The fastest office development in Q2 recorded in Kaunas

In 2017, activity in the commercial real estate market reached record new levels countrywide. According to the data of the State Enterprise Centre of Registers, the first half of this year in Lithuania saw over 4% more transactions on non-residential properties (buildings and premises) compared to the same period in 2016. In total, 9,159 non-residential buildings and premises were purchased over the first half of this year in Lithuania and this is the best first half year result in the country’s history. According to Statistics Lithuania, construction works worth EUR 404 million were carried out in the non-residential buildings sector in the first half of 2017 or 15% more than in the same period in 2016.

In Q2 2017, the fastest expansion of new offices was recorded in Kaunas city. Developers and other companies actively developed buildings of different purpose which provided new area for offices both for own needs and for the market. All in all, five different purpose construction projects were completed. All five projects offered a total of 14,700 sqm useful office area (A and B blocks in Prospekto Verslo Parkas, Sitis, Žaliakalnio Terasos, B66 and the newly completed headquarter of the consulting company SDG). Due to these projects the modern office premises market in Kaunas grew by as much as 15% over the second quarter of this year and the total office supply reached 111,800 sqm. This sharp growth in supply affected the vacancy rate in Kaunas – over the second quarter of this year it increased from 2.4% to 7.9%. The largest area of office premises was offered by YIT Kausta, the construction and development company which has completed construction of the office building B66 on K. Baršausko Street offering about 4,900 sqm of office area to the market.

On completion of the development, about 70% of its premises were already rented. The biggest tenants are the IT companies Teltonika and Virtustream. Since there is no longer any shortage of administrative premises projects in Kaunas and the market will gradually be supplemented with new projects in 2017–2018, it is inevitable that there will be an increase in the number of vacant premises. However, the wider choice also makes the demand more active since companies can plan their expansion very realistically or consider establishing their business in Lithuania’s second biggest city. Kaunas is still very attractive for larger companies where rents are on average 20% lower than in Vilnius. Recently the office rents in Kaunas has stabilised and it is unlikely that it will increase significantly in the existing competitive environment. Over 2017 alone, the modern office market in Kaunas city will be supplemented with a useful office area of 30,000–40,000 sqm, i.e. this year the total modern office premises market in Kaunas might increase by as much as 30–40%. At the end of the second quarter this year, the rents for A class offices in Kaunas was 11.0–13.5 EUR/sqm, B class – to 6.0–10.0 EUR/sqm.

Meanwhile, the country’s capital welcomed the second quarter of this year in a more modest manner since the construction of an office building of P. Baublio Street had been completed just before Q2 2017. This building, Santariškes Medical Business Center, with an area of around 2,000 sqm was rented to one tenant (private clinic). The total area of the modern office premises grew to 647,400 sqm at the end of the second quarter in Vilnius. Meanwhile, tenants of office premises were particularly active and continued to reduce the amount of vacant premises in already operating office buildings. The area of rented modern office premises amounted to over 11,000 sqm in the second quarter of this year in Vilnius and reduced the total vacancy rate from 5.8% to 5.1%. The vacancy rate of A class offices accounted for 2.7%, and of B class – for 6.3%. It could be said that the speedy development of modern office premises that has taken place over the last few years in Vilnius has been successful. Taking a look at the projects that have been completed in 2017 and that are nearing completion, it can be seen that new projects have definitely received a considerable amount of interest on the part of tenants. Most of the latest projects do not face any major problems in relation to finding tenants. Even some lease agreements are signed beforehand, though construction has not even started, and this fact signals a sufficiently fast business development. If all the planned projects will completed this year, the market of modern offices in Vilnius city will be replenished with up to 15 different projects or their stages with a total useful area of 84,000 sqm. The well-balanced supply and demand continues to maintain stable office rents in Vilnius which, in principle, have not changed since the end of 2015. Currently, B class offices are renting at 8.0–13.0 EUR/sqm, A class – at 13.5–16.5 EUR/sqm.

Meanwhile the office market in Klaipėda city continues to be stable. The port city has long failed to demonstrate any abundance of new projects. Nevertheless, lately, the development of some small projects can be noticed. In the third quarter this year, the construction of a new 1,000 sqm area building on S. Nėries Street should be completed. It is planned to rent the building to companies in the medical services industry. No other major office development plans are anticipated in Klaipėda in the near future. The previously announced and already launched development of the industrial territory on Liepų Street, which is being carried out by Viremidos Investicijos and which planned to build the office building Kamino Biurai during the first stage, is now being adjusted.

This territory will now be used for the development of the technology park Inovacijų ir Verslo Slėnis which should house institutions and agencies training IT, digital design and other innovative field specialists. The sluggish expansion of companies that need modern and more expensive office premises continues to maintain a fairly high level of vacant premises in Klaipėda city. Although the vacancy rate of modern office premises reduced from 18.3% to 17.3% over the second quarter of this year, this indicator has remained within the range of 15–20% since the end of 2011. Meanwhile, investors in new and bigger scope projects are deterred by relatively low office rents whose growth potential is limited due to too small demand. For example, recently only the administration of Klaipėda city municipality has considering acquiring or renting larger premises. For this reason, office rents have remained the same: they are 6.0–9.0 EUR/sqm in B class buildings, and 9.0–12.5 EUR/sqm in A class buildings.

Lithuania Commercial Market Commentary Q2 2017