Experts Predict: What Will the Commercial Real Estate Market Look Like in 2024

Although demand for commercial real estate declined last year, several new commercial buildings are being completed this year, as the need for modern, centrally located commercial property has not disappeared. Demand for warehouse space has also increased, according to an analysis by Kinnisvara24 and RE real estate.

According to Andi Pleskovski, partner at RE real estate, there are hundreds of thousands of square meters of new office space alone planned in Tallinn. "Since the supply of commercial space currently exceeds demand, developers' plans may change over the course of the year. Therefore, it is more accurate to follow those projects that have already begun construction and where the majority of spaces are already covered by lease agreements. Currently, 55,000 square meters of commercial space is under construction in the capital, which will be completed in 2024."

Over half of this is made up by Arter Kvartal, rising in the heart of Tallinn, which is scheduled to be completed by autumn. Among the larger projects, work is also underway on Wise's new headquarters, a 30,000-square-meter commercial building in North Tallinn on Volta Street.

Pleskovski said that last year could be considered the end of one growth cycle in the commercial real estate market. "Until last year, the commercial real estate market saw continuous increases in both supply volume and price levels. This was enabled by sustained high demand and active deal-making. Last year, activity declined primarily in the office rental market. Since interest rates rose sharply, investments in new commercial space were also made very cautiously."

However, demand for quality, modern commercial space remains strong. According to Urmas Uibomäe, CEO of Kinnisvara24, the portal is offering approximately the same amount of commercial space for rent in January this year as a year ago – the portal has 3,267 commercial real estate listings. "Although demand for older commercial space has declined, well-located, new commercial space with favorable ancillary costs finds tenants quickly. Therefore, the supply surplus has not increased," Uibomäe pointed out.

Demand for older commercial real estate has declined

In Pleskovski's view, when analyzing the condition of the office market, one must distinguish between objects of different levels. "In our work, we divide commercial real estate into A-, B-, and C-category spaces based on quality and location. The supply and demand for modern, well-located A-class spaces is in good balance and there is no oversupply. Vacancy has begun to rise in lower-class office buildings, where vacant spaces are more difficult to re-rent in today's market." RE Real Estate monitors over 300 well-known office buildings in Tallinn, and the statistics show that the vacancy rate for A-class properties remains below 10%, for B-class between 5-15%, and for C-class around 10-20%. "An increase in vacancy can be expected in all segments for the next six months, but larger changes are expected in B- and C-level buildings," Pleskovski added.

According to Urmas Uibomäe, the highest demand in Tallinn is for office buildings located in the City Center and North Tallinn as well as on the outskirts of the City Center. In other cities, the highest demand is also in the city center. "In the longer term, commercial spaces in older office buildings located far from the city center will remain vacant, for example, in residential areas. Also in buildings whose owners are passive and unwilling to modernize their property or keep up with changing tenant needs." Uibomäe believes that it is not always reasonable to modernize all older objects for the same purpose, but it makes more sense to repurpose them for other uses. "There are examples where a former office building gets a new lease on life either as a residential building or as a commercial building with a different purpose," he pointed out.

Demand for warehouse space is growing

In the warehouse market, the availability of vacant space has remained at a very low level in recent years. "Many warehouse buildings have been 100% rented out for years – as soon as any space becomes available, a new tenant is found immediately. There is demand for both older and cheaper warehouse space as well as for newer multifunctional stock-office type projects," said Andi Pleskovski. The previous two years brought nearly 200,000 square meters of warehouse and stockoffice space to the Harjumaa market, most of which were rented out at the time of building completion, meaning the client had to make a choice before the space was finally completed.

"Although there is also some uncertainty in the warehouse and industrial space sector regarding the future, several experienced and strong developers have recently started construction of new projects in Harjumaa, which means that nearly 80,000 square meters of new space will be completed in 2024. Many of these are buildings constructed on order for a single anchor tenant," Pleskovski pointed out. The lease agreement is the dominant form of transaction in the warehouse and office space market, as sales offers are scarce. "Professional developers prefer to accumulate long-term and stable rental flows. With today's land and construction prices and financing costs, it is not worthwhile to build objects for sale, and at this price level there are also no buyers. There are also individual objects where it is possible to purchase a share of the building, but most are developments aimed at small businesses and small investors," explained Uibomäe.

The completion of new commercial buildings takes time

The planning and construction of a larger commercial building takes 2-3 years. If construction has already begun, it takes an average of 18 months for a larger office building to be completed. Therefore, new commercial buildings whose cornerstone will be laid this year will only be completed next year. "Project completions often take longer than planned. For example, some buildings planned for 2023 will only be completed this year, and some buildings initially planned for 2024 will not be completed until 2025," said Andi Pleskovski.

Since the planning and construction of new large buildings is a long-term process, it is difficult for developers to catch the best phase of the market, i.e., to bring supply to market during the growth phase and be waiting during the decline phase. For smaller buildings, such timing is easier to achieve. Pleskovski predicted that several smaller and medium-sized projects will be put on hold until the situation in the market changes or an anchor tenant is found for the project. "Large projects in the portfolio of a developer with a strong background and in a good location are brought to market according to plan, so it is quite likely that another high-rise building will rise in central Tallinn in the coming years."

Interest in investing in commercial real estate has not disappeared

According to Pleskovski, professional investors still have interest and liquidity to supplement their positions when buying new objects. "Compared to residential property, commercial real estate is a clearer numbers game. The property being purchased must generate expected returns for investors or have clear potential. While on the residential market there are often examples of small investors simply parking money in real estate for the future, expecting the property to increase in value over time, in the commercial real estate market transactions do not happen if the return calculations do not work out."

Urmas Uibomäe added that since loan interest rates have already fallen and further declines are predicted, this year could bring some revival in commercial real estate investment.