Newsec: what awaits commercial real estate in 2021?
The real estate (RE) market will long remember 2020 as a roller coaster ride – with euphoria at the start of the year, market stagnation during the first quarantine, a surge in optimism over the summer, and caution late in the year. Mindaugas Kulbokas, Head of Baltics Research & Analysis at international RE advisory firm Newsec, discusses what’s in store for the commercial RE market in the upcoming year of 2021.
Hybrid work arrangements are altering office tenants’ plans
Habits are changing: people can work from anywhere
One of the most important changes brought by the pandemic is the realisation that it’s possible to work from anywhere. For the moment, how work in offices ultimately will be organised is still under consideration, but one thing is already clear – it will be a hybrid way if working.
Major tenants are not abandoning offices
Major tenants, in planning the long-term outlook for their operations, are not forsaking office-use plans but are considering fundamental changes to how they’re organised. Under a hybrid model of work which combines working at the office and at a freely chosen remote location, the need for space per employee could remain the same or increase. That depends on whether tenants take disease-prevention requirements into account, though it’s not entirely clear yet what decision organisations will make.
Offices are becoming a place for a company’s culture and meetings
In the office of the future, great importance will go to installing open work areas and flexible workspaces suited to different tasks and activities. A search for new values that are important to both employees and organisations will lead to office-interior transformations, since it will be necessary to rebuild teams, strengthen the social ties between people, encourage employee creativity, and rethink ways to boost efficiency and collaboration.
Owners’ future success formula is flexibility
Bigger choice, more freedom to manoeuvre
Due to an increase of supply, there is more and more free office space. In 2021, the vacancy level will settle at between 7% and 10%, creating a new Vilnius office reality which will guarantee tenants more freedom to manoeuvre. Owners, meanwhile, to attract and retain tenants, will have to offer more flexible terms for the lease period and amount of office space. Reacting to tenants’ evolving needs no doubt will be the main challenge of 2021, one owners will have to address here and now. That will require both investments and changes to contracts.
Old offices will be renewed
Lithuania’s capital is seeing the start of reconstruction of office buildings that have gone through the occupancy cycle (10 years). To continue competing successfully with new projects, renovation or a search for alternatives is unavoidable.
Kaunas will become the second choice in Lithuania
In Kaunas, the vacancy rate will reach about 13% in the coming year. Kaunas’s main office tenants are smaller service centres and Lithuania-based companies with offices throughout the country. The key trend for Kaunas offices is in 2021 to become the second most attractive choice for new market players in Lithuania.
Industry and logistics – a rising star
More investments in industrial properties
The driving force of the Lithuanian economy in 2021 no doubt will be industry, which will enjoy unique export opportunities in the recovering post-pandemic market. Both foreign and Lithuanian investors are showing interest in this sector, so investments in new industrial properties should only accelerate in the coming year.
Along with e-commerce, the logistics segment is growing
As e-commerce grows ever faster amid the pandemic-related limitations and restrictions on physical shopping, more parcels are naturally also being sent in Lithuania and the rest of the world. So the logistics segment is entering 2021 very much strengthened and is currently one of the best and most promising investments.
Further growth of logistics networks, as core components of e-commerce, is foreseen. Consumers will continue to actively shop online, and the biggest challenge will be to optimise the cost of logistics between the manufacturer, the seller, and the consumer, which is closely related to the needed RE potential.
Kaunas’s position will improve
Lithuania has three main logistics points –Vilnius, Kaunas, and Klaipėda–, and in that it stands out in the Baltic logistics sector. In Vilnius, logistics centres on consumption, while the port city offers cargo transport and repacking solutions, and Kaunas has a very strong logistics hub tied to the chain that links producers and consumers. In coming years, Kaunas’s position in this sector should strengthen even further thanks to the implementation of the Rail Baltica project, i.e. a railway connecting the Baltic countries with Western Europe.
Growth of investment transactions
Increased trust of foreign investors
It is calculated that in Lithuania in 2020 about EUR 270 million of investment deals will be completed, with the year ending better for the Baltic countries than was expected in March. Investors now see the Baltics as a part of the Nordic region (Scandinavia). Thus, in coming years trust in the Baltic countries undoubtedly will increase, bringing more opportunities to attract ever bigger foreign players.
Increasingly active private investors
This summer and fall, increased activity by private investors was noted. They are showing interest in a variety of both development and cashflow generating properties and are quite active participants of tenders that are organised. It is often said in the Nordic RE sector that every square metre has its buyer. Lithuania is also moving in that direction. Thus, it appears that next year private investors will be even more active, and the competition between them and funds will increase.
Alternative financing methods are gaining momentum
There are now competing options for financing development and acquisitions with the help of not just banks. This is changing all players’ positions. Hence it is expected that next year investors will not only use bank financing but will be more creative and take advantage of alternative financing approaches.