Are New Office Buildings Leaving Old Office Buildings Empty?

The new work arrangements that took root during the corona years and continuous construction of new office buildings have created difficult times for decent B-class office buildings, where vacancy is increasing. It is especially time-consuming to find tenants for large spaces exceeding 500m2.

Last year, approximately 70,000m2 of new office space came to the market, much of which has been filled with tenants by now. This year, the volume of completed office space is significantly smaller, but over the next couple of years this number will grow again, especially if all planned developments are realized.

The vast majority of tenants in new buildings are Estonian companies, which means that as each new building is completed, some spaces in older office buildings become vacant again, and there is no longer sufficient demand for such offices. Even in buildings built less than 20 years ago, which are quite prestigious in every way, it is difficult to find new tenants for large office spaces.

Energy efficiency and new technologies

Large companies that plan their moves well in advance anyway prefer to rent a new office built specifically for them rather than having an existing space renovated. In addition, companies increasingly value green thinking and therefore environmental friendliness and sustainability are also considered when choosing office space.

Building energy efficiency is no less important, which is particularly crucial in light of the drastic increase in energy prices. Solar panels, district cooling, sun-blocking external blinds, and other modern technologies that help reduce the building's energy consumption are understandably important for tenants. Here, new buildings naturally have an advantage, since standards were different a couple of decades ago.

Moving speed matters

In a rapidly changing world, companies have less and less time to plan their moves, and lease agreements are not recommended to be signed before construction begins. Thus, the shorter wait time could speak in favor of renting space in a finished building. However, it is no longer significantly shorter, especially if office spaces need to be adapted for the tenant.

In recent years, construction activity has been continuous, so there is always some office building being completed and one no longer needs to wait a year or longer for a move (unless dealing with spaces of several thousand square meters).

As a recent trend, the market has seen the emergence of already-rented spaces in new buildings. Since many companies now combine office and home work, with this kind of work arrangement, part of the office remains empty. Thus, they look for sub-tenants or try to find a replacement tenant so they can move to a smaller space themselves. For companies that need office space, this is convenient – they can move into an almost brand-new office right away.

Demand for older office space is declining

So renting out large spaces in older B-class office buildings is becoming increasingly difficult. Whether a significant reduction in rent prices would help is uncertain, because the better companies are doing, the more they can afford to take newer and more attractive office spaces.

The nature of the office has changed for many companies – it is no longer simply a place to work, but must be an inspiring environment that gives employees a reason to leave their home office.

Converting large vacant office spaces into smaller ones is expensive, while at the same time tenants are not willing to pay rent in an older building that would approach the price level of new buildings. And certainly there would be no demand for such a large number of small offices either.

Hopefully, in the coming years, we will see quite a few environmentally friendly renovation projects, as one could prefer modernizing existing buildings to denser urban development. However, since there is no rapid growth in office space demand expected in the coming years, quite a few older office buildings could get a new life as residential buildings, and considering the aging population, why not also as care homes or other social care facilities.

Article author: Aira Veelmaa (Uus Maa Real Estate professional broker)