Not competing on price: modern and smart office buildings are more desirable to tenants

Q3 2017 was active in the modern offices market. Projects of various sizes contributed to the increase of the modern office space in the major cities of the country. The largest projects were implemented in the capital city, where construction of four new office buildings was actually completed in Q3: Liepyno Verslo Namai, Narbuto 5, Eleven 11 and Green Hall 2. These projects contributed a total of 19,200 sqm of usable office area to the market in Vilnius which now totals 666,600 sqm.

At the end of Q3 2017, the occupancy rate in these four newly completed buildings was 78% (over 4,200 sqm of the usable office space was vacant). These latest projects did not have a major impact on the overall market indicators and the general vacancy rate over Q3 2017 increased from 5.1% to a mere 5.3%. The vacancy rate for A class offices was 3.5% and B class – 6.3%.

According to Ober-Haus, the current office vacancy rate in Vilnius (5.3%) remains fairly stable and exceeds the average of the past ten quarters (4.8%) only by half a percentage point. ‘The business centres that will be completed by the end of 2017 will not make a major difference to the situation in the market, because these buildings have already been leased. In the context of the current development rate of companies, the supply of new office space in 2018 does not appear threatening – the projects scheduled for the coming year will offer nearly 62,000 sqm of usable office space’, Saulius Vagonis, Head of Valuation & Analysis Department at Ober-Haus, said.

‘New projects are attractive to the companies which aim to optimize their physical workspace costs and to attract (or retain) employees by offering them modern, technologically smart and attractive workspace. So the trends are sufficiently clear – in order to compete in today’s market, owners of new office buildings must offer an appropriate product and those of older office buildings must upgrade their property. Steady and significant increase in supply is useful both for potential tenants and the economic climate in Vilnius in general,’ Mr Vagonis said.

Competition between business centres determines that the base rent for office space has not changed substantially since the end of 2015. According to Ober-Haus, currently stands at 8.0–13.0 EUR/sqm for B class offices and 13.5–16.5  EUR/sqm for A class offices.

However, in order to attract larger and better known tenants, building owners must be much more flexible in the negotiations with the tenants, especially compared to the 2014–2015 period. The medium and larger leasing transactions concluded today for the new and top-class office buildings usually feature rents under 15.0–16.0 EUR/sqm. ‘If the landlord agrees to negotiate on the base rent, the standing practice in the market is that the tenant will pay all additional building maintenance costs (particularly in top-class business centres). That is, the tenants will compensate not only operation and maintenance costs of the building and premises, but also real estate and land taxes, property insurance, and property management costs. Tenants also normally pay a fee for all parking spaces allocated to them,’ Mr Vagonis said.

Kaunas offers some choices: increase in the number of vacant office premises and a broad range prices

In anticipation of the completion and opening of lager office building projects in Kaunas, smaller scale projects keep supplementing the market. According to Ober-Haus, two projects were completed in Q3 2017 (Jonava 30 on Jonavos Street and S3 on Studentų Street), which offered 3,800 sqm of useful office space totalling 115,600 sqm of modern office space in Kaunas.

After a sudden increase in the vacancy rate in Q2 2017 (from 2.4% to 7.9%), it stabilised and stood at 7.5% in Q3. It is likely that due to active implementation of new office projects in Kaunas, the vacancy rate will remain relatively high in the future.

‘It would be too optimistic to expect that the market in Kaunas will be able to absorb the office space offered to the market in a short period of time (even with the help of international companies). However, a sufficiently broad choice of office premises should be seen as the economic growth potential in Kaunas, because workspaces which meet the needs of the market is one of the essential factors for business development. Some office building developers may face competitive challenges – while certain projects will enjoy high occupancy rates and well-known tenants, others may have to be more pro- active in attracting prospective tenants,’ Mr Vagonis said.

In all, 11 projects of different scale and for different purpose are planned in Kaunas in 2017. They will offer a total of 35,700 sqm of modern office space. Although the new and top-class business centres slightly increased rents in the city of Kaunas, the price range for modern office premises remains very broad. According to Ober-Haus, at the end of Q3 2017, rent for A class offices stood at 11.0–14.0 EUR/sqm and for B class – 6.0–10.5 EUR/sqm.

Small signs of recovery in Klaipėda office market

Development of small projects continues to dominate in the modern office market of Klaipeda. In Q3 2017, development of a new 1,000 sqm building was completed on S. Nėries Street. The premises were leased to a dental clinic, a sports and wellness studio and other tenants.

‘Although slowly, businesses are trying to activate the stagnating market by repurposing the existing sites and buildings,’ Mr Vagonis said. For example, Vakarų Laivų Gamykla (Western Shipyard) together with Klaipėda Science and Technology Park founded the Pilies dirbtuvės in an old administrative building on Pilies Street which offers premises to the representatives of creative industries for a small fee. A former industrial site on Liepų Street will accommodate a technology park (Innovation and Business Valley) for educational institutions which train specialists in information technology, digital design and other innovative areas. The site will also accommodate the co-working centre Spiečius to be completed in mid-2018. Meanwhile this year, Stemma Management plans to complete reconstruction of an old administrative building on the former site of Klaipėdos Kranai (Verslo Biurai 103) and offer about 2,500 sqm of retail and office premises to the market. If this project is implemented successfully, by the end of 2017 the modern office space area in Klaipėda will total 68.500 sqm (annual growth rate of almost 4%).

Although at the end of Q3 2017 the vacancy rate of modern office space in Klaipėda was 17.9%, a large portion of vacant offices are in the buildings constructed earlier (mostly before 2009) (e.g. Business Centre Vitė) and negotiations regarding the property lease in these buildings have not been fruitful for various reasons. So newly developed projects and more flexible approach of the owners to the customer’s needs can contribute to a more successful implementation of new projects in Klaipėda than shown by the general market indicators. According to Ober-Haus, office rents remain stable in Klaipėda and currently the rents in B class buildings stand at 6.0–9.0 EUR/sqm, and in A class buildings – 9.0–12.5 EUR/sqm.

Lithuania Commercial Market Commentary Q3 2017

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