Newsec: newly opened business centres experience no deficit of tenants

2017 10 25

The capital continues opening new business centres and expanding vacant office space with rental prices still climbing. At first sight it might look like the rapidly growing Vilnius office market is about to overheat, whereas the real estate (RE) experts disagree.


According to Gintaras Toločka, an analyst at Newsec, the international real estate consulting services company, even though the general forecast from several years ago was that the newly-built business centres in Vilnius would not be able to attract tenants and would remain empty, it did not materialise.


“Today, at the moment of opening of new office buildings, 70 to 90 per cent of space is already occupied; several months later their capacity is fully filled. Even the offices expected to be opened in 2018 and 2019 have nearly 50 per cent of space already rented out. Thus, Vilnius office market will continue experiencing a growing demand even after 2019,” stated he.


In the opinion of the analyst, the underlying basis of a growth forecast is yet so modest statistics of modern office space in Vilnius. At the end of the third quarter of 2017, the area of modern offices in Vilnius comprised 566.4 sq. m. – only some 1.04 sq. m. per capita.


“Even in the context of the neighbouring countries these numbers look rather modest, because so much in Latvia as in Estonia or Poland the modern office area per capita is higher. For example, in Warsaw the office area per capita reaches nearly 2 sq. m. In the countries of the Western Europe this number amounts to 3 sq. m. or higher,” stated Mr. Toločka.


No market turbulence in sight


Jurgita Šilaikytė, the Head of Brokerage at Newsec, noted that a similar activity in Vilnius office market was reported a decade ago. For example, in 2008–2009, 13 office projects were implemented, the total area of which comprised 135,000 sq. m., whereas it is expected that the capital’s market will attain a 140,000 sq. m. office area in the coming years. The current rent prices are still below the peak indicators of 10 years ago. In 2008, class A office building prices reached nearly 18–20 EUR/sq. m., while today the prices in the same class buildings vary between 15 EUR/sq. m. and 17 EUR/sq. m.


Nonetheless, Šilaikytė holds that the current situation is significantly different because both banks and developers have safeguards in place.


“Nowadays, the market, tenants and developers are different; and so is financing. The tenants are not afraid to conclude transactions according to which offices will be physically occupied in only 2 years, the majority of projects are conducted with a high degree of rationality and consistency and a presence of strong anchor tenants, or where the building is fully occupied in advance,” said Newsec representative.


In the third quarter, in comparison to the second quarter of 2017, the rented office area in Vilnius market climbed to 4.8 per cent. Four business centres were opened in the said period: Class A Park Town I (89 per cent occupancy), class A Narbuto 5 (97 per cent occupancy), class A Green Hall 2 (70 per cent occupancy) and class B Eleven, where occupancy on the date of opening comprised 65 per cent.


 

Minor growth of vacancy rate


The new business centres opening their doors to tenants induced the indicator of Vilnius office vacancy (vacant office space); unfortunately, with the average vacancy rate reaching 5 per cent (class A – 3.1 per cent, class B – 6 per cent), the change was weaker than predicted.


It is expected that as Vilnius continues to successfully house new business centres, the office vacancy rate will gradually grow. The hopes are that in the last quarter of this year the market will be replenished with another 140,000 sq. m. of office space. Ten out of fourteen business centre projects are in ongoing construction. More than 80 per cent of the buildings will be class A offices located in the central business district.


“The developers are cultivating top class offices in the highly attractive areas of the city, because their market supply is the lowest, which makes renting them so much easier. The vacancy rate of class A offices is nearly twice lower than that of B class buildings,” added Toločka.


According to the analyst, as the vacancy rate will continue to slightly grow in the future, the office rent prices in Vilnius will level-up accordingly. In his opinion, the average vacancy rate in 2018–2019 in Vilnius could rise up to 6 per cent or a maximum of 7 per cent.


Offices and retail trade property remains the most attractive commercial RE segment – in Europe these areas receive almost 65 per cent of all RE investments. It is still regarded as one of the safest investments in the market.

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