Sluggish Vilnius office market saw no big changes in 2nd quarter of 2020 | Newsec

Sluggish Vilnius office market saw no big changes in 2nd quarter of 2020

Sluggish Vilnius office market saw no big changes in 2nd quarter of 2020

The negative economic forecasts made during the quarantine look more positive today: amid initial signs of recovery, no marked swings in rental price were noted in the second quarter on the Vilnius commercial real estate market and major tenants continued moving ahead with their expansion plans, international real estate advisors Newsec write in their “Vilnius Office Outlook” market report for the second quarter of 2020.

According to Newsec’s Head of Brokerage in the Baltics, Jurgita Ragaišė, rental prices on the Vilnius office market were almost unchanged over the last several months, while newly offered premises and their price average rose slightly: “The average rent in class A is 15.5 euros, and in class B it’s 11.9 euros, while the overall price level starting rising a bit already a year ago, which was also influenced by annual indexation. It can be seen that rents on newly developed projects are bigger than the market average, while managers of older office buildings, given the rapidly growing supply of modern offices, are starting to offer more flexible leasing terms. Still, as the choice of new offices increases, project managers who want to stand out from both old and new projects will have to invest in quality solutions.”

Despite the challenges sparked by the COVID-19 pandemic, developers completed planned projects and offered the market a total of 19,500 sqm of new leasable space. Those projects are: Paupys, which is meant not only for business but also for local and city-wide residents, and Green Hall 3, which completed an architectural ensemble of three office buildings on the right bank of the Neris River. With these projects, the office market in Vilnius grew to 747,000 sqm in the second quarter of 2020, an increase of 2.7%.

While the quarantine period brought companies’ decision-making process to a halt, major tenants on the market went ahead with planned expansion projects: “The rental market was more active than expected in the last months, with lease agreements concluded for more than 27,000 sqm. The most notable one was the deal between Western Union and Technopolis on 15,000 sqm of office space at the Ozas Park office campus. That was the biggest office transaction so far this year not just in Vilnius but in all the Baltic countries, showing active expansion of service centres that are already operating on the market. Organisations like Metso and the Department of Migration also undertook significant expansion,” Ragaišė notes.

She said properties will be completed over the next half-year that will offer the market 95,000 sqm of leasable area (70% of which is already taken). Still, the trend has become clear that what occurred in the second quarter of 2020 was second or even third rental cycles, with transactions mainly involving companies that have been operating in Lithuania for some time already.

Little change in the vacancy rate

Ragaišė estimates the vacancy rate reached 3.3% in the second quarter (up 0.6 percentage points from the previous quarter), and as most tenants of the office centres planned to open in 2020 will be moving from class B office buildings, the trend of increasing free office space will remain strong in the class B segment.

“More unoccupied space has turned up in the class B segment, where the vacancy level is 4.3%. Growth in the supply of class A office buildings was very modest, so the projected increase in vacancies did not occur, and in fact they slightly decreased, from 2.4% to 2.1%. The rather low vacancy figures show that currently most modern offices are already leased out. But given the pre-lease agreements for properties that are still in development and class B tenants who are gradually moving to new premises, space available for leasing in the market for older offices is set to increase,” the group’s head of brokerage services explains.

Although at the end 2019, a vacancy rate of 5-6% was forecast for the coming year, it is now becoming clear that upon the completion of all planned 2020 projects, space on the Vilnius office market will increase by 115,000 sqm and the vacancy rate may grow to 7-10%. That will be record supply for a single year – by comparison, over the last five years, an average of 65,000 sqm of new space was offered per year. Most likely, the forecast changes in free office space will be influenced by such factors as the COVID-19 pandemic and development of newly projects. In any case, increased supply on the office market will bring tenants opportunities for even greater choice.

Emerging need for office flexibility  

Ragaišė notes that the office market today is feeling the impact of the remote working model which took root during the quarantine period: “For some time now, some tenants have been closely watching the COVID-19 situation and economic forecasts, due to which they’ve had to reconsider expansion or relocation plans, putting them on hold for a time and taking a more cautious view of the future.”

The evolving nature of work and rapidly changing situation in the market are also leading companies to seek flexible solutions. This situation may favour those offices and developers of new projects who can offer “flexible” offices through simple technical possibilities for re-planning premises and rearranging workspaces in keeping with the new work-safety requirements.

Summing up, the specialist notes that take-up of space this year will not be like the last several years, when the market was peaking, though the office market in the capital could get a boost from lease transactions with state-owned companies.

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