Commercial leasing comeback

Speculative development continues to be a four-letter word for chastised real estate developers after a market crash brought expansion to a halt, but industrial leasing is nevertheless swinging in the right direction.

In the second quarter of 2010, transactions totaled 221,600 square meters (2.4 million square feet), a 41 percent growth on the previous quarter and 147 percent rise on the year, according to a new report released by DTZ, a global real estate adviser. The report came on the heels of another positive indicator for the sector, as industrial output in the Czech Republic grew 16.9 percent year on year in May.

"During [2009], we saw quite a drop in activity from manufacturing companies," said Lenka Hartmanová, a consultant with DTZ. "But in the second quarter, we've seen quite a rise in take-up from manufacturing companies. The net take-up of manufacturing companies made up 57 percent of overall activity. That's quite a high share when you take into account [how low it was last year]."

Much of the activity can be attributed to lease renegotiations or even expansions by companies at existing locations, she added. In the second quarter, 25 percent of overall occupational activity was in fact extensions of leases.

"There are not so many new companies entering the market," Hartmanová said. "It's a lot to do with the companies that are here and want to expand in their current locations."

CTP Invest, which took first place for overall leasing activity in the second quarter, has had a great deal of success helping existing customers expand on their sites, said CTP Business Director Jakub Pelikán. The third-largest transaction in the whole market last quarter was the extension of a Techdata site in the CTPark Bor of 16,3000 square meters.

"About two-thirds of the deals we've done lately have been done with existing customers who require an expansion of their business," Pelikán said. "It's great; it proves the Czech market is healthy and is seen as a stable place to continue investing in production."

While speculative development is a thing of the not-so-distant past, developers are working on a basis of "pre-leasing" for any new construction, whereby tenants sign contracts before breaking ground for either all or a portion of a development.

"I'm not convinced we'll see developers feel confident enough to develop a 100 percent vacant building without having some secured tenants any time soon," said Martin Šumera, senior industrial agent at DTZ. "Construction doesn't usually start until they have pre-leases for at least 30 percent to 40 percent of the leaseable area."

With demand and supply at an interesting crossroad, the final half of 2010 is going to be a window of opportunity for many companies looking to renegotiate leases, expand or buy new sites, Šumera and Hartmanová said. In addition to lower rents, many developers and landlords are offering incentives to underbid the competition, such as months of free rent.

"The next six months present a unique opportunity for clients who are considering moving from older premises or even for renegotiating with landlords who are charging high rents based on contracts they signed, say, five years ago," Hartmanová said.

"We expect headline rents will start increasing next year, within six months' time," Šumera added.

At CTP, leases are typically signed for periods of about eight years, so renegotiating has not been a big part of the company's activities, Pelikán said. While at one point the company did speculative developments on the "rare" occasion, the company is holding fast to a more conservative approach of keeping its portfolio vacancy rate as low as possible. Within its 1.7 million square meter portfolio, the company has maintained a 10 percent vacancy rate, well below the national average of 15.76 percent in the second quarter.

"We focus on leasing existing space first, and after that we consider pre-leases," Pelikán said. "We've tried to design our buildings in a way that can accommodate any current demand on the market, so we can adjust to meet and fit the requirements of new customers."

Industrial leasing activity, while largely positive, still varies widely depending on the region. In the greater Prague region, which is home to roughly 45 percent of building stock according to Milan Korbelář, head of Industrial Agency at King Sturge Czech Republic, the competition among landlords is much stiffer and can therefore offer tenants better deals. In regions where supply is much smaller, the owners don't need to sweeten the pot as much.

"In Brno, there is a lack of spaces at the moment, so the developers and landlords don't need to provide incentives there; the potential tenant has to take it anyway," Korbelář said. "But in Prague and north of Prague, the competition is pretty high, so you've got some rent wars between competitors, and the incentives have to be quite good."

Claire Compton can be reached at
ccompton@praguepost.com