Industry leads thaw in property

In another indication of a recovering economy, sectors of the commercial real estate market are starting to thaw - so much so that experts say there could actually be a shortage of supply by the end of next year.

However, the economy has not improved enough for companies to either invest themselves in or obtain adequate financing for speculative building, so forecasts predict that in 2011 there will actually be an undersupply of premium office and industrial space.

"The Czech Republic has always been an attractive place to set up a business," said Kevin Turpin, head of research for Central Europe for Jones Lang Lasalle. "So we expect demand to pick up again, but if you want a large amount of space or you have some special requirements, in some parts of the city you may have a very limited choice or none at all."

The importance of this news goes beyond the real estate market, said Pavel Sobíšek, an analyst for UniCredit based in Prague. The fluctuations of the real estate market are used as "lag indicators" for the economy, which means they aren't used to forecast where the economy will go, but they can be used to evaluate the intensity of the economy's situation - in this case, the robustness of the recovery.

"It's very important in terms of the level of investment in the economy, and obviously, investments can boost GDP growth further, or it can slow it down if there is a lack of them," Sobíšek said.

Currently, the industrial market is leading the way in the upward trend, with the vacancy rate down 14.1 percent and take-up levels just in Prague reaching 153,000 square meters in the first six months of 2010, exceeding the levels of all of 2009 combined, according to a report from Jones Lang Lasalle.

"The crisis has helped slow down wage growth, and that is helping to bring back a little bit of life in the industrial sector, so it's a little bit more rosey," Turpin said, adding that the government push for more higher value added projects was also helping to drive some development.

Also on the upswing is the office space market. Although current vacancy rates in Prague are the highest they've been in the past five years at 13.79 percent, it's expected that demand for newly constructed and higher quality office space will push vacancy down to 10 percent by the end of next year and outpace supply. When the economy is more stable, average vacancy levels are around 10 percent, Turpin said, and when the economy is especially bullish, vacancy rates hover around 3 percent and 4 percent.

The good news in the premium office and industrial space sectors has not been enough to motivate developers, however, and speculative development has been very limited, which will likely cause a gap in supply by the end of 2011, forecasts say.

"What investors typically do is monitor the situation; they do not rush into any new construction," Sobíšek said. "Now it's clear the recession is not the end of the world. The only element of uncertainty is when exactly the economy will be robust enough to boost sufficient demand for new office space."

Remon Vos, CEO of CTPark, a commercial property developer that holds the largest integrated system of business parks in Central Europe, said supply issues were already a concern for his company's future projects. Vacancy rates in the company's portfolio have dropped from 10 percent to 8 percent, and his company expects in the next 10 years to add 10 new 100,000 square meter projects to their portfolio - about a 70 billion to 80 billion euro investment.

"The market could dry up, and prices would go up, and investors might go elsewhere," Vos said. "We have to think about our 2015 plan. We have a lot of land to think about and a lot of opportunities. ... I can't say 'no' to my clients."

On average over the past six years, only 150,000 square meters of new buildings were added to the market, compared with 320,000 square meters in 2008, Turpin said.

In the industrial sector, 2010 will have the lowest number of completed space released on the Prague market, with just 4,000 square meters compared with 15,000 square meters in 2009. Outside Prague, there is more activity, but none of it is speculative, which means that it is already set to be leased to a company and will not be available for expanding companies looking for space.

Speculative development has resumed in the office-space sector, but many projects are not slated to be completed to meet the expected shortage in 2011, when developers will be able to benefit from higher prices because of the shortage, the report said.

But Sobíšek said there was a silver lining to this trend.

"What's interesting to see is that basically none of the big developers resigned entirely; they simply stopped their projects and are sitting on their grounds and are waiting for a better moment to come," Sobíšek said. "So this in principle is very optimistic, and it's only a question of time before they resume speculative investments, and if banks see the rationale behind their decisions, they will have no dramatic problems with new construction."

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com