RE developers to focus on development of class B business centres

Last year, Class A business centres developed in the capital city comprised up to 70-80 per cent, while the vacancy rate of Class B business centres dropped drastically in this period. Therefore, the developers intend to change their focus and concentrate on the development of Class B business centres – the share of these objects already comprises 40 per cent among newly developed facilities. This information has been made available in the Vilnius Office Outlook Q3/2018, the Vilnius office market review published by Newsec, the international real estate advisory company.

The construction of a Class B business centre, Duetto, in Viršuliškės Neighbourhood of the capital city will be completed before the end of the year. More than a third of 18 business centres planned to be built by 2020 will be Class B offices, which will open their doors somewhat further away from the central business district – on Savanorių Avenue, in Šeškinė, the Ozas Park and Užupis.

“In the third quarter of this year, the vacancy rate of Class A offices grew from 1 to 2.7 per cent, while the vacancy rate indicator of Class B offices dropped from 3.6 to 3.4 per cent. In the past years, this percentage has been shrinking consistently and gradually. This pattern stimulated a more active development of new Class B offices in the city and its suburbs, where seven Class B business centres will open before 2020 with their area totalling to 88.8 thousand sq. m.,” said Mr Gintaras Toločka, an analyst at Newsec.

Sign of a mature market

In the past four years, the development of Class A offices was much more extensive than that of Class B. The main reason for such trend was a high demand in Class A office spaces and the all-time low availability of vacancies. The vacancy rate of Class A offices in this period amounted to 1-2 per cent and was one of the lowest in the European Union. There were several times more vacant spaces in Class B business centres, while the vacancy rate indicators amounted to over 5 per cent.

Upon completion of the development of dozens of new Class A offices, the vacancy indicator leapt up, while the vacancy rate in the Class B office segment dropped, as it introduced comparatively less new objects to the market, thus changing the pattern and making the developers switch their focus to Class B offices.

“A higher number of Class B offices in development only confirms that the developers are serious in their intentions. The drastic shortage of spaces in Class A offices was a stimulus for construction of objects of this level. However, as the demand grew, upon completion of more than a dozen of new Class A business centres, the developers ended up in the situation where they started to sense a lack of demand,” added the Newsec analyst.

The expert stated that such a natural change of focus of the developers’ activities is a sign of a mature market.

“This is a positive change, as it will introduce new projects of various quality in different parts of the city. Exactly a year ago, more than 83 per cent of the newly developed area comprised Class A offices, however, this year’s number dropped to up to 60 per cent as Class B office supply has increased by 3.5 times. This level of expansion demonstrates a growing demand in high-quality Class B buildings and a quick response to it by the RE developments,” stated MrToločka.

It is expected to complete the construction of Duetto Business Centre with an area of 8.3 thousand sq. m. in Viršuliškės before the end of this year; the U219 multifunctional complex with an area of 16 thousand sq. m. on Ukmergės street in Šeškinė should open its doors in 2019; a Class B business centre with an area of 15 thousand sq. m. is planned to be built nearby the Paupys project currently in development in Užupis; a 9.7 thousand sq. m. Class B business centre will be opened on Savanorių Avenue before 2020; and Nova, the largest office building, located outside the city centre in the Ozas Park, will offer 20.9 thousand sq. m. of office space and is expected to be completed before the end of 2020. The development of other two business centres is expected in close proximity to the city centre, on Švitrigailos and Linkmenų streets.

Most rapid development continues concentrating in the city centre

Nonetheless, the major share of the business centres, i.e. 10 out of 18 planned, will emerge in the central business district. The largest projects on Konstitucijos Avenue are the last bock “South” of the class A business centre Quadrum, which will offer an additional area of 11 thousand sq. m., and a 12.7 thousand sq. m. office building to be constructed between the National Art Gallery and Forum Palace Centre, this year’s lease agreement of which has reached the record level – the fund of Lords LB Asset Management, the investment management company, leased the premises of the constructed Class A business centre that comprises the area of 10 thousand sq. m. or 80 per cent for the needs of SEB Bank.

“40 thousand sq. m. of office spaces were leased in Vilnius within three quarters of the current year. The contribution of Newsec in these lease transactions is significant since the company provided its intermediary services in conclusion of nearly 70 per cent of these agreements. The forecast for the end of 2018 is that the total area of leased premises will comprise approx. 60-70 thousand sq. m,” estimated the Newsec’s analyst.

Even though it is expected to complete the construction of 3 objects, comprising additional 35 thousand sq. m of offices spaces in Vilnius, before the end of the year, it will not have a significant impact on the vacancy rate because a considerable part of the area has been leased in advance. Despite a slight increase in the available office spaces, this number remains one of the lowest in the European office market. The average vacancy rate indicator in the Western European countries amounts to 7-8 per cent.

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