Kaunas office market expansion offers tenants ever wider opportunities | Newsec

Kaunas office market expansion offers tenants ever wider opportunities

Kaunas office market expansion offers tenants ever wider opportunities

The commercial real estate market in Kaunas continues growing briskly, with the amount of office space offered for lease up 12% in the first half of 2020 and a full 33% over the past year. Such rapid growth of offices is giving tenants a wide choice of options, though that trend will not continue for long, the analysts at international real estate advisors Newsec say.

Three new modern office properties were completed in the first half of 2020, adding 26,800 sqm of new space to the market. With these projects, the Kaunas office market had a total of 253,000 sqm at the end of June, according to the “Kaunas Office Outlook” market report for the second quarter of 2020 published by Newsec.

Despite the negative impact of the COVID-19 pandemic on the economy, rental prices for office space in Kaunas rose somewhat in the first half of this year. The overall price level grew 0.7%, with rents now averaging 12.0-13.5 euros in class A and 7.0-11.5 euros in class B. The slight change in prices was also influenced by the launch of the Magnum Business Centre, notes Jurgita Ragaišė, Newsec’s Head of Brokerage in the Baltics.

“Built alongside Kaunas Akropolis and Žalgiris Arena, the Magnum Business Centre is the city’s biggest modern office project, adding 18,000 sqm of leasable space to the market in Lithuania’s past temporary capital. The property blends harmoniously into Kaunas’s emerging central business district, giving companies a chance to lease class A premises with the most innovative solutions on the market. They include autonomous microclimate and LED lighting systems, infrastructure for renewable energy sources, and automatic management of office costs,” Ragaišė says.

Largest deal was by Swedish IT company

According to Newsec’s data, lease transactions in Kaunas in the first half of the year totalled 9,000 sqm, or 30% of take-up in the full year 2019.

The largest lease transaction in Kaunas in the first half of this year was by Evolution Gaming, a Swedish IT company which provides services for casino operators. Evolution Gaming’s employees moved into a 2,000-sqm office in the Alia Business Centre. Another large leasing deal was the decision by start-up Tribe Payments to move into 900 sqm of space at the BLC2 office complex.

The solar energy engineering firm Detra Solar and software developer PVcase also decided to lease more space. The two companies, which have a single owner, will occupy an entire 1,300-sqm floor at the Magnum Business Centre.

Smaller service centres are multiplying

While the average size of offices in Kaunas is growing, companies’ leased areas are seen to rarely exceed 2,000 sqm and smaller tenants predominate in the city. According to Ragaišė, Kaunas is often chosen by smaller international service centres, so project developers try to adapt to the needs of smaller tenants.

“The business ecosystem that is developing in Kaunas offers every chance for the city to become a hub for smaller service centres. Kaunas already has 17 service centres with almost 3,000 employees. The city’s incentives have also been noted by international experts – in its European Cities of the Future rating for 2020/21, The Financial Times’ fDi Intelligence unit ranked Kaunas No. 2 in the small regions category,” says Ragaišė.

She stresses that Kaunas’s focused strategy for attracting international tenants has also influenced local companies. Given a wide choice of modern offices, companies are increasingly making the decision to move to new business centres.

“Both foreign and Lithuanian companies are looking for identity and distinctiveness, they want to offer employees better conditions and also see a chance for synergy in leasing offices in the city’s emerging business district. That’s why tenants show more interest in office buildings concentrated in one place, where companies with similar profiles are coming together and business communities are forming,” Ragaišė stresses.

It is forecast that in future, clusters of office buildings will be more competitive than individual administrative buildings.

Supply will shrink

Besides the 9,000 sqm already leased this year, developers expect to able to agree on leases for another 10,000 sqm of office space by year-end. By comparison, past take-up was almost twice as much, at 35,000-40,000 sqm a year.

“Due to transactions proceeding more slowly and the increased supply of offices, Kaunas’s office vacancy rate grew from 12.3% to 17.2% at the end of the first quarter. A full 44,000 sqm of free office space was offered for lease in newly built properties. More than a third of premises are at projects completed in 2020, so tenants in Kaunas truly have a big choice. On the other hand, such a favourable period for tenants will not continue for long,” Ragaišė notes.

Under current projections, the vacancy level will be 13% at year-end and later fall to 10%. Developers will likely put the growth of modern offices on hold, so the outlook for coming years is that newly developed modern office space in Kaunas may decrease.

It is now forecast that planned commercial real estate developments in Kaunas will be carried out no earlier than in 2022-2023. So, according to the Newsec expert, no growth in the supply of office space is planned in the second half of the year, and in 2021 the total supply will probably shrink and may total about 12,000 sqm.

“It’s becoming clear that tenants may need 12-18 months to absorb the available office space in Kaunas, which poses notable challenges for developers. So new projects are likely to advance at a more modest pace and mainly on a built-to-suit basis where the developer builds a property according to a specific client’s needs and that client then leases or buys it,” Ragaišė explains.

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