Tallinn Commercial Real Estate's Difficult Choices: Lack of Vision Destroys Competitiveness

Over the years, Tallinn has emerged as the leading real estate engine in Estonia, if not throughout the Baltics, where trends arrive first. The city's development has been significantly influenced by Western Europe, Sweden, and to some extent, developments across the ocean. Estonian developers seek ideas abroad, which is evident in their architectural solutions. Modern, green, and human-centered environments are rising in Ülemiste, North Tallinn, and the Old Town. Primarily, new approaches are being applied to new real estate development rather than to improve the competitiveness of aging commercial property.

Tallinn's real estate market differs dramatically from the rest of Estonia, as demand for land and quality space is extremely high in the capital. Tallinn has jobs, tourists, infrastructure, and money. And where there is demand, supply follows. In Tallinn's city center and its surrounding areas, large construction volumes are planned for the coming years in both residential and commercial real estate. Yet as focus has shifted to new real estate development, A-, B-, and C-class commercial property is languishing in the shadows.

Home offices accelerate the transformation of aging property

The question of aging property is not unique to Tallinn. In fact, it is already a century-old problem reaching Estonia. For example, New York has grappled with this issue for half a century - how to make the old new. A massive amount of office buildings agonize under outdated concepts. New real estate differs from old like night and day, and old spaces gradually remain empty. They do not fit the requirements and needs of the new era. American experts compare the situation to the major transformation that took place in the 1920s, when there was a transition to a post-industrial society, or the formation of an information society.

Over the past decade, changes in real estate have been dictated by the digital age and job creation around technology companies. The pandemic period, cybersecurity, green requirements, and the digital age's transition to artificial intelligence have also disrupted more modern concepts. The search for new and correct solutions is ongoing everywhere – in industry, logistics, commerce, and office spaces.

Positive experience with home offices proved globally that privacy and individuality are vital from a productivity standpoint. So today, real estate solutions are moving toward a balance, tilted by collaboration and individuality in their favor.

Large international architecture firms constantly highlight in their interviews that one fits for all no longer works. A new approach has emerged, called destination workplace. In Estonia too, companies are gradually realizing that buildings intended as work environments must be adapted to suit the organization's culture and be based on employee needs. The pandemic rapidly accelerated this understanding, as organizations had to suddenly look inward to understand what types of people work in their organizations, what are their habits, and how they would like to work. The manifestations of this phenomenon had already appeared in agile organizations and models slightly earlier.

So are widely prevalent call-center type work areas, where each employee is given 1 square meter to complete their work tasks, becoming a thing of the past? Certainly not, because it can be an effective, natural, and normal way of working for a particular work community. However, broadly applying one way of working to all employees is no longer possible. Already, new technologies allow architects to create wonderful and individual office and outdoor micro-environments where people feel completely different. Where there are different lighting solutions, spatial planning, temperature, humidity and sound solutions, furniture and what all else.

Keywords for modern office buildings are hospitality and community

It is difficult to say where office architecture and interior design will move in the long term, but hospitality is currently a very popular keyword being adhered to. And another keyword is culture and community. So the shift has been toward a concept where the key is still understanding how a person or work community feels and perceives themselves. The workplace is an environment where people want to come, not where they are obligated to come. Like home, where we feel comfortable, where we are spontaneous and return instinctively.

Listening to interviews with top US brokers and architects, the workplace must provide access to the city's diversity, talent, and life experience. But also conversely, city development must today support a community mindset. In Tallinn, this is already the case in some areas – for example, Kalamaja, Rotermann, and Ülemiste. A foreign company opens an office in a new country in a place where the environment is as similar as possible to the country of origin. The company moves to a place where everything surrounding it supports its activities. This has been especially evident with IT companies, where Silicon Valley-type innovation centers have emerged. Supportive environments increase productivity because they are created to improve collaboration. Recently, the question has arisen: why don't people want to return to the office to work anymore? Because productivity is already higher in hybrid work forms. Merely changing the external environment will not change how a person feels inside it. You cannot change an employee by forcing them into an old concept; instead, you must proceed from new solutions, which are much more attractive than comfortable hybrid work and home office.

So destination workplace, or perhaps some other newer concept, has emerged to balance the popularity of home office or hybrid work. And so office space is becoming increasingly similar to home office.

EU directive: a quarter of the poorest quality spaces must be renovated by 2033

Solving the problem is not easy because it is not cheap. With each new addition of a modern and new concept A-class office building, the competitiveness of many existing B- and C-class buildings decreases. Building new is always cheaper than renovating old. This is true worldwide, and also in Tallinn. The downtown areas of Estonian cities are full of aging office and service spaces. Many of them likely cannot be repurposed as office space. And even if an old space owner makes a certain effort, it is far from possible to demand rental prices on those spaces that would be desired for productivity or that would help finance future larger investments. They cannot keep up with new principles because the investment is too high. So it is no wonder that new concepts of a completely new type have emerged in old industrial buildings, such as Telliskivi Quarter or Aparaadi Factory in Tartu. The tenants of these spaces do not compete with A-class and the investment in creating a new environment is relatively low. Thus new environments are created.

Perhaps the most appropriate way to breathe life into old property is radical change. Currently, Tallinn has approximately 100,000 square meters of new office space under construction. Adding the volume in the pipeline, owners, urban planners, and sector financiers are simply forced to think about property that will remain empty. The alternative is complete reconstruction and change of purpose, e.g., converting a former office building into apartments. Something that has been done in New York for a long time. Yet precisely given the example of that major city, only 10–16% of existing commercial space is considered suitable for residential conversion. What this rate is in Tallinn can be said by an architect, but reconstruction alone is not a panacea. However, it does allow buildings to be quickly repositioned to a new segment.

In Tallinn too, there are examples where reconstruction does not work successfully. At the same time, this should be actively addressed by the city administration, not to hinder but to support value-creating changes. From here arises the question: is merely changing the city's main street causing changes in real estate? Does creating a main street mean that buildings around Narva Road in Tallinn will only have their windows replaced and crumbling Soviet-era plaster glued back to the walls? Or is the ongoing change so significant that residential and work spaces on the side of the capital's main street will finally begin to offer their inhabitants access to the city's diversity? Probably not, because in certain cases, demolition of low-quality buildings would be necessary, since land alone is at a high price in Tallinn.

Unlike Helsinki, Tallinn is not featured in major real estate mega-trend analysis reports such as ULI. However, Tallinn can certainly be classified in the category of high-growth regions where capital follows new developments. These developments and changes need to be pushed, prompted, supported, and financed.

The pressure to renovate and reconstruct old buildings will come sooner or later. Not only from the need to improve competitiveness, but also from a regulatory perspective, as already from the buildings' energy efficiency directive, 26% of the poorest performing non-residential buildings must be renovated by 2033. Looking at the detail plans pending in Tallinn, the cityscape of Tallinn's downtown and its surroundings will change completely over the next ten years. Unfortunately, in its current state, not through the renovation and transformation of old buildings, but at the expense of new buildings being constructed.