrial Spaces in Europe: Czech Republic on the Rise

• The Czech Republic ranks among the countries with the lowest vacancy rates

• In the second half of 2024, an increase in investment transactions into industrial real estate is expected both in Europe and in the Czech Republic

• ESG standards are playing an increasingly important role in investor decision-making.

Demand for industrial spaces is stabilizing across Europe, as indicated by the recent European Logistic Update report from Cushman & Wakefield. In the Czech Republic, the situation is returning to pre-pandemic levels, driven primarily by manufacturing and logistics companies. The Czech Republic continues to be among the countries with the lowest vacancy rates, which rose to 2.9% in the second quarter of 2024. Investment in industrial real estate is growing across Europe, with ESG standards playing a more significant role in investor decision-making.

Demand for industrial spaces is stabilizing across Europe, and the Czech Republic is no exception, with trends indicating a return to pre-pandemic levels. In the entire Central and Eastern European region, demand is primarily driven by manufacturing companies, especially in the automotive industry. Several "nearshoring" transactions are being completed in the Czech Republic, with more production activities being relocated closer to end customers. Further demand continues to come in.

The volume of construction projects has decreased by approximately 25% compared to the second quarter of 2022. This is mainly due to more cautious behavior in planning new developments and avoiding speculative projects in unproven locations. Europe has seen an even sharper decline, with construction decreasing by an average of 30%.

The Czech Republic remains one of the countries with the lowest vacancy rates, which rose to 2.9% in the second quarter of 2024. Only the Netherlands had a lower vacancy rate at the end of June. However, the Czech Republic has seen an increase for the third consecutive quarter. This is evident not only in newly completed industrial warehouses but also in units being vacated in existing halls. For example, in Prague and its surroundings, the vacancy rate in the second quarter of 2022 was almost zero (approximately 14,000 sq m of available space), while now the supply of vacant space has increased to nearly 80,000 sq m. The higher share of available space is also due to longer decision-making processes on the part of potential tenants, with these spaces remaining vacant longer than usual. However, demand for space still exceeds supply, so a dramatic increase in vacancy rates is not expected, as confirmed by statistics from other European markets.

During the pandemic, rents in Prague and its surroundings exceeded the European average, with some rents rising by up to 80% and often comparable to certain industrial markets in Germany. As a result, a certain correction and stabilization is now occurring in the Central and Eastern European region, while rents for prime locations in Western Europe continue to rise. In the long term, a slight increase in rents is expected across European markets, influenced by lengthy permitting processes, a shortage of land for development, and rising construction costs.

Investment in Industrial Real Estate

In the second half of 2024, a rise in investment transactions into industrial real estate is expected on a Europe-wide scale. A similar trend is being observed in the Czech Republic, where industrial properties, along with the retail sector, have been the driving force. Industrial real estate became a popular investment product during the pandemic and constitutes a significant portion of transactions in European countries.

Jiří Kristek, Head of Industrial and Retail Warehousing Team: “Industrial real estate is on investors' radar, and negotiations are already underway for the sale of some major industrial projects. Due to longer processes, this will be reflected in the statistics later. Investors are primarily interested in core-plus and value-added products, particularly in desirable locations with prospects of rent increases. ESG standards are playing an increasingly important role for investors, directly impacting final decisions.”

Despite this, the market in the Czech Republic is different. One reason is that industrial property owners are not offering their assets for sale, and due to long-term lease agreements and nearly full occupancy, these assets are being retained. This is confirmed by investment statistics: in 2023, ten industrial transactions with a total value of just under EUR 140 million were completed in the Czech Republic, compared to 13 transactions worth over EUR 350 million in 2022. In the first half of this year, five industrial transactions were completed with a total value of EUR 146 million.

The price level of industrial real estate has stabilized in most European markets. However, high-quality industrial properties in top locations in the UK and the Czech Republic have seen slight yield compression — in the Czech Republic, yields have decreased by 5 basis points, while in the UK, yields have fallen by 35 basis points.

Sustainability in the Industrial Sector

According to the latest Sustainable Logistics – Navigating Change in European Logistics Real Estate report from Cushman & Wakefield, which analyzed over 1,500¹  real estate transactions, investors are willing to pay, on average, 19% more for properties with green certifications or other sustainable features. For properties located outside the most luxurious and expensive super prime locations, this price increase is even higher, reaching up to 24%.

Environmentally friendly buildings have a significant advantage in the market, according to the report. Due to their ability to quickly attract tenants and maintain higher rents, these properties retain higher value. Currently, rents for high-quality logistics buildings with green standards are 10–30% higher than for lower-quality buildings, confirming their growing appeal to investors. The sustainable logistics report also examines the factors behind the increase in investment value and how sustainability influences all aspects of the sector, from building design and supply chains to financing.

Jiří Kristek, Head of Industrial and Retail Warehousing Team: “Building standards are becoming increasingly important for both investors and tenants. Sustainability is becoming a key factor, not only for securing financing, with better rates for highly rated properties, but also for obtaining internal approvals from tenants or attracting top customers for logistics companies.”

_{¹Given the relatively small number of assets that have been traded with BREEAM ratings across Europe as a whole, this analysis is extrapolated from assets of 10,000 sq m or more in the UK and the Netherlands where there is the most data.}