Q4/2023: CZECH ECONOMY WILL SLIGHTLY GROW IN 2024
The Czech economy stood on the brink of recession in 2023. Gross domestic product is expected to have contracted by 0.6% for the full year 2023, with a projected growth of 1.2% for 2024. Inflation is anticipated to decline significantly this year and stay below 3% for most of the year. However, there is a risk of falling below the target due to the persistent weakness in both domestic and foreign demand.
Conditions in the Czech industry remain fragile, with all sectors except automotive showing a downward trend. Given the decline in new orders and the prevailing weak manufacturing sentiment, the Czech industry is likely to face challenges in the first half of 2024.
Despite sluggish economic growth, the unemployment rate has stayed low throughout 2023, as employers are hesitant to lay off workers. Moody's Analytics foresees a slight increase in the unemployment rate during the first half of 2024.
Office
The annual supply in the Prague office market reached 98,400 sq m in 2023, marking a 31% increase compared to 2022, although it still fell below the 5-year average. There were no new construction projects initiated throughout 2023. Despite the current low level of developer activity, with only 84,000 sq m under construction at the end of 2023, developers plan to add up to half a million sq m to the market by 2030. In 2023, there was a 3% year-on-year decrease in gross take-up, and net take-up saw a 17% drop compared to the previous year. By the end of 2023, approximately 280,700 sq m of office space remained vacant, resulting in a vacancy rate of 7.2%. Prime headline office rents in the city centre held steady at EUR 28.50/sq m/month. Prime rents experienced growth, particularly in the inner part of Prague, notably in popular locations such as Prague 8 and Prague 5. At the same time, we are witnessing an increasing disparity in rents between newly completed office buildings and older ones in less attractive locations. This gap is expected to widen in the upcoming periods.
Industrial
The yearly addition of new modern industrial space to the market amounted to over 921,300 sq m in 2023, showing a 16% decrease compared to 2022. As of Q4 2023, the total industrial stock under construction was estimated at 981,200 sq m, with 70% of it already pre-leased. Gross take-up reached 1,520,600 sq m in 2023, marking a 31% year-on-year decrease, largely attributed to economic uncertainty and a reduced need for additional product inventory. Over the past year, demand in the sector was primarily driven by logistics companies (36% of gross take-up) and producers (33% of gross take-up). Following a substantial rent increase in 2022 and a slight uptick in 2023, no significant rise is expected in 2024.
Retail
In the Czech market, approximately 86,700 sq m of new retail space was delivered in 2023, marking a 57% increase compared to the previous year. As of the end of 2023, there were about 104,200 sq m under construction. However, there are still more than 700,000 sq m in the pipeline at various stages of development, including long-anticipated larger mixed-use projects like OC Dornych in Brno, Savarin in Prague, and Ameside in Pilsen. Several high-street projects, such as Máj, 100 Yards, Fairmont Hotel, or Pařížská 25, are currently undergoing reconstruction. Upon completion, they will house attractive retail concepts, enhancing the overall business environment of the entire location.
Hospitality
Prague hotel market started catching up with other European cities in terms of recovery in 2023, namely in its H2.
- After a period when the Prague hotel market was falling short of other European cities in terms of recovery from the impacts of the covid pandemics, all of its performance indicators increased significantly in 2023. RevPAR ended 10% above the level recorded pre-covid in 2019, in December 2023 as much as 35% above December 2019. Occupancy reached 71% last year, in December 2023 returning to the level of December 2019 with 79%. The average daily rate was EUR 110 in 2023, 22% higher than the year before. The investment transactions volume grew by 68% year on year, reaching EUR 137 million, and additional major deals are planned for 2024. The Prague hotel market proves its resilience and attractivity.
- Across the CEE-6 capitals, the average hotel occupancy level in 2023 lagged behind 2019 by 9%; however, the ADR surpassed it by 23%, resulting in a 12% RevPAR growth. The strongest RevPAR increase was recorded in Warsaw and Budapest. The positive trend is anticipated to persist in 2024, albeit at a more moderate pace. Increased cost of financing and ongoing economic and geopolitical headwinds in the region caused 2023 transaction volumes to drop by 18% compared to 2022. However, the volume invested by international buyers increased by 197% over the same period, illustrating the region’s rising attractiveness for inbound capital. Several significant deals are progressing since the year-end 2023, suggesting transaction volumes will rise in 2024.
Investment
The Czech property investment market concluded 2023 with a turnover of approximately EUR 1,300 million, marking a 26% decrease compared to the previous year. The retail sector, with EUR 492 million, took the lead as the primary driver of real estate investment in the Czech Republic, making up 38% of the total investment volume in 2023. The fourth quarter of 2023 saw the lowest activity throughout the year, with a total investment of EUR 177 million. In 2023, the majority of buyers (76%) in Czech commercial real estate transactions were local. Prime yields across all asset classes have continued their upward trend year over year. We assume that the price correction has progressed sufficiently, and we anticipate that initial yields will stabilize throughout 2024.
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Explore our 5-minute Real Estate Market Snapshot, a video overview of the commercial real estate market developments presenting the key trends in real estate investment, logistics, office and retail sectors in Q3 2023.
