Commercial lease sector jacked up
“During 2012 to 2015, the Baltic and Nordic capitals have evidently dominated the Lithuanian market for investment deals: the share of capital from investors from these countries in the total investments over these four years accounts for nearly 82 per cent. The dependence on local capital and capital from neighbouring countries started to decrease in 2015, and this share decreased to 52 per cent in 2016.”
“The year 2016 was one of the most active years in the Vilnius office market in recent years,” said Saulius Vagonis, Oberhaus Head of Valuation & Analysis. In 2016, 6 new projects were implemented in the Lithuanian capital city, which offered the market 80,800 sqm of useful office space”
In 2016, the development of the commercial premises sector on the whole country’s scale was somewhat enlivened by new market players – the German retail chain Lidl and the Latvian retail chain Depo specialising in construction materials and household goods. However, in recent years, any active development of new commercial buildings has only been observed in the two largest Lithuanian cities, i.e. Vilnius and Kaunas. The development of commercial properties in the other cities and towns of the country remains fairly slow and does not show signs of any sustainable recovery. This to a certain extent is proved by the volumes of construction in Lithuania, which have been decreasing for the second consecutive year. According to data from the Lithuanian Department of Statistics, in 2016, works of construction of non-residential premises in Lithuania for 862 million EUR were performed, which is a nearly 7 per cent decrease compared to 2015 (at current prices). The highest volumes of construction of non-residential buildings in Lithuania were recorded in 2008 (1,544 million EUR), Ober-haus writes in a review of the commercial real estate market.
According to Ober-haus, in the time period from 2012 to 2015, the Baltic and Nordic capitals have evidently dominated the Lithuanian market for investment deals: the share of capital from investors from these countries in the total investments over these four years accounts for nearly 82 per cent. The dependence on local capital and capital from neighbouring countries started to decrease in 2015, and this share decreased to 52 per cent in 2016. In 2016, the geographical distribution of investors was to a large extent affected by the acquisition of the logistics centre of Kesko Senukai by US investors and by the major investments from the Swiss-based investor Partners Group for the second consecutive year. At the beginning of the year, Laurus, which is jointly managed by Partners Group and Northern Horizon Capital, purchased a portfolio of commercial properties in the Baltic States, of which 19 properties (mostly current or former divisions of SEB bank) are situated in Lithuania, from the Dutch company Geneba Properties. This was the second largest investment deal in 2016. In addition to the major investments that involved US and Swiss capital in 2016, Lithuanian commercial properties also attracted investors from Lithuania, Estonia, Norway, Russia, the Netherlands and Germany.
“The year 2016 was one of the most active years in the Vilnius office market in recent years,” said Saulius Vagonis, Ober-haus Head of Valuation & Analysis. In 2016, 6 new projects were implemented in the Lithuanian capital city, which offered the market 80,800 sqm of useful office space: Quadrum, City, 135, Delta, Highway, and the upgraded offices at Vilnius Gates in Gynėjų St., which prior to that were used for retail purposes (Fashion Gates boutiques). The previous leap in the supply of offices was only recorded in 2008, when 12 projects or project stages were completed and offered the market 89,500 sqm of office space. In 2016, the total supply of modern offices in Vilnius increased by nearly 15 per cent, and by the end of the year, the total useful area of modern offices in Vilnius amounted to 627,400 sqm.
The rich supply of new offices has offered considerable selection opportunities and improved the office take-up figures. According to Oberhaus, in 2016, a total of 75,900 sqm of office space was leased in Vilnius, which is a 44 per cent increase compared to 2015. The overall office vacancy rate in Vilnius business centres continued to increase for the second consecutive year, i.e. in the course of the year increased from 4.1 per cent to 6.4 per cent. By the end of the year, the amount of vacant office space was 40,100 sqm. The vacancy rate for class A offices was 3.4 per cent, while the vacancy rate for class B offices was 8.1 per cent. Although the demand for modern offices remains fairly high, and developers could be satisfied with the lease pace (of the 2016 supply, 73 per cent was leased by the end of the year), the growth in the vacancy rate was easily predictable. “Some of the companies leave their previous offices and opt for new ones. But, the 2016 projects were dominating by companies undergoing expansion, which either established their new units, or transferred their individual units into a single building. Therefore, the expanding and newly establishing companies compensate for the office space of other companies (which move from one location to a different location) in other projects, and a fairly consistent growth in office vacancy rate in Vilnius could be observed in 2016. The year 2017 is also promising in terms of both supply and demand. Developers plan to implement as many as 15 various-scale projects or stages in the course of the year and offer the Vilnius market nearly 83,000 sqm of new modern office space. Therefore, even in case the demand for the offices remains the same as in 2016, the growth of office vacancy rate in 2017 is practically inevitable,” said Saulius Vagonis.
The development of new offices has finally started in Kaunas. The lengthy discussions about the insufficiency of offices in Lithuania’s second largest city have proven fruitful. In 2016, 5 small-scale office projects (in Neries Krantinės St., Taikos Ave., Pramonės Ave. and Partizanų St.) added up to the Kaunas market for modern offices. As a result, the Kaunas market for modern offices grew by 8 per cent (7,550 sqm of useful office space) in a year, and the total supply by the end of 2016 was 97,100 sqm. Although the growth in supply in 2016 was only minor, the construction of some large business centres started in Kaunas in 2016 will, if completed, provide some good opportunities for the growth of the sector and attract businesses in 2017 and 2018. In theory, the construction of 8 office projects might be completed in 2017, with the useful office space there amounting to 40,000 sqm. These projects include both the reconstruction of old administrative buildings of various size and the construction of new, fairly large business centres, which will offer tenants over 5,000 sqm of office space per building. However, considering that the construction of modern buildings often takes longer than expected, and that the pace of construction works also depends on demand (the real interest on the part of tenants), the completion of some of these projects might be postponed to 2018.
In any case, the new supply is likely to attract both local and international companies, which were unable to establish or expand in Kaunas earlier, due to shortage of office space on offer. Regardless, the fact that 5 new, smallscale projects were implemented in Kaunas in 2016, the vacancy rate in the course of the year remained stable and was 2.5 per cent by the end of the year (the vacancy rate at the end of 2015 was 2.6 per cent). By the end of 2016, the total area of vacant offices was nearly 2,500 sqm. It is evident that the currently available area of vacant premises is insufficient for companies which are looking for large office areas in a single building. Therefore, any major movement on the part of tenants is likely at the end of 2017 and in early 2018, when the first major projects will be completed and the actual demand for such properties in Kaunas will become clear. Although, in the course of 2016, rents for offices in Kaunas on average increased by nearly 6 per cent, the current rent level is considerably lower compared to rents in Vilnius (in Kaunas, rents for modern offices are on average approximately 20 per cent lower than in Vilnius).
Similarly to previous years, in 2016, the development of modern offices was the slowest in Klaipėda. In the course of the year, two small office buildings (M19 in Minijos St. and a small building in Taikos Ave.) with the total useful office space amounting to 3,100 sqm were built here. This means that, in 2016, the market for modern offices in Klaipėda grew only by 5%, and the total supply by the end of the year was 66,200 sqm. “Although the implementation of any large-scale projects in Klaipėda in the nearest future seems unlikely, local investors are trying to revive the stagnating market for commercial premises in this city,” said Saulius Vagonis.
No major changes in the office occupancy rate have been recorded in Klaipėda in 2016, although, in the course of the year, the overall office vacancy rate in the city decreased from 18.8 per cent to 16.9 per cent. Unlike Vilnius or Kaunas, the modern offices market in Klaipėda receives most interest from local companies. The lack of international companies, and the fairly slow expansion of companies operating in the city do not provide any grounds for believing in any speedier development of this segment in the foreseeable future. However, with the growth of the national economy and the improvement of company performance, successful companies are able to pay higher rents for modern offices. In the course of 2016, rents for modern offices in Klaipėda on average grew by nearly 3 per cent, but nevertheless remain nearly 20–30 per cent lower compared to Kaunas and Vilnius.
The development of commercial premises in the Baltics last year was enlivened by new market players