Vilnius office market vacancy rate will soon reach the European average – what will next year bring? | Newsec

Vilnius office market vacancy rate will soon reach the European average – what will next year bring?

Vilnius office market vacancy rate will soon reach the European average – what will next year bring?

Calm settled over Vilnius’s commercial real estate market in the third quarter as fewer new lease transactions were made and tenants’ choice of offices continued to grow. The vacancy rate in Vilnius is forecast to rise gradually in the fourth quarter this year to 7-8%, reaching the European average, and within 12 months vacancies may exceed 10%, international real estate advisors Newsec write in their “Vilnius Office Outlook” market report for the third quarter of 2020.

As forecast, a low vacancy rate in Vilnius led project developers to invest in office expansion, and in the third quarter of 2020 supply on Vilnius’s modern office market grew by 50,100 sqm or 6.7%, while from the start of the year supply increased by 69,700 sqm or 9.6%. The market’s overall vacancy level increased in the quarter from 3.3% to 4.9%: in class A it rose from 2.1% to 3.2% and in class B from 4.3% to 6.3%. The last time more space was added in a single quarter was 4 years ago, when the Quadrum and City business centres opened.

Projects currently in development in Vilnius include some 236,800 sqm of new leasable office space, which will increase supply in this sector even more through the end of 2022.

“Given the leasing deals being made and the scale of new project development, it’s forecast that the va-cancy rate will increase at year-end to 7-8% and reach the European average. In 2020 and the next two years, the average annual supply that is planned (138,000 sqm) is twice as large as the average for the last five years (65,000 sqm). We calculate that if take-up of space does not grow faster than that versus a year earlier, within 12 months we may have vacancies of more than 10%. Still, an increasing supply of new offices will remain the main reason for growth of free premises in Vilnius and developers will be searching longer for new tenants for that space than was usual the last few years,” says Jurgita Ragaišė, Newsec’s Head of Brokerage in the Baltics.

Slowed market for new lease transactions

Vacancies in the office segment grew faster in the third quarter of this year also due to a slowing of the leasing transaction market. Take-up since the start of the year exceeded 77,000 sqm as the leasing mar-ket slowed by about 15% compared to the first 9 months of last year. Compared to the previous quarter, the leasing market slowed in the third quarter of 2020 by 53%, with take-up of just 13,300 sqm. There are several factors behind the current situation: potential new investors cannot come to workplaces due to re-strictions on travel, not all companies are planning for growth of workspaces or they are planning it for work in shifts, and due to the uncertainty caused by the pandemic companies are trying not to plan reloca-tions and avoiding moving costs.

“In this period of uncertainty, companies are not rushing to give up the offices they have, since leasing space usually accounts for a rather small share of their costs (on average about 6-8%). Moreover, lease agreements are usually made for a period of 5-10 years and terminating them early means you must pay additionally. Companies’ decisions about office needs and the impact of those decisions on the market will become clear over the coming 12 months. Market activity may be supported both by long-term growth plans and by decisions to change to another office location or even reduce space,” Ragaišė notes.

The office of the future – a place for meetings and working together

During the pandemic, the expert points out, flexible lease conditions and ability to implement non-traditional solutions in the office became more relevant than ever before. Changes like allocating more space to each employee, setting up flexible workspaces, and equipping many areas for varied tasks and activities and space for informal relaxation, will in the future need to help form teams and social ties and promote crea-tivity, efficiency, and collaboration. These values are important both to employers and employees.

It is foreseen that the main reason for needing to maintain an office will become cultivating a company’s culture and identity. Currently over half the tenants of Vilnius’s modern offices are IT firms and global ser-vice centres. They are dictating the trends in fitting out offices. Most of these companies have not slowed their growth pace even amid the introduction of complex models of working from home and office. In the past quarter, Danske Bank, Bentley Systems, SEB Bankas, Vinted, Swedbank and others have moved to new offices.

Supply is multiplying but rents are not changing

There was no correction of rental rates in the third quarter of 2020. In class A the average rent was EUR 15.60 and in class B it was EUR 12.20. According to Jurgita Ragaišė, rental rates on the office market will stay at similar levels, but clients may see more favourable leasing conditions. Growth of available office space will give tenants a bigger freedom of choice and more power to negotiate for more flexible terms. Landlords will have to invest more in quality in order to meet clients’ expectations.

“Over the coming year, increasing vacancies will give tenants more freedom and choice. It looks like nego-tiations will only intensify and a package of special terms may become even more important for attracting tenants. For office projects to remain competitive, their developers will have to invest even more in quality and be more flexible on other conditions of lease agreements,” Newsec’s Head of Brokerage in the Baltics notes.

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