Ero Viik on Tallinn's Commercial Real Estate Market: Recovery, But Not for Everyone and Not Equally

By autumn 2026, Tallinn's commercial real estate market has reached a state where large developments are changing the cityscape, while demand for new space remains modest. The situation for developers is complicated by faster-than-expected growth in input prices, limited room for rental price increases, and an environment that continues to present challenges.

Investor interest has increased somewhat, but buyer and seller expectations still do not align sufficiently for transaction volumes to increase significantly. Therefore, the activity of buying and selling transactions remains modest, while the volume of new space development has grown considerably.

The common denominators of the most attractive objects continue to be a good location, a strong tenant composition, and low ancillary costs. However, for owners of older and larger buildings with higher ancillary costs, this means growing pressure to invest in renovation or be prepared to reduce rental prices.

Construction prices stabilized at a high level

According to Statistics Estonia, the construction price index rose by 1.5% in 2025. Although the rapid price growth of construction inputs appears to have paused for now, prices remained at a relatively high level. Over the past couple of years, construction costs have grown significantly faster than predicted and have squeezed the profitability of main contractors, particularly those who have concluded fixed-price construction contracts. Since main contractors' margins typically range between 5–8%, even a slightly larger miscalculation in one or two projects can lead to a company posting losses at the end of the year.

For developers, a more stable price means better cost predictability than before, but not necessarily cheaper construction. Energy efficiency, technical systems, building codes, and the total cost of financing keep the production cost of new quality buildings high. For this reason, space currently under development in new buildings cannot be offered at significantly lower rental prices than those offered to date.

Tallinn's A-class office space rental prices currently range from 19–25 €/m², and despite growing supply, the price level has remained relatively stable. B-class office space rental prices range from 10–15 €/m², but are in a downward trend according to forecasts.

Supply is growing faster than demand

Tallinn's office space vacancy is 10–12% according to various data, while retail space vacancy is below 5%. However, in the office segment, it is worth looking beyond the average figure. New and energy-efficient A-class buildings are attracting tenants largely from older buildings, and therefore owners of older buildings must decide how to remain competitive – whether to make significant investments in modernizing their space, find new uses for it, or reduce rental prices. At the same time, the total number of office jobs has not grown for some time, and companies are talking more about efficiency in space use and the need to reduce space rather than add it.

Currently, over 100,000 square meters of new space is under construction in Tallinn, which accounts for approximately 10% of the existing office space stock. If you add spaces waiting for tenants in new buildings, the total amount reaches approximately 130,000 square meters. From recent history, it is difficult to find another moment in time when Tallinn had so many large developments underway simultaneously. This represents a significant increase in supply, and the main risk accompanying it is not the emptying of new buildings, but the departure of tenants from older B- and C-class buildings.

Large developments are shaping new attraction centers

Construction has begun in several quarter-sized developments in Tallinn. On the Hippodrome site, it is possible to build over 1,000 homes and more than 100,000 square meters of commercial space. In North Tallinn, construction is underway at Telliskivi and Krulli quarters, with larger developments also at Talsinki, Porto Franco, and in the Ülemiste City area. Several more projects are in preparation, including the Luther quarter and the Tallinn bus station area.

Large developments can change the attractiveness of entire districts, but at the same time increase competition with existing office, service, and retail space. Success depends not only on the quality of the new building, but also on whether the area generates enough life – residents, workers, and visitors. Integrity is important!

The financial situation of market participants has remained good despite headwinds

Compared to a few years ago, lower euribor has improved project cash flow and money availability, but this effect has not been the same for all developers. Those who have lost a tenant have had difficulty finding a new one. Often, the space has remained empty and incoming revenue has declined.

According to OECD data, loans to real estate and construction companies accounted for almost 49% of Estonia's total business loan portfolio in 2025. However, this indicator should be interpreted carefully, as based on the public financial reports of local banks, loans given purely to the real estate sector account for approximately 30–35% of all loans issued to businesses.

Bank reports also do not show a significant increase in borrowers experiencing payment difficulties. Nor have there been major changes in banks' financing policies, which has helped maintain the pace of new supply with which the market has managed without major problems so far.

The situation has begun to change somewhat, however, as new developments are being undertaken primarily by market participants whose strong financial position allows them to obtain funding even with a smaller volume of pre-contracts. Developers with strong balance sheets and long-term capital now have the opportunity to take good positions by refinancing previously more expensively raised capital on somewhat more favorable terms. Conversely, those with high debt loads, weak pre-sales, or amortized buildings may face major challenges.

Three trends to keep an eye on

1. The quality gap is widening. New energy-efficient buildings are attracting tenants from older properties. When buying older space, alongside yield, one must assess future renovation costs and potential vacancy.

2. Mixed-use quarters are winning over individual properties, because value is increasingly created by an integrated environment. The most interesting could be smaller service, retail, and rental spaces in areas where the number of residents and daily traffic are growing.

3. In Tallinn's next real estate market growth cycle, it cannot be assumed that all assets will appreciate equally. In Tallinn's next real estate market growth cycle, winners will be those who, while pursuing reasonable returns, maintain a long-term perspective and do not