Taking the Changing Environment in Commercial Real Estate into Account Now and Immediately. Let’s be honest: the market is in decline. However, the volatile situation presents both challenges and opportunities. What do industry experts forecast for the coming year, for the crisis, and for the post-crisis era?
“The biggest threat to the real estate sector in 2023 is clearly geopolitics in all its forms. Security experts are pointing out increased real risks, not to mention endless information operations and the biggest question of all – when and how will the war in Ukraine end? All of this affects the decisions of foreign companies in the local market,” noted Eduard Sorokin, Head of the Commercial Real Estate Department at Uus Maa. He also highlighted the energy issue as a separate topic: “Energy prices showed their teeth last year. In 2023, this risk hasn’t disappeared; quite the opposite. We’re taking last year’s shock as a warning and considering the risk of energy prices in our business plans.”
On the other hand, Sorokin saw the biggest opportunity in the upcoming change of government coalition after the parliamentary elections on March 5th: “The biggest opportunity for all of us in 2023 is the new government coalition that will form after the parliamentary elections on March 5th. In any crisis situation, leadership is crucial, active management.”
As for Taavi Ojala, Chairman of the Management Board at Kapitel AS, he sees both global and local threats for the coming year: “Starting with the more general aspects, the duration of the war in Ukraine and its possible escalation are unknown. There’s a serious situation with the spread of coronavirus in China, which hopefully won’t spread as rapidly worldwide and to our region again, resulting in further travel and lifestyle restrictions.” He also highlighted two sectors: “Energy issues – the price and availability of energy carriers, which in turn affect practically all other sectors. The price and availability of financing – the significant and rapid increase in base interest rates in Europe since the beginning of the summer is greatly impacting the economy, and this impact is only beginning to affect the economy.”
In the office space market, there won’t be room for those trying to catch a stork with an axe.
On the topic of foreign capital, Ojala mentioned that certain companies might find themselves in trouble due to misjudging the price of foreign capital in the coming years: “Foreign capital has partially left the region and is partially on hold due primarily to the security situation in Eastern Europe. So currently, there’s no rush of foreign investors to our region.” However, he also pointed out the opportunity: “Potential buyers of commercial real estate might find interesting buying opportunities, as there are fewer buyers, and various sellers are forced to lower their price expectations for various reasons.”
“Sustainability and a quality certificate for buildings are already playing an increasingly significant role,” Sorokin shared as key themes and topics for the upcoming growth cycle.
“Build-to-suit projects have a super time in 2023 for negotiation, planning, and construction, taking one to three years, depending on the volume. A build-to-suit agreement locked in this year is a well-priced ticket to first class. Later, that train might have left entirely,” Sorokin guided the way to the post-crisis era.
Is it still worth investing in commercial real estate?
“Real estate investment is still worth it if you have the money, reliable market information, and the ability to make decisions,” said Sorokin. He stressed that achieving results requires precise and fast market information, thorough and broad analysis, and the courage to make decisions. “True gems don’t sparkle on advertising banners on real estate portals. Exceptionally good buying opportunities usually don’t reach the general public – they circulate briefly within the real estate circles where professional market participants quickly pick them up.”
“Investing in commercial real estate is promising excitement in the near future, but it also requires sharpness. The ‘win-win model’ that has been in place for the last 10 years in the commercial real estate business has ended. It was a pleasant expression of a growing market on steroids,” Sorokin noted and gave a strong recommendation: “Our strong recommendation is to consider the changed environment now and immediately! Let’s be honest – the market is in decline. The new model might best be described by the proverb ‘one man’s gain is another man’s loss,’ or woman’s. There’s an imminent redistribution of assets where there will be more losers than winners; in other words, the winners will take big.”
“Rising interest rates are now eating away a large chunk of the business income from real estate investments, which can mean real losses for quite a few projects with thin margins. The overall economic activity decrease is also affecting vacancy rates in older poorly managed office buildings. Amortized, poorly maintained B- and C-class office buildings are usually occupied by tenants engaged in less efficient business activities. Such buildings are most affected, as the economic downturn sweeps away less efficient businesses. Energy price shocks add momentum to this process. Now, it’s time to honestly face the situation and make decisions. Communicate with tenants. Modernize buildings. Restructure loans. Look for a buyer for the property if you can’t handle it yourself,” Sorokin listed urgent recommended steps.
“Investing in long-term capital placement, yes, definitely. There won’t be a significant amount of new centrally located and comprehensive concept commercial real estate added in the coming years, so supply won’t increase,” Ojala commented on investing in the current year.
Regarding the real estate market post-crisis: how to prepare for it, what to be ready for, and what the future trend might be?
Every crisis results in a revaluation of values,” Sorokin emphasized. What’s bad might have a silver lining? The energy shocks of the past year have opened people’s eyes to the problem of wasting natural resources.
“The new growth cycle of the economy will be succinctly ‘green.’ Sustainable management in various forms: consumption efficiency, renewable energy sources, the sharing economy, waste sorting… these are just a few keywords. The energy class of buildings and quality certificates are already playing an increasingly significant role,” Sorokin shared the keywords and topics of the new growth cycle.
On the other hand, one must be prepared for a price surge after the crisis: “One must be ready for the fact that with the recovery of the economy, there will be a supply vacuum for new high-quality commercial spaces. Today, many large and small development projects are on hold, for an unknown period. But if one day demand returns and everyone starts building at once, construction times will extend, and prices will soar due to scarcity. Moreover, it’s important to remember that inflation will remain high for some time, thus affecting input prices in the future. In the role of a tenant or buyer, 2023 is a super time for negotiations, planning, and construction of build-to-suit projects, which takes one to three years, depending on the size. A build-to-suit agreement locked in this year is a well-priced ticket to first class. Later, that train might have left entirely,” Sorokin guided the path into the post-crisis era.
“We don’t know if, when, or what kind of crisis will come,” Ojala remarked about crises. Therefore, “…one must possess competitive real estate throughout economic cycles, invest constantly in its improvement, and monitor the market.”
But still – what and how to proceed?
“For example, in the context of a modern office building like Arteri Quarter, future trends include significant advantages such as time-saving – the location of the quarter in the city center combined with the placement of various necessary daily convenience services within the quarter, environmental friendliness – environmentally friendly and energy-efficient heating and cooling solutions, sustainability, and a quality and healthy work environment – both the specific office space of the company and a good surrounding indoor and outdoor environment, different work and recreation areas, and greenery,” Ojala listed the future trends in commercial real estate, also important keywords post-crisis, using the example of Kapitel’s ongoing development in Tallinn.
Author: Siim Sultson / Äripäev / Kinnisvarauudised.ee
