Riga office market: Spark needed to ignite big potential
Riga’s market for modern offices, which has been recovering in recent years, is opening up broad opportunities for tenants and awaiting a new impulse from local and international companies, says the “Riga Office Outlook” market report for the first half of 2020 published by Newsec.
According to Mindaugas Kulbokas Head of Strategic Analysis at Newsec Advisory in the Baltics, last year and this have seen a breakthrough on the Riga office market: during 2019 and half of 2020 the same amount of new space was offered to tenants – 113,000 sqm – as the entire supply of modern offices in the prior seven years (2011-2018). The total market for modern office premises stood at 756,000 sqm at the end of the first half of 2020.
“The Riga market was helped to achieve notable supply changes by local Latvian developers and by Lithuanian-owned real estate developers who decided to expand abroad. Supply was significantly increased by projects like the 19,100-sqm Henrihs Business Centre developed by Hanner, the 14,000 sqm of leasable space offered at Vastint’s Latvia Riga Business Garden, and the 9,000-sqm Akropole Business Centre developed by the Akropolis Group,” M. Kulbokas says.
The biggest office projects of the first half of 2020 included the Z-Towers and Origo One business centres, offering tenants 25,000 sqm and 11,500 sqm of A class office space, respectively. Intense development of new projects boosted leasable space by 6% in the first half of this year and by nearly 15% in 2019.
Even bigger growth of supply is forecast as of 2022, when over 142,000 sqm of space will be brought to market by new office projects set to be completed one after another like Verde, Business Garden Riga, Jaunais Preses Nams, ELEMENTAL, Office Building Complex, Pine, and Salas Biroji.
“It’s forecast that the increased supply will pause a bit next year, since the office space that’s on offer will need to be absorbed, and new projects will be on hold until the start of 2022. Once the growth of new office supply slows, the vacancy rate should fall below 12%,” M. Kulbokas notes.
Hesitance moving to class A offices, or ‘who’ll kiss the sleeping beauty?’
Even though premises and services at the new properties meet higher quality standards, the sudden jump in supply and slower take-up of space is limiting the possibilities for rental rates to rise.
In the first half of 2020 rents for class A office space in Riga averaged 13-17 euros, and in exceptional cases more than 20 euros. For class B+ offices, meanwhile, located further from the city centre, rents averaged 11-14 euros. In other central districts, rents were 7-13 euros.
In expert’s view, the main engine of Riga’s leasing market could be the relocation of offices of companies operating in Latvia from lower-class to modern class A premises. After the first wave of the pandemic, though, tenants will need another 4-12 months to assess their plans for the future and new transactions will mainly be done on the basis of lease renewals.
“While older offices are often unable to offer the flexibility of office premises and easier reorganization of workspace layouts that are particularly relevant right now to meet the latest workplace safety requirements, companies are rather hesitant about expanding to modern offices. Riga’s ‘sleeping’ office market could get impetus from banks, insurance companies and international service centres, which tend to have strong corporate culture and seek to ensure good conditions for employees. Hence the biggest spark in the Latvian capital’s office market could be an increased need for qualitative change,” M. Kulbokas notes.