The Czech industrial real estate market is preparing for a new model of production and logistics - the core can also help

The optimistic expectations are backed by the assumption of stable growth of the Czech industrial market in the coming years. The automotive industry and the upturn in a number of industries related to the production of chips and semiconductors should contribute to a large extent. The possible implementation of a gigafactory for the production of batteries for electric vehicles in the Karviná region and, last but not least, the completion of the nuclear power plant in Dukovany should also contribute.

The victory of the South Korean company KHNP, the builder of the new unit of the Dukovany power plant, should mean a promise of investment for the Czech Republic from industrial giants such as Samsung, LG or Hyundai. Incidentally, South Korean President Jun Sok-jol will also be discussing them in Prague these days. The gradual turnaround of the domestic economy from an "assembly plant" to a position of "smart" production with higher added value, requiring an increasing number of skilled workers, is also confirmed by the investment of the American chip manufacturer Onsemi. The joint venture of technology giants TSMC, Bosch, Infineon and NXP will also have an impact on the Czech Republic. The latter is currently based in Dresden, but an influx of investment is also expected in local branches and companies related to this sector.

"We cannot forget the growing automotive segment. We are in the grip of not very positive economic expectations in Germany, where 30% of our exports are directed. But this has not yet had an impact on domestic car production, which in the first half of this year was the highest since the Czech Republic was founded. However, the stagnating electric vehicle segment is now looking to competition coming from China. Large European car companies are now unable to compete with these foreign cars on price," adds Jakub Holec, director of 108 REAL ESTATE. Given the emission reduction targets set by the European Union, he says the big question is how European carmakers will respond. China is home to BYD, the largest battery manufacturer, as well as the largest stockpile of precious metals needed to produce many key components. There are also many deposits of precious metals in Africa, where China is investing massively and forging valuable alliances. The same applies to Russia, which mines much of the world's palladium reserves in Siberia.

The expansion of the automotive segment is illustrated by the launch of a new production plant by the Chinese company Nobo Automotive Systems. This manufacturer of luxury seats for the BMW brand has leased 29,000 m2 in GARBE Park in České Budějovice. Other examples are the opening of 60,000 sqm in Panattoni Park Cheb East for Goodyear, the move of ZF Automotive Czech to P3 Park Jeřmanice or Vitesco Technologies to modern premises in CTPark Ostrava Hrušov.

The unfavourable trend from the first quarter of this year was overcome thanks to leases in the manufacturing sector, but logistics still prevails. The second quarter in terms of new lease volume surpassed the results for the same period of 2023, albeit only by a small margin. "Despite a number of positive examples and trends in recent months, caution is in order, especially on the part of developers. We are still registering around one million sqm of new construction. Which is quite a lot considering the fact that continuously

vacancy rate is growing and subleases are still widespread," says Matěj Indra, Head of Industrial Leasing at 108 REAL ESTATE. In the first half of this year, new lease agreements were concluded for 374,337 sqm.

Optimistic expectations are dampened by the development of, for example, the German economy, which has entered a (cyclical) phase of stagnation. The automotive segment, which has been highlighted, could also suffer in the Czech Republic if fears of the possible closure of two Volkswagen plants in Germany come true. There is also uncertainty about the state of the US economy, depending, among other things, on the results of the forthcoming presidential elections.

Therefore, the domestic industrial space market is also working with a "black" scenario, where the vacancy rate could again reach over 6%, above the accepted healthy rate of 4-6%, when supply and demand are in balance. According to 108 REAL ESTATE, the spectrum of new tenants will change with the new model of production and transportation of goods. It can be predicted that large leases above 25,000 sqm will decline - among other things, in view of pan-European tenant tenders, in which the Czech Republic has not yet been the most successful. On the contrary, the number of smaller lease transactions up to 5,000 sqm will increase. The average leased area in the first half of the year was 9,130 sqm.

"The situation with medium-sized leases will probably be the most volatile. Here, the competitive environment among developers could continue to play a role, which may manifest itself in a further decline in rents in selected locations and other costs and more flexible terms. However, the overall economic situation in the region is equally important for mid-sized projects. As well as the availability of qualified staff - in terms of numbers and salary requirements," explains Michal Bílý, Head of Market Research at 108 REAL ESTATE.

However, this does not contradict the preparation of many development companies for a possible recovery. Projects are several years in the making, especially if they are connected with the conversion of an old, unused site or other type of brownfield. For many occupiers, this may ultimately be key: they require, according to the ESG strategy, premises with the lowest possible environmental impact, including appropriate certifications. The CzechInvest agency currently registers more than 4,400 brownfield sites in the Czech Republic. Their total area is over 13,000 ha.

According to 108 REAL ESTATE, due to the tightening legislative conditions and the virtual unavailability of development sites on "greenfields", a new opportunity is opening up for a number of older sites or properties with various types of encumbrances. Michal Bílý estimates that conversion and revitalisation concerns about a fifth of the total volume of almost 8 million square metres of construction projects of production or warehouse space. The concentration of new development projects also corresponds to this in principle: most square metres are planned in the Moravian-Silesian and Ústí nad Labem regions and traditionally in the vicinity of Prague and Central Bohemia.

About 108 REAL ESTATE

108 REAL ESTATE is a real estate consultancy company that has focused exclusively on commercial real estate since 2009. Since its inception, the "Hundred and Eight" has marketed more than 10.33 million square meters on the Czech, Slovak and Hungarian markets. Clients turn to 108 REAL ESTATE for lease and sale brokerage, investment advisory services as well as marketing and management of development projects. Thanks to a strategic acquisition in 2021, 108 REAL ESTATE is now the exclusive alliance partner of BNP Paribas Real Estate for the Czech and Slovak Republics.