baltic states and belarus real estate market review - Colliers

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Real Estate Market Review 2011 | Estonia Office Market Office Market OVERVIEW After poor conditions and high vacancy in 2009 the office market had begun to firm coming into 2010. Entering 2010 it appeared that rental and vacancy rates would remain relatively stable. However, coming into the year with a significant oversupply, no dramatic recovery was expected and no significant office projects were anticipated to be added to the market. The year saw vacancy rates gradually decrease and the situation in the office sector in 2010 started to improve particularly for landlords who were flexible with lease terms and pricing. The vacancy rate in A and B1 office buildings started to decrease slightly in the second half of the year. Supply As no new premises were added to the market during 2010, the total office stock in Tallinn remained at 473,500 sqm. After the first half of 2009, when approx 51,700 sqm of new supply entered the market, development in the Tallinn office market and supply of new properties has ceased due to unfavourable economic conditions, an oversupply of office premises, and a high cost or absence of liquidity in the market. By the end of 2010, several developers considered possibilities for establishing new office buildings in two-three years time. Due to the relatively large speculative risk, it is crucial for developers to have a very good capitalisation and a high proportion of pre-lease tenants before starting construction works. By the end of 2010, the total stock of office space in CBD area accounted for 42 per cent of total Tallinn stock. While 65 per cent of new supply in 2005 came onto the market in the CBD and 51 per cent of new supply in 2006 came onto the market in the Kesklinn (Centre City) district, over the next two years (2007 and 2008) the most dynamic development of new office properties was outside the CBD - in the Lasnamäe district (mainly in Ülemiste City), comprising 39 per cent and 34 per cent of new supply in Tallinn during that period respectively. Half of new supply in 2009 was developed in CBD. By the end of 2010, Class A premises accounted for about 10 per cent (49,400 sqm) of the total stock of speculative (not built-to-suit) office buildings in Tallinn, Class B1 for 54 per cent (254,900 sqm), and Class B2 for 36 per cent (169,200 sqm) of total stock. The volume of occupancy permissions issued for office and administration buildings in Tallinn during 2010 decreased by 51 per cent compared to the same period in 2009 (140,275 sqm in 2010 and 284,916 sqm in 2009), while the volume of building permissions issued for office and administration buildings in Tallinn in 2010 comprised only 5,789 sqm. The majority of volume of issued occupancy permissions in Tallinn in 2010 was for office and Distribution of Speculative Office Space in tallinn by Class Dynamics of Office Space in Tallinn f - forecasts 500 450 54% 400 Sqm (000s) 350 300 250 200 10% 36% 150 100 50 Class A Class B1 Class B2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f Total Stock New Construction Built-to-suit Expected Construction CONTACT: AVO RÕÕMUSSAAR - a.roomussaar@colliers.ee Colliers International | p. 54
Real Estate Market Review 2011 | Estonia Office Market List of New Built-to-Suit Projects in Tallinn in 2010 Year Project Address GLA, sqm Developer/Occupant 2010 The Estonian Forensic Science Institute Office building Rahumäe tee 6 10,000 Riigi Kinnisvara Total 10,000 List of New Built-to-Suit Projects Under Construction in Tallinn for 2011-2012 Year Project Address GLA, sqm Developer/Occupant 2012 Paldiski 80 Office Building Paldiski road 80 8,000 Wilson Kinnisvara Total 8,000 administration buildings built in 2008 (Marienthali Business Centre) or in 2009 (Peterburi business quarter). Delivery of new office facilities in the near future clearly depends on further economic progress. Presently, construction activity can be seen mainly in the public sector. According to the Building Register, in 2009 - 2010 approx 75 - 80 per cent of construction projects under way were public sector office and administrative premises. Demand During the first half of 2009, when the Tallinn office market witnessed more tenants moving out of space than tenants moving in, it experienced positive absorption in the 2010. In 2010, the demand for high quality, modern office space (A-class offices in favourable location) started to grow as landlords of A and B1 office buildings were flexible enough to offer attractive lease terms, incentives and good pricing, allowing companies to move to better quality properties. Since several lease contracts that were concluded 3 - 5 years ago started to end by the mid-2010, it became possible for tenants to rent A-class office premises with more or less the same rental level as B-class premises. By the end of 2010 the most favourable office properties were those below 100 sqm. Some larger companies were also looking for larger modern office premises. Since landlords believe that the rental rates will more or less recover in a two-three years period, they are interested in concluding short-term contracts, while larger tenants wish to benefit from the present situation and rent A-class premises at low rental rate for longer period of time. In coming years the demand can be expected to surge mainly in CBD area due to the location and lack of supply. Other potentially realistic locations are highly developed concept areas (e.g. Ülemiste City). The highest contribution to take-up volume in 2010 came from companies in the IT and High Tech sector (29 per cent) and the Manufacturing, Industrial and Energy sector (18 per cent). Companies in the Finance and Consultation sectors occupied 11 per cent and 9 per cent respectively of total take-up. The majority of new lease agreements in 2009 were mainly in the Financial Services, IT, and Healthcare-related sectors. In 2010, the office sector has also observed increasing interest for larger premises among BPO (Business Process Outsourcing) companies. The strongest demand remains tied to smaller office space, with a significant increase in demand for Class A office facilities in the CBD due to highly attractive starting prices. Rental Rates and Trends in Tallinn * -asking rental rates (EUR/sqm/month) excluding VAT and operating expenses - stable, - slight increase, - slight decrease Class Rates* Trends for 2011 A existing 8.9 - 15.1 B1 existing 5.4 - 10.6 B2 existing 3.2 - 6.5 CONTACT: AVO RÕÕMUSSAAR - a.roomussaar@colliers.ee Colliers International | p. 55
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