Long-awaited office space jump in Kaunas

shutterstock_171707618In Q2 2016, increase in office supply has been recorded even in Klaipėda – construction of M19 business centre with total area of 2,000 sqm on Minijos Street was completed. This is the second office building by Stemma Management offered to the office market in Klaipėda over the past few years (at the end of 2014, this developer completed a small project, Liepų Offices, in the centre of Klaipėda). Following the completion of the project, the total usable office area of modern offices in Klaipėda increased to 64,900 sqm. Despite the tenants’ interest in new office projects (e.g. most of M19 business centre has already been let), previously built business centres are not particularly attractive and the total vacancy rate remains very high. At the end of Q2 2016, the vacancy rate of modern office space was 18.7%, whereas office rents remained same as at the end of Q1 2016 – B class office rents ranged from 6.0 to 9.0 EUR/sqm and A class – 8.5–12.5 EUR/sqm.

At the same time the office market in Kaunas is gaining momentum. So far, investors in Kaunas have focused on the development of small administrative buildings and have been slowly getting ready for larger projects. At the beginning of 2016, reconstruction of one administrative building (Neris Business Centre) was completed, but completion of the construction of another five projects (on Vytauto Avenue, Taikos Avenue, Pramonės Avenue, Partizanų Street and Savanorių Avenue) is scheduled in the second half of the year and will offer modern office premises to tenants. In total, the office market in Kaunas will gain 11,300 sqm of office space in 2016. In mid-2016, the total usable office area of modern offices in Kaunas was 91,300 sqm.

An even greater leap in the supply of office premises in Kaunas is planned for the period 2017–2018, when considerably larger business centres will be offered to the market. To sum up the intent of developers, during the next few years at least 6-7 new projects currently at various stages of completion (from already started construction/ reconstruction to approval/design stage) could be implemented in Kaunas. These are projects, which are already being developed and planned on Jonavos Street, Vytauto Avenue, Karaliaus Mindaugo Avenue, K. Donelaičio Steet, K. Baršausko Street and Savanorių Avenue, could offer to the market in total up to 30,000 sqm of modern offices. This would be a really great impetus to the development of the offices market in Kaunas, since at the moment potential larger tenants have almost no choice. The vacancy rate of modern offices in Kaunas in mid-2016 was only 2.1% or 2,000 sqm. Changes in office rents are also conducive to the development of new projects. Although the increase in rents is not significant (during the first half of the year rents for office space in Kaunas increased on average by 5%), this is an extra incentive to developers. Currently B class office premises are renting for 6.0-10.0 EUR/sqm and A class – for 10.5-13.0 EUR/sqm in Kaunas.

shutterstock_298584731The second half of this year promise abundant developments in the office market in Vilnius. All six projects in progress (Quadrum, CITY, 135, Green Hall 2, HIGHWAY and Delta) will be completed offering 82,600 sqm of office space. Since no new business centres were opened in the first half of the year, the vacancy rate in Vilnius business centres decreased to 3.5% totalling 19,000 sqm at the end of Q2. Developers declare they will offer another 69,200 sqm of modern office space across 13 different projects (on V. Gerulaičio Street, Saltoniškių Street, T. Narbuto Street, Lvovo Street, Naugarduko Street, P. Baublio Street, Liepyno Street, Mozūriškių Street, Verkių Street, Viršuliškių Lane, and Kareivių Street) in Vilnius in 2017. Since the great majority of these projects are actually in the construction phase, it is likely that they will be implemented and in 2016–2017 we will have the same impressive volumes of development of office space as it was in 2008–2009.

Particularly rapid development of offices eight years ago coincided with the start of the global financial crisis and resulted in the leap of the vacancy rate to 10% at the end of 2008. At the end of 2009, the vacancy rate was almost 18% and rents in 2009 dropped by 40%. Repetition of such scenario in the present economic and market conditions is unlikely. Sustainable economic growth of the country and increasing attractiveness of the capital city to investors (arrival and expansion of international companies) has up to now determined a sufficiently smooth realisation of new office building projects and allows to expect that on the day of opening of newly built business centres, the vast majority of premises will also be let. It should also be noted that some part of the buildings and its premises is developed for own use and builders or companies related to them will move from old premises to newly built ones. Therefore a leap in the vacancy rate is not expected this year, however, starting from the second half of 2016, a moderate increase in the vacancy rate will be observed.

Competition between business centres in Vilnius has been sufficiently strong recently and this is attested by stable rents, which have not essentially changed since the end of 2015. Currently B class office premises are renting for 8.5–13.0 EUR/sqm and A class – for 13.5–16.5 EUR/sqm. Compared to the lowest rents in 2010, rents for office space in Vilnius have on average increased by over 40%. It can be said that the current and planned supply and demand ratio has determined the office rental market peak and it is unlikely that during the next few years rents could considerably increase.

Lithuania Commercial Market Commentary Q2 2016 

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