CEE Colliers’ predictions for 2024

Economy: firming growth expectations

The favourable dynamic of the CEE region expressed by the triple increase of GDP is supported by several factors, from an improving external picture (the Eurozone is also set to bounce back) to dwindling inflation/interest rates compared to 2021-2023 levels to a robust inflow of capital for investments. It is noteworthy that longer term forecasts look even rosier: by 2028, as per IMF forecasts, the CEE-6 – if it were to be regarded as a single economy – would be one of the top 10 largest in the world.
Silviu Pop, director, Research, Romania & CEE at Colliers

Geopolitics: seeking a new balance

Russia’s invasion of Ukraine and the reshuffling of relations between China and Western nations are cause for both concern and uncertainties. However, for much of the CEE region, we recall the 2023 headline from the Financial Times: “The rise of middle powers”. Poland and maybe Romania are the only ones in the CEE-6 which may fit the bill size-wise, while the countries remain entrenched in the Western sphere of influence. But the region’s geographic position makes it that much more relevant going forward in the changing waters of international relations, which should benefit the CEE-6 over the longer term. Of great importance to the geopolitical balance are elections being held in 2024, not just in some CEE countries, but also in major economies, like the US, India and the UK.

Capital flows: a new gold rush in CEE

The CEE region continues to be an attractive prospect for re-/near-shoring for Western economies, given the wide gap between productivity and labour costs for all the countries in the region. Change is already taking place, with all CEE displaying, even as of 2023, a solid level of capex in the economy, which is comfortably above the average for the previous cycle. Moreover, in 2023 Czech Republic, Poland, and Romania saw record levels of gross capital formation. All of this suggests a rosy medium-term outlook, with hefty job creation leading to solid wage gains and increasing purchasing power, while some positives should already be visible this year.

Retail: talking about expansion

The decline in inflation rates and the stronger economic outlook are bound to be on the agenda for many retail developers and investors as they take stock of areas or towns in the CEE which can still accommodate fresh schemes. Compared to Western Europe, the cover of modern retail schemes in the CEE is certainly smaller, even subpar in some regions, so it is not a question of “if”, rather “when” such gaps will be filled. Retail parks remain a key focal point spearheading the growth of the market in the CEE as they can be deployed at lower costs for developers and also target smaller towns, while big mixed-use schemes are also being developed in some cities, a testament to the heterogeneity with a country, not just between the CEE-6. On the demand side, while the decline in inflation should help the consumer, we nevertheless see a strong outlook for discounters.

Investment: still not there yet

While the light of lower interest rates is visible at the end of the tunnel, we are still not there yet given that loans are set to remain much more expensive than they were in 2021-2022 for many years to come. Furthermore, there is the problematic aspect of capital values, which have decreased steadily over the last year and a half, and as such, a lot of investors are waiting on the sidelines waiting for a better opportunity to buy, while for sellers, they would rather hold onto their assets if possible. Therefore, at least for H1 2024, we would expect to be another lackluster period for CRE investments in the CEE region. Still, we should see some tentative green shoots for activity in the second part of the year, provided that interest rates come down in the Eurozone and in the US, that economic activity remains at decent levels and that refinancing triggers some requirements to sell.

Offices: diminished pipeline to help subsequent recovery

For the most part, 2024 is likely to bring a sharp slowdown in deliveries of new offices. In some instances, like in the capitals of Slovakia and Romania, (almost) no significant office projects are due to be delivered in 2024. For now, it is still very much a market driven largely by tenants as vacancy rates remain in double digit territory in CEE capitals (with the exception of Prague). The saving grace here is that the slowdown in deliveries will help absorb the vacant spaces, particularly those in modern/ESG-compliant offices and maybe gradually tilt the equilibrium towards a neutral market by the end of 2024.

Industrial: rental rates stabilization

With construction costs normalizing and, in some cases, vacancy on an upward trajectory as of 2022 or 2023, Colliers experts anticipate a stabilization or at least a slower growth of rents in the CEE region. The last few years have seen an unprecedented increase in rents which dents the region’s overall attractiveness, though we would argue that when placed alongside the hefty gap between wages and output, the region still looks way better than Western European alternatives.

ESG: green is no longer just a buzzword

Tenants, landlords and investors in all CEE countries are increasingly focusing on the quality of buildings. The gap between older/outdated and modern/efficient buildings is becoming increasingly wider in terms of a multitude of factors, from rents to attractiveness for tenants and occupancy rates to capital values. In turn, we view this as a decisive factor in pushing for more and more retrofitting of older buildings which may become viable. Timing-wise, these changes are coming at a bad time, as the green push is coming in a difficult context for the market, given how high interest rates are. Furthermore, we need to acknowledge how relevant the green characteristics are on the financing side, as banks need take into account not just the value of the building itself, but how efficient and future-proof it is.

AI: coming to an office near you

Speaking of buzzwords, “AI” could arguably be 2023’s biggest when it comes to corporate circles. While the world has been talking mostly about the possibilities of machine learning until now, we are clearly entering practical territory. Things like multimodal AI that could greatly enhance productivity are becoming a reality, while smart office solutions that better the relationship between tenant and landlord are maturing. All of these should prop up the hybrid work regime present in the office market, but we also feel, and not just in the CEE, but throughout the world, that fears over the death of the office work model have been proven as greatly overstated, as most companies clearly still need their employees to have face-to-face interactions.

Residential: a different story around every corner

While some real estate themes are somewhat uniform across the region, arguably the most diverse is the residential scene. The affordability of new apartments can range from quite decent in cities like Bucharest and Sofia, to bubbly territory in Prague and Bratislava. While a decrease in interest rates should help move things a bit in the right direction, it mostly comes down to different regulatory issues and legislative hurdles (notably the slow authorization cycle), so no changes or improvements should be expected fairly quickly. Amid this uncertain backdrop, PRS schemes should continue to gain traction across parts of the CEE region. For Poland and Hungary, however, some challenges for rental schemes derive from currency risk, while countries that either have the EUR or a somewhat stable currency regime, this is either fully or almost a non-issue.