Revival in Central and Eastern Europe in the second half of the year, depending on the reduction of interest rates in the euro zone.
The Central and Eastern Europe (CEE) region will experience a significant tripling of GDP growth from below 1% last year to about 2.5%; the growth of the market in the region will still be driven by shopping parks, and a smaller supply of new office spaces will help fill vacancies, especially in modern ESG-compliant offices – these are just some of the 10 most important forecasts for the CEE-6 region in 2024, published by Colliers.
Economy: Growth Perspective
The favorable dynamics of the development of the Central and Eastern Europe region expressed by threefold GDP growth is the result of several factors: from an improving external situation (the euro zone is also expected to rebound), decreasing inflation / interest rates compared to the levels of 2021-2023, to strong inflows of investment capital. It is worth noting that long-term prospects look even better. According to forecasts from the IMF, by 2028 Central and Eastern European countries, if treated as a single economy, would be among the top 10 largest economies in the world – explains Silviu Pop, Director of Research at Colliers for CEE and Romania.
Geopolitics: In Search of a New Balance
Russia’s invasion of Ukraine and the reshuffling of relations between China and Western countries are cause for concern and uncertainty. However, as the Financial Times writes in a series of articles The Rise of Middle Powers, it opens up new opportunities for countries around the world, especially those of medium size.
Poland and Romania are the only countries in the CEE-6 region that fit this ranking in terms of size, while remaining deeply rooted in the Western sphere of influence. However, the geographical location of the region means that it has much greater importance in the context of changing international relations, which should be beneficial for it in the long term. The elections taking place in 2024, not only in some Central and Eastern European countries but also in the world’s major economies such as the USA, India, and Great Britain, play a significant role in geopolitical balance.
Capital Flows: A New Gold Rush in Central and Eastern Europe
From the perspective of Western economies, Central and Eastern Europe still offers attractive opportunities for reshoring (moving production back to the home country) and nearshoring (moving production to neighboring countries), considering the significant difference between productivity and labor costs in all countries of the region. Changes in this area are already taking place, and the whole of Central and Eastern Europe, including 2023, reports solid levels of investment in the economy, which is significantly above the average from the previous cycle.
Furthermore, in 2023 the Czech Republic, Poland, and Romania reported record levels of gross capital accumulation. All this indicates optimistic medium-term prospects – a large number of new jobs leading to wage increases and growing purchasing power. Positive signs should be visible already this year.
Retail Trade: Development Prospects
Deflation and better economic prospects will certainly be at the center of attention of many developers and investors analyzing Central and Eastern European countries in search of a place for new projects. Compared to Western Europe, the availability of modern retail facilities in the CEE region is smaller, so it’s not a matter of “if”, but “when” this difference will be leveled. Shopping parks remain the engine of the market in Central and Eastern Europe, as their construction costs are lower and they can be established in smaller cities. The fall in inflation should favor consumers in terms of purchasing power. Discounts will continue to develop.
Investments: Not Yet
Although the prospect of lowering interest rates is on the horizon, it should still be borne in mind that for many years to come, loans will remain much more expensive than in 2021-2022. Moreover, over the past year and a half, the value of capital has been steadily falling, so many investors are waiting for a better opportunity to buy, and sellers would rather keep their assets, if possible. Therefore, at least in the first half of 2024, we expect another weak period for investments in commercial real estate in Central and Eastern Europe. Despite this, in the second half of the year, we should observe some timid signs of recovery, provided that interest rates in the euro zone and the US fall, economic activity remains at a decent level, and refinancing forces a sale.
Offices: Fewer Projects will Aid Absorption
In most countries of the region, 2024 will probably bring a sharp slowdown in the supply of new offices. In some cities, for example, the capitals of Slovakia and Romania, almost no significant office projects will be established in 2024. For now, it is still a market largely driven by tenants, as vacancy rates in the capitals of Central and Eastern European countries (with the exception of Prague) remain double-digit. The slowdown in supply will help fill vacancies, especially those in modern ESG-compliant offices, and may gradually tilt the balance towards a neutral market by the end of 2024.
Warehouses: Rent Rate Stabilization
With the normalization of construction costs and, in some cases, an increase in the vacancy rate from 2022 or 2023, Colliers experts predict stabilization or at least slower growth in rental rates in Central and Eastern Europe. Over the past few years, an unprecedented rise in rents has been noted, reducing the overall attractiveness of the region, though according to Colliers experts, taking into account the large gap between wages and productivity, the region still looks much better than its Western European counterparts.
ESG: Ecology is no Longer Just a Trendy Slogan
Tenants, landlords, and investors in all countries of Central and Eastern Europe are increasingly focusing on the quality of buildings. The gap between older, outdated, and modern, efficient buildings is becoming greater in terms of many factors: from rents, attractiveness to tenants and occupancy rates, to capital values – says Dominika Jędrak, Director of Advisory and Market Research at Colliers.
Colliers experts see this as an incentive to modernize older buildings, which as a result of renovation may regain attractiveness in the eyes of tenants. However, these changes come at a bad time in the economic cycle, given the high-interest rates. The introduction of eco-friendly solutions may also be significant in the context of financing. Banks must take into account not only the value of the building itself but also whether it is efficient and ready for future challenges.
Artificial intelligence: In Your Office Soon
While until now the debate around AI has focused mainly on machine learning capabilities, we are now entering the realm of practical application. Technologies such as multimodal artificial intelligence, which can significantly increase productivity, are becoming a reality, while intelligent office solutions that enhance the relationship between the tenant and the landlord are maturing. All these factors should favor the development of a hybrid work model in the office market. However, predictions of the end of the stationary office work model proved premature, as most companies still need their employees on-site, emphasized by Colliers experts – and it applies not only to Central and Eastern Europe but the whole world.
Residential Segment: A Different Story at Every Turn
The affordability of new apartments can vary from quite decent in cities such as Bucharest and Sofia, to very attractive in Prague and Bratislava. While the fall in interest rates should increase supply, challenges in the region remain various regulatory issues and legal obstacles (especially the slow process of issuing permits), which may delay improvement. In such conditions, in some parts of Central and Eastern Europe, the private rental sector (PRS) should continue to gain popularity. However, for Poland and Hungary, certain challenges in this sector result from currency risk, while in countries where the euro is in use or a fairly stable currency system is in place, it is either completely or almost irrelevant.
[1] Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria
[2] International Monetary Fund
