Despite numerous obstacles, the Central and Eastern Europe (CEE) nations' economies demonstrated a surprising amount of durability, surpassing predictions made by leading research institutions in 2022. This resilience can be credited to the relatively strong consumer demand in most CEE countries as a result of eased pandemic regulations and expenditures by Ukrainian refugees. Additionally, these countries maintained stable labour markets with low unemployment rates relative to the rest of the EU.

All CEE countries, excluding Romania and Slovakia, are predicted to face declining GDP growth rates in 2023. Nevertheless, this dip is forecasted to be temporary and mild, with a likely resurgence in 2024. Inflation, which soared to fresh multi-decade highs in late 2022 or early 2023, is expected to fall across all CEE countries. Even though stringent financing conditions and high-interest rates will slow investment growth in CEE and the EU in 2023, a recovery is predicted in 2024.

INDUSTRIAL MARKET

The CEE region maintains a strong foundation in the industrial property market. Moreover, it's anticipated to pique the interest of businesses looking to execute nearshoring strategies in various sectors, including automotive, machinery and equipment, apparel, and consumer goods.

In the first quarter of 2023, roughly 2.5 million sq m of modern industrial and warehouse space was introduced in the CEE region, increasing the total stock to over 57 million sq m, with 52% situated in Poland.

Around 5 million sq m are currently under construction in the region, with Poland and Czechia accounting for 43% and 25% respectively. While speculative development has seen a rise, developers are increasingly leaning towards a build-to-suit (BTS) strategy for new projects.

In the first quarter of 2023, occupier activity remained strong. Despite the overall gross take-up being approximately 20% lower compared to the previous quarter and the same quarter in 2022, net absorption remained positive across the entire CEE region and in each country, exceeding the last quarter's performance and the 5-year quarterly average.

Despite substantial development activity, the vacancy rate saw a marginal rise, remaining under 7% across all CEE markets. Notably, vacancy rates stayed below 2% in Czechia and Bulgaria.

On a yearly basis, prime rents saw an increase across all CEE markets in Q1 2023. The most notable rental growth over the past 12 months was observed in Poland (+59% y/y), Czechia (+29% y/y), and Bulgaria (+28% y/y).

OFFICE MARKET

The first quarter of 2023 saw a rise in prime rents but a slowdown in occupier activity, primarily driven by lease renewals.

In Q1 2023, the total gross take-up decreased by 20% y/y and 30% compared to Q4 2022. Net absorption declined as an aggregate regional figure on both a quarterly and annual basis, by 20% q/q and 51% y/y, respectively.

Office development activity has varied across CEE capitals, but a rolling 12-month indicator of new completions in the region shows a general slowdown. However, the delivery pipeline remains substantial, surpassing 1 million sq m, with 64% being developed on a speculative basis.

During Q1 2023, vacancy rates in most CEE capital cities fell compared to Q1 2022, with the exception of Budapest, where availability grew by 24% and Bratislava, where the vacancy rate remained consistent over the past 12 months.

In Q1 2023, prime office rent witnessed an ongoing upward trend in all CEE capitals, except for Warsaw. Also, within each market, the rental difference has increased between various office schemes, depending on factors such as location, efficiency, ESG compliance, and other features.

RETAIL MARKET

Despite various challenges, retail schemes of different formats performed well, with retail sales matching or surpassing pre-pandemic levels. While footfall in shopping centres typically remains lower, customers are visiting shopping malls with specific purposes and spending more. E-commerce continues to grow, although its rate has slowed since H2 2021 as COVID-19 restrictions have relaxed.

In Q1 2023, the new supply in CEE-6 was approximately 154,000 sq m, with 77% located within retail parks.

About 1.4 million sq m of shopping centre and retail park space is currently under construction in the region. Nonetheless, the CEE's retail property sector has experienced a significant slowdown in overall development activity. This is primarily seen in the shopping centre segment, as developers are now prioritising refurbishments and extensions of existing shopping centres and the construction of smaller retail parks and convenience centres.

CEE countries continue to attract new brands, with at least 18 new market entries already recorded in 2023, and more planned by the end of the year. The most dynamic expansion is seen among discount non-food retailers, affordable clothing brands, sports goods stores, and the food and beverage (F&B) category.

In Q1 2023, prime rents remained steady for high street retail space across CEE, but further increased for retail parks and shopping centres in some countries.

HOTEL MARKET

In Q1 2023, hotels in the CEE-6 capitals demonstrated a considerable performance improvement. Although occupancy levels were below 2019 levels in all markets except Warsaw, the region’s average RevPAR exceeded Q1 2019 by 8% due to a strong ADR rebound, on average 22% higher than Q1 2019. There is still potential for growth as Europe overall recorded an average RevPAR of over EUR 72 in Q1 2023, meaning that the gap between the CEE-6 average and the European average RevPAR has widened from 29% in 2019 to 31% in 2023.

Looking forward, we expect a continued recovery in the CEE-6 region, particularly in Prague, Sofia, and Bucharest. These markets have seen slower hotel performance growth compared to the rest of Europe, indicating opportunities for further development and enhancement.

Hotel investment activity in the CEE region reached almost EUR 116 million in Q1 2023, an increase of 88% compared to Q1 2022, but still 77% lower than Q1 2019. Although high financing costs remain a significant hurdle, the uptick in hotel performances should help bridge the gap between buyer and seller expectations. Looking at the rest of 2023, the stabilisation of inflation rates and increased interest from European, Middle Eastern, and Asian investors boosts the prospects of increased transaction activity in the CEE-6 region. This sentiment is further supported by several hotels being listed for sale across the CEE region.

INVESTMENT MARKET

In the property market, investment volumes in CEE during Q1 2023 were the lowest for Q1 since 2013, as the region faces competition from broader Europe and adjusts to the higher interest rate environment.

Capital originating locally was responsible for most of the significant deals in the office and retail sectors across CEE markets, while the industrial sector remains more attractive to global capital.

Although it is not anticipated that commercial real estate capital values in C The return of institutional capital from North America and Asia-Pacific will be a major contributor, alongside European investment activity.

The CEE region remains attractive to investors, as it provides higher returns than Western European countries. Despite the slowdown, the region’s strong fundamentals and increasing recognition of ESG criteria in investment decision-making continue to underpin investor confidence.