Expert: Many office building owners face a harsh reckoning this year

The volume of newly completed office buildings and the resulting increased vacancy are putting many B- and C-class commercial building owners in difficult positions this year, predicts Kirill Vigul, head of commercial real estate at 1Partner. 

First and foremost, older and partially depreciated office buildings that no longer meet the expectations of today's tenants are facing a difficult situation. "The completion of new premises and changed demand are forcing more and more owners of older properties to choose whether to significantly reduce prices or make substantial investments to give the building a fresh function and new life," explains Vigul, who notes that there are buildings on the market that, despite efforts, are soon becoming ghostly mansions.  

Last year alone, nearly 100,000 square meters of new premium-class spaces were added to Tallinn's commercial real estate market, mainly through the large-scale Arti and Krulli Park quarters, and the impact of the resulting chain reaction on rental prices is clearly visible. "Successful companies are moving to better spaces and an excess is growing at the lower end. There are already deals on the market where lower-class office spaces are closing at a price of 5 euros per square meter, whereas a year ago their typical price level was approximately 8 euros," describes Vigul the changes and adds that many owners find it more beneficial to reduce prices and keep the building's occupancy rate high rather than maintain a half-empty building and hope for a small miracle. 

From an owner's perspective, particularly strong downward price pressure occurs at a time when the existing tenant's contract is about to expire. "This period, when the current tenant has a debt-free choice emerging, opens many alternatives and shifts the balance of price negotiations," notes Vigul, but at the same time reminds that every move is inevitably associated with costs and inconvenience for the tenant as well, which is why finding a compromise to continue the existing cooperation is usually in the interests of both parties. 

According to Vigul's assessment, the downward price pressure does not affect new and attractive office spaces in prime locations that meet modern expectations for quality, energy efficiency, and flexible usage options. "It is likely that several developers in recent years have had to make minor adjustments to the business plans of their newly completed buildings, but in most cases A-class office occupancy rates are adequate and it is specifically the owners of older buildings who must inevitably reconsider their existing business model," the expert states the main trend of the office space market in the beginning of this year.  

1Partner is the leading real estate group in the Baltic countries with over 20 years of experience, with offices in Tallinn, Tartu, Riga, and Vilnius. The 1Partner group provides real estate brokerage, valuation, construction, development, management, and investment management services. 1Partner real estate group is the official cooperation partner of JLL (Jones Lang LaSalle), the world's largest commercial real estate consulting company, in the Baltics.