Estonian Commercial Real Estate Market in Strong Headwinds

The economy continues to move in waves that we cannot directly influence ourselves. Conflicts and energy market fluctuations affect inflation, and central bank decisions find their way into the everyday lives of domestic entrepreneurs and investors. At one moment, capital becomes more expensive, at another, companies become more cautious and major decisions are postponed to an indefinite future. All of this also affects the Estonian commercial real estate market.

The current state of the Estonian commercial real estate market is well described by office space vacancy. Average vacancy in the commercial real estate market has remained at approximately the same level compared to the same period last year. Office spaces have a vacancy rate below 10% only in new, up to five-year-old buildings, which account for slightly over one-fifth of all office spaces in terms of square meters.

Buildings developed more than five years ago have average vacancy in the range of 11–14%. This means that in office buildings located in Tallinn, there are approximately 130,000 square meters of free space in total. Percentage-wise, the vacancy rate of Tallinn's office buildings is quite similar to Vilnius and lower than in Riga.

Lower rent or investments?

An increase in vacancy from 5% to 15% does negatively affect clients' loan servicing capacity, but its impact is still smaller than, for example, the base interest rate or euribor rising from 0% to 4%. Even the combination of these two – an increase in vacancy and rapid euribor growth – has not caused particular concerns for Estonian banks. The quality of banks' loan portfolios has remained stable and the share of clients with payment difficulties is still near zero.

Owners of older buildings generally have two options: lower the rent and accept declining cash flow over time, or invest in modernizing the building to remain competitive with newer buildings.

Since several major development projects are currently underway, pressure on the vacancy growth of older buildings will continue in the coming years. It will be interesting to observe how many office buildings are converted into residential apartments or something else, which is currently lacking in urban space.

Local investors have taken a stronger role in the market

In an uncertain economic environment, risk mitigation is key. This means that institutional investors focus primarily on their home markets, which has created an opportunity for local investors to take stronger positions in the market.

In a comparison of the three Baltic capitals, in 2025 the volume of Tallinn's commercial real estate transactions was the most modest (27%), while in Vilnius it was the largest (42%). In Estonia, transactions were conducted slightly below 300 million euros in value last year, and over 90% of them were made by local investors.

The average transaction size ranged from 2.5 million euros for offices and 4.6 million euros for retail spaces, depending on the sub-sector. Other sub-sectors fell between these two. The market has been characterized in recent years by smaller transactions, and most likely this trend will not change significantly this year.

Despite headwinds, development is inevitable

The question is not only how much space is currently vacant or how expensive money is. What is more important is how tenant expectations, investor strategies, and the role of buildings in urban development are changing. Change in commercial real estate is inevitable, and it is at the crossroads of these changes that the next chapter of the Estonian commercial real estate market is being written.

Despite strong economic headwinds, capital availability remains good and its price for borrowers is at the historical average level. This is a favorable foundation for implementing new and interesting projects.

In the long term, buildings currently being prepared are more competitive because tenant expectations and requirements for commercial buildings will be something different in the future than they were before.