Once a predominantly landlord-oriented markets in the Baltics have now been replaced by a tenant market, forcing developers and landlords to show flexibility in lease terms and seek for creative tenant-oriented solutions.

 

In Riga, there is a temporary respite in the pace of new retail space entering the market observed. No new facilities with a GLA of over 5 000 sqm opened in Riga in 2008. By year’s end, only 7 000 sqm of retail space was added to the market due to the expansion of Alfa Shopping Centre. The economic downturn and drop in retail turnover have forced many local companies to cancel their expansion plans and even go out of business. The demand for retail space is declining and is mostly being generated by international companies, having experience in operating in a falling market. New shops are being opened in shopping centres rather than on retail streets due to the stable year-round consumer flows and lower rent rates. Continuous tenant rotation, the decline in consumer purchasing power, smaller retail turnover and weak demand have pumped up the high vacancy rate. Vacancy rate is relatively high even in successful shopping centres, rent rates are expected to continue their downward tendency.

 

Delays in the construction of office projects in Tallinn planned for 2008 have set the stage for a relatively large supply to enter the market in 2009. Expected volume for 2009 (approx. 59 000 sqm) would increase the total stock of office space by 75 percent compared with 2006. Due to the rapidly deteriorating economic situation and decreasing liquidity in the market, the delivery of new office facilities in the near future may also be postponed (4 projects scheduled for completion in 2009 have already been frozen). Vacancy rate is expected to climb to about 15 percent in the coming year, leading to a decrease in rent rates for non-prime projects, and more flexible lease terms for tenants especially in the Class B segment. Further development and a reliable level of rent rate stability and vacancy in the medium term are expected only in the Class A segment. Taking advantage of falling rent rates and new supply of higher quality office space, companies are moving from aging Class C premises to more modern office facilities at little cost or even with a total cost decrease.

 

In Lithuania, the warehouse market in the Vilnius region was the first to react to the economic slowdown. In 2008, the market grew by 7.1 percent (in contrast to 30 percent in 2007), and completed with 289 300 sqm of new warehouse space by year’s end. About 75 percent of all the projects planned in 2008 have been rescheduled and together with other new projects (approx. 170 000 sqm) are now adrift in the market with no clear implementation date. Companies have started to search for a ways to optimize their operating costs are seeking for cheaper rent alternatives. This year, warehouse rent will continue to experience a correction but should not fall below 3 EUR/sqm/month (excl. VAT and operating costs).

 

“After many years of booming phase, and less conservative investment approach, most of the real estate market participants in our region, have entered crisis and recession stage without serious analysis and preparation, moreover, without having alternative plan, which could be implemented without time delays” says Mihails Morozovs, Managing Partner of Colliers International Baltic States and Belarus. “And now, the biggest challenges will be related with individual strategies how to stabilize liquidity and value, and refusing from previous plans, which could help to stay on the market and avoid bankruptcies.”

 

These are selected market facts from the recent Colliers International 2009 Real Estate Review, covering Estonia, Latvia, Lithuania and Belarus property markets. Report provides facts, figures and analysis of supply, demand, rent and vacancy rates in the office, retail, industrial and hotel sectors. In addition, legal and tax overviews are provided for each country.

 

The full report is available for downloading at: