Demand for new business centers in Lithuania is growing further

The beginning of 2015 was relatively stable in Lithuania’s commercial premises sector and was marked by continued efforts of developers of modern offices to increase the number of design and construction projects involving business centres in the capital. The City business centre on Žalgirio Street, developed by Hanner and scheduled for completion in the second half of 2016, is one of the largest new projects and will offer about 20,000 sqm of modern office space to the market. Another large office building project is the office building complex planned by M.M.M. Projektai on the site of the former bakery on Saltoniškių Street, on completion this will offer up to 65,000 sqm. However, the construction of this business centre will not start before 2016 and both the speed of development and its different stages of development will depend on the situation in the market.

In addition to the above projects under planning or in progress, at least three new projects were implemented in Q1 2015: the Sostena and Vertingis business centres on Ukmergės Street, and the reconstruction of a historical building on J. Basanavičiaus Street, all of which have space for lease. The total area of modern office space in the capital is now 519.000 sqm. Meanwhile, in Kaunas, the telecommunications and real estate development company Mikrovisatos Valda completed a 3,600 sqm business centre on Savanorių Avenue; the total area of modern office space available in Kaunas increased to 91,300 sqm in Q1.

The opening of these new business centers has increased the supply of office space, with the result that for the first time in a while most of the country’s major cities have recorded an increase in vacant office space. Previously it was Kaunas that had the smallest vacancy rate, but in Q1 2015 the vacancy rate there increased from 1.3% to 5.7%. This jump in the vacancy rate was due to newly built office buildings that are still looking for tenants. The liquidity of modern office space in Kaunas is considerably lower compared to Vilnius. There is not sufficient development of local enterprises requiring space in the new business centers, even where there is quite a small vacancy rate on the market. International companies already in the city or planning to establish branches could provide an additional stimulus to the market.

The three newly opened business centers in Vilnius were also responsible for the increased vacancy rate in Q1 2015, which rose from 3.9 % to 4.9 %, an area of 25,500 sqm, at the end of the quarter. In view of the statistics of the past seven years, this amount of vacant space and the increase are not significant enough to speak about oversupply, which could influence the rents. In fact, it is lower class (B) office projects that increase vacancy rates, which currently stand at 6.9%, whereas the vacancy rate in A class business centres is only 1.0%. It is likely that because of this low vacancy rate in A class business centres, an increase in the vacancy rate will be recorded in late 2015/early 2016, when the business centres currently under construction are opened. However, this growth should not be significant, because early interest in these premises remains high and lease agreements are actively signed when construction is still in progress.

The fact that owners of new and existing business centres do not feel any pressure because of vacancies is illustrated by stable office rents. In Q1 2015, rents for modern office space remained stable in Kaunas and Klaipėda, and saw a slight growth, of 1% on average in Vilnius in class A business centres. At the moment, A class office rents in Vilnius are 13.0–15.6 EUR/sqm, B class – 8.0–11.6 EUR/sqm. Meanwhile in Kaunas A class office rents are 9.5-13.0 EUR/sqm, and in Klaipėda about 8.7–11.6 EUR/sqm. B class office rents in Kaunas range 5.2–7.8 EUR/sqm and in Klaipėda – 5.2–7.2 EUR/sqm.

Steadily increasing office rents and decreasing yields gradually increase the value of commercial property in Vilnius. Top-class office rents rose almost 5% in Vilnius in last 12 months, while the yield of such premises during the same period decreased on average by 0.2 percentage points – from 7.6% to 7.4%. Thus, the capital value index over the past 12 months increased by almost 8%; such capital value was last recorded in the second half of 2006 and in early 2009. This shows that at the moment, property values are only lower than the price levels recorded at the peak (i.e. the price level of 2007–2008).

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