The coronavirus years have left a mark on the commercial real estate market. The popularity of remote working means that businesses that no longer need large office spaces are moving to smaller premises. Older office buildings will either be renovated or repurposed as flats, real estate broker Eduard Sorokin suggested.
Sorokin, head of office and commercial space for real estate brokers Uus Maa, said that unlike apartments, commercial rent prices have not fallen recently as they did not experience the kind of price hike that flats did during Covid years.
He said that rent prices are also tied to loan conditions for business real estate.
“In other words, there are bank coefficients according to which commercial spaces need to sport a certain rent price level for loan conditions to remain unchanged.”
Price drops could be in store for B and C category office space in older buildings, with the popularity of remote working the cause. Sorokin said that newer and more expensive office space is sought by successful IT, finance and medical companies that spend the most on salaries and for which a difference of a few thousand euros in the price of rent is negligible.
“That is why they are willing to go for newer and more expensive premises that serve as a motivating work environment, which means older and larger commercial spaces lose out. Companies no longer need major space, it is being dialed back and there is vacancy,” he said. “These vacancies are seeing prices drop.”
The buildings in question are usually over a decade old and often free of loans, meaning that it is easier to lower prices there.
Trendier parts of the capital, such as between the Rotermann Quarter and Noblessner, are seeing the opposite as prices go up and vacancies are increasingly scarce.
Older office space to be turned into flats
The Arter Quarter to be built opposite the Radisson Blu Olümpia Hotel in Tallinn by fall 2024 will add 29,000 square meters of office space in the city center, complete with rental apartments, a spa, restaurant etc. Elari Tamm, executive manager of Arco Vara, said that more competition is welcome.
“B and C commercial spaces will have to start investing or find clientele not interested in premium real estate. There will always be demand for the latter in the city center and Tallinn is nowhere near having enough commercial real estate,” Tamm said.
Sorokin said that finding tenants should not be a problem for the new quarter, that it will attract the best of the best and can be considered the development of the decade.
He said that older commercial real estate falling out of favor is a global problem and changing the function of out-of-fashion office space is an ongoing trend in the West. “They are either rebuilt as office space or repurposed as residential real estate.” The expert said that this trend will be the next five years’ keyword in Estonia.
He added that this will require massive initial investment from owners and that many will not be able to pull it off.
The situation of business real estate is also affected by the war, with instability in Eastern Europe affecting international companies’ expansion decisions.
“The situation will improve once heads of companies find their confidence again, while 2023 will not be easy,” Sorokin said in summary.