Macroeconomic Background

According to the spring economic forecast of the Bank of Estonia, the recovery of the Estonian economy will shift to the second half of the year but will then be more vigorous. According to the central bank, the rapid economic growth in the second half of the year has two sources: the removal of activity restrictions and the temporary sharp increase in consumption based on money withdrawn from the second pension pillar. The recovery of the economy is happening later than forecasted in December, but then more abruptly. The recovery from the crisis at a previously expected pace is hindered by a new and aggressive outbreak and the restrictions imposed as a result. Due to the restrictions, part of the service economy (hotels, restaurants, tourism services, passenger transport, entertainment) will remain in a longer depression and can only start to recover in the second half of the year. Therefore, the economic recovery also shifts to the second half of this year. The normalization of economic conditions coincides in time with the first wave of payouts from the second pension pillar. In the first wave, more money will be withdrawn from the second pillar than previously estimated, because, contrary to expectations, individuals with higher-than-average pension savings are exiting in the first wave. Therefore, the average amount withdrawn from the second pillar in the first wave is significantly higher than previously estimated. The sharply increasing disposable income of households will also be reflected in greater consumption expenses, which will give the economy a temporary strong boost in the second half of the year.

Since the conditions in the first half of the year are still difficult, the economic growth for this year will be 2.7%, but in 2022 economic growth will rise to 5%. The industrial sector and goods exports, which are connected to international commodity markets, are less affected by coronavirus restrictions. International demand for industrial production and global trade has already surpassed pre-crisis levels, which also offers growth opportunities for Estonia’s exporting sectors. As in the previous year, the broader recovery of the economy is largely connected to the removal of domestic demand restrictions. Since the course of the pandemic and the restrictions imposed as a result are difficult to predict, the uncertainty related to the economic outlook remains very high.

Estonia’s gross domestic product grew by 5.4% in the first quarter compared to the same period last year. The large economic growth became possible due to last year’s low comparison base – half of the economic growth came from the impact of taxes, especially the good collection of VAT and excise duties. Of the activities, trade, information and communication, financial and insurance activities contributed the most to economic growth. As with taxes, the positive impact of trade was also due to the decline in the same period last year. The economy was also boosted by the health care sector as a result of coronavirus expenditures and the energy sector, which benefited from a colder winter. Of the larger sectors, the economy was still held back by the manufacturing industry and the construction sector, which was affected by the delayed impact of the coronavirus. Due to activity restrictions, the accommodation and food service sector also remained in decline.

Private consumption has now declined for a full year, falling by 3.3% in the first quarter. Excluding travel-related expenses, the rest of consumption showed modest growth. As in previous periods, expenses related to a home lifestyle increased – communication, home furnishings and supplies. Expenses for eating out, leisure, transportation, clothing and footwear continued to decrease. Health care expenses increased, which also drove the consumption growth of the general government sector. Foreign trade, which started to grow at the end of last year, continued on the same path. Goods exports increased by 5% and imports by 12%. Foreign trade was driven by the import and export of wood products, electronics and motor vehicles. Among services, computer services made the largest positive contribution. Foreign trade in travel services continued to decline, but transport services are gradually recovering.

The impact of the crisis on wages has been modest. Wage growth has remained rapid—around 5%—despite rising unemployment. Wages have increased in most sectors, including those where employment has declined. As a result, households have been able to save more, and monthly deposits have doubled compared to pre-crisis levels. Corporate deposits have also grown rapidly, indicating that pressure to cut wages is likely low.

The average gross monthly wage in Q1 2021 was €1473, which is 4.9% higher than at the same time the previous year. While the previous year showed signs of slowing wage growth, Q1 of this year points again to an acceleration.

By sector, the highest average gross monthly wage was in information and communication (€2629), financial and insurance activities (€2582), and energy (€2295). Compared to Q1 2020, the average gross monthly wage fell only in accommodation and food services (-2.2%) and energy (-1.8%). The largest increases were in health care (13.6%) and agriculture (9.6%).

The highest gross wages remained in Harju County (€1623) and Tartu County (€1438), while the lowest were in Võru (€1118) and Põlva County (€1133). The largest annual increases were in Hiiu (15.4%), Pärnu (10.5%), and Lääne County (10.4%). Wages increased in every county, with the slowest growth in Võru and Põlva, both under 1%.

After three quarters of decline, the consumer price index (CPI) rose in Q1 by 0.6%. The largest increases were in health care costs (3.4%) and housing (2.7%), and leisure spending also rose by 2%. Spending declined in four categories, with over 1% drops in communication (-2.1%), clothing and footwear (-1.2%), and eating out/accommodation (-1.1%). Prices are expected to gradually rise. In 2021, the main driver of inflation is energy prices. In 2022, the effect of previously lowered excise taxes will also fade, which has so far kept inflation in check. Along with improvements in the labor market and recovery in wage growth from pandemic lows, cost pressures on businesses will increase, pushing the average price level close to 2% in 2022.

This spring’s pandemic wave will increase unemployment only slightly, but the risk of long-term unemployment is growing. Unemployment will rise due to the prolonged crisis, but not as much as in spring 2020. While tighter restrictions reduce business activity and demand for labor in many sectors, industries like tourism were already in decline and many employment adjustments have already occurred. However, a prolonged crisis and a failed tourism season may increase long-term joblessness.

Q1 labor market indicators reflect the impact of the pandemic. The unemployment rate was 7.1% and the employment rate 65.7%. There were 48,700 unemployed, 13,500 more than the same time last year. A positive note is that compared to the previous three quarters, the number of unemployed decreased: 1,500 fewer than in Q4 2020. The unemployment rate in Northeast Estonia was more than twice the national average, while it was lowest in Central and Southern Estonia. Almost half of the unemployed had been without a job for less than half a year, and 13,200 people had been unemployed for a year or more.

Among people aged 15–74, 551,500 worked full-time and 89,200 part-time. The employment rate was slightly higher among men, and more women worked part-time. There were 8500 underemployed individuals (part-time workers willing to work more and available to start additional work within two weeks). The number of inactive people in the labor market was 286,400. The main reasons for inactivity were retirement age, studies, and illness or injury.

Previously, construction price growth was mainly driven by rising labor costs, but now the main driver of inflation is rising construction material prices, largely due to supply shortages. In Q1 2021, the construction price index reached a record high of 203.61 points. Compared to the same period last year, the index increased by 1.07 points. Labor costs fell by 1.62 points, and construction machinery costs by 1.89 points, while material costs increased by 1.81 points.

The negative impact of the state of emergency led to a decline in real estate construction and development loan volumes in 2020. That year, new loans totaling €932.4 million were issued, which was €68.4 million less than in the same period the previous year. The decline was broad-based, with only loan volumes for the purchase of other commercial real estate increasing, which was one of the largest segments in terms of volume (€209 million).

The downward trend continued in the first four months of 2021, during which €255.7 million in new real estate construction and development loans were issued—€96.4 million less than during the same period the year before. The only increase occurred in loans for acquiring property for own use (+€24.8 million), while loan volumes for the purchase of other commercial real estate (-€51.8 million) and financing retail spaces (-€29.1 million) declined the most.

Consumers’ confidence in taking out housing loans has been influenced not only by rising incomes and positive future outlooks but also by low interest rates. The EURIBOR turned negative in November 2015 when the European Central Bank began applying negative interest rates on reserves held at the central bank, aiming to push banks to lend more to businesses. Interest rates were further suppressed by the ECB’s decision to launch large-scale asset purchase programs—in simpler terms, printing more money. Since then, rates have mostly fallen, hitting their lowest point in November 2020, when the six-month EURIBOR dropped below -0.5%.

Given the continuation of these asset purchase programs, eurozone countries—many of which increased their debt levels to combat the COVID-related economic downturn—have no interest in inflating their debt burden. This implies that the negative interest rate environment is likely to persist into the following year.

The main effects of the negative EURIBOR have been:

Growth in construction sector investment volumes
Improved access to housing loans
On the other hand, it has also contributed to rising real estate prices, as more people have been able to enter the housing loan market.

Despite the negative EURIBOR, interest rates on loans to non-financial companies have increased:

2017: 2.528%
2018: 2.578%
2019: 3.009% (+0.431 pp)
2020: 2.82%
First four months of 2021: 2.68%
This increase in loan margins stems from:

Reduced competition among lenders
Regulatory changes in capital requirements pressuring banks to build larger capital buffers to better withstand economic downturns
Since banks must maintain larger buffers and shareholders are unwilling to accept lower returns, banks need to raise interest rates on loans. Future changes in interest rates will also depend on what happens in the deposit market—if deposit interest rates rise, loan interest rates are expected to increase accordingly.

Office Spaces

The office space market is characterized by a slight oversupply due to active construction and development.
Rental prices are expected to remain at similar levels as last year, despite higher-than-average vacancy rates.
As tenants continue to move into newer buildings, vacancy rates are highest in older B-class buildings.
Due to decreasing space needs, we are witnessing hidden vacancy growth through subleasing.
In Tallinn, the office property market is concentrated in five main areas that cover most of the A- and B-class office spaces: the city center, Pärnu Road, the beginning of Mustamäe Road, Mustamäe Tehnopol, and the Ülemiste business district. The market is characterized by strong competition between central and suburban locations as well as between buildings under construction and newly completed ones.

As of July 2021, the total volume of modern office space in Tallinn exceeds 1 million m².

A-class buildings (marked blue on the map) and B-class buildings (marked red) include only those with at least 2,000 m² of commercial space.

The economic crisis that began in 2007 brought office property development to a complete halt. Between 2009 and 2011, less than 60,000 m² of new A- and B-class office space was built, including less than 4,000 m² in 2011. A new upswing began in 2013, and over the next five years (2015–2019), more than 280,000 m² of office space was delivered to the market — an average of just under 60,000 m² per year.

In 2020, over 50,000 m² of new office space was added. Notable completions included the Viktor Palm building (10,743 m²) and the Lurich building (3,691 m²) in Ülemiste City, the Maurus building on A. H. Tammsaare Road (6,694 m²), the Ellips building (4,784 m²), and the first and second stages of Fahle Park in the city center (a total of just over 9,500 m² of commercial space).

The construction slowdown caused by the COVID-19 pandemic has now been overcome. As of July 2021, 16 office projects are under construction, offering more than 140,000 m² of rental space. Over 30,000 m² of modern office space will be completed in 2021, and over 100,000 m² is expected in 2022.

In 2021, more than three-quarters of the new office space will be completed in the city center, divided among Kaamos’s Avala Quarter Electra building (9,950 m² of office space, anchor tenant Elektrilevi), Capital Mill’s Skyon project (7,902 m², anchor tenant Coop Pank), the Aja Maja business building in the Rotermann Quarter (6,486 m²), and Pärnu mnt 132 (2,758 m²). The latter two are reconstructed tsarist-era industrial buildings with modern extensions.

Outside the city center, the largest building under construction is Hepsor’s Grüne Maja (Meistri 14, 3,329 m² of office space), which, like the developer’s earlier projects, is driven by green thinking.

In 2022, due to delays in the construction of several buildings that were originally scheduled for completion in 2021, more than 100,000 m² of office space is expected to enter the market. Ülemiste City will continue to grow rapidly, with the completion of two new buildings adding nearly 33,000 m² of office space. In Mustamäe, the third Tehnopol building (12,425 m²) will be completed, as well as the office building at Ehitajate tee 104 in Haabersti (5,962 m²).

In the city center, significant development will occur around the Vanasadam (Old Port) area. The Ahtri 4 and Lootsi 8 office buildings are expected to be completed next year, along with Porto Franco. Additionally, the former Eesti Meedia headquarters will be renovated and expanded. In the Avala Quarter, the Polaris office building (9,952 m²) will rise. However, due to the persistent trend of working from home, the construction of several buildings initially scheduled for completion in 2022 may be postponed.

Major office buildings scheduled for completion in 2021–2022 include:

Although the market has largely absorbed the available supply by now, the volume of offerings remains high and has kept rental prices stable for several years. However, a slight increase in rents has occurred in modern office buildings with high-quality tenants due to indexation. As of January 2021, net rents in Tallinn’s central business district A-class office buildings (AA-class) generally ranged between €14 and €17 per m², with vacancy rates between 8–10%. The vacancy in existing buildings has remained nearly unchanged compared to July of the previous year. While the office space market has suffered less from the COVID-19 pandemic compared to retail spaces, the reduced need for space may still lead to a further rise in hidden vacancy. In practice, this means that tenants either reduce the space they lease or sublet unused parts.

In suburban A-class (BA-class) buildings, the vacancy rate in July was slightly lower than in the city center (8–9%), with average rents approximately €3/m² lower. Slightly higher rental levels are seen in the best buildings in Ülemiste City, which can reach AA-class rent levels (€14–15/m²). Among these buildings, those located in well-established business areas or offering advantages over central business district buildings (such as parking, pricing, or expansion opportunities) are the most preferred. However, even in this segment, economic uncertainty may begin to push vacancy rates upward.

Tulenevalt suurtest arendusmahtudest, on B-klassi hoonetes (nii A- kui B-piirkonnas) suurenenud vakants (2021. aasta juulis ligi 10%) tasemele, mis on viimaste aastate kõrgemaid. Olukord ei leevene ka lähiaastatel, kuna arendusjärgus on enam kui 200 000 m² büroopinda. See hoiab vakantsi vähemalt samal tasemel, ehkki surve vakantsi suurenemiseks on olemas. Suurenenud on ka hinnadiferents A- ja B-klassi pindade vahel: kesklinna B-klassi pindadel on valdav üürivahemik 8–12 €/m² ning äärelinnas 7,5–11 €/m² ehk 3–5 €/m² madalam kui piirkonna A-klassi pindadel. Suure mahu tõttu jääb B-klassi pindade hinnatase stabiilseks ka tänavu.

B-kvaliteediklassist allapoole jäävad valdavalt nõukogude ajal ehitatud majades asuvad pinnad, kus toimub renoveerimine vaid sel määral, kui võimekus lubab. Need pinnad üüritakse valdavalt välja kas alustavate ettevõtete, väikeettevõtete või hinnatundlike üürnike poolt. Hoolimata tehtavatest investeeringutest, ei pruugi teostatavad tööd tänases turusituatsioonis ennast üürituluna tagasi teenida, mistõttu on mõnedes kohtades hakatud juba pindade otstarvet muutma. Heaks näiteks on endised Coopi büroo- ja laopinnad Nõmmel, mille uus omanik ehitab nende asemele eluhooned või Volta piirkond, mida ootab samalaadne muutumine. Moraalselt ja tehniliselt vananenud C-klassi pinnad on siiski üsna hästi suutnud ära katta kõige defitsiitsema pinnavahemiku (20–50 m²), ent tihti on problemaatiliseks juba rohkem kui 50 m² suurustele pindadele üürnike leidmine.

In recent years, the volume of new office space entering the market has brought about certain changes that, in the long term, will primarily weaken the competitiveness of older office buildings. This is mainly due to the wave-like filling of vacant rental spaces, meaning that newly completed buildings fill their vacancies largely at the expense of older buildings in the same class. In turn, these older buildings are left to be filled with tenants from B-class properties. The reasons behind this include a relatively small price difference, significant differences in functionality and energy efficiency, and improved corporate image. Since new large companies enter the market rather rarely, this tenant reshuffling is quite common. In more rare cases, spaces are repurposed for different uses. An anomaly has also emerged, where the asking rents in new developments have increased only slightly, while buildings completed three to four years ago have seen their rents rise through indexation — making newer buildings a better deal when leases expire.

As the market has become tenant-driven due to increased supply, so-called convenience factors are playing an increasingly important role. On the one hand, these factors push developers to strive for better results with new projects; on the other hand, they force the owners of older buildings to modernize their spaces as much as possible — even though older buildings offer fewer options for reconfiguration. These convenience factors include heightened requirements for the appearance of office space, often driven by prevailing — and sometimes macroeconomic — trends, along with a noticeable shift toward greater environmental awareness.

Over the past five years, we have seen lease periods shorten — instead of ten-year leases, five-year agreements have become the norm. However, in today’s market, landlords can’t even rely on that, and shorter leases are being signed. These changes are indirectly influenced by the rapidly evolving space needs of technology sector companies and rapid developments in the field. Due to the tenant-focused market, there is now a common €0.5–1.0/m² difference between listed and actual rental prices, allowing tenants to negotiate more favorable lease terms or take time to evaluate suitable spaces for their business. As a result, the flexibility of landlords, their sales and marketing capabilities, and their willingness to cooperate with real estate agencies have become increasingly critical in meeting tenant needs.

In recent years, demand for co-working spaces — or office hotels — has grown, helping to address the shortage of small spaces in high-demand locations. For developers, this model is convenient, as they only sign a lease with an operator, who then sublets the spaces on a short-term basis. The high demand is also driven by companies looking for shorter leases or temporary office space. This concept is now represented in several central locations (e.g., Tornimäe Office Building, Metro Plaza, Hobujaama Business Building) as well as in suburban areas (e.g., Ülemiste City, Manta House in Nõmme). As international trends increasingly emphasize flexibility and convenience, interest in co-working spaces will remain high in the future — already today, this impacts vacancy levels in older office buildings.

Retail and Service Premises

Retail sales have recovered rapidly, though wholesale remains below peak levels.
The fastest growth is seen in the local convenience store segment, with several retail chains building new stores.
Main concerns are tied to the Old Town, which has not recovered from the drop in tourism, while local residents prefer areas like Noblessner and Telliskivi Quarter.
E-commerce continues to grow, increasing pressure for more efficient use of space.
Lidl’s market entry is challenging the profitability of existing retail chains.
Vacancy rates in shopping centers remain low, under 5%.
The market for retail and service premises in Harjumaa is centered around Tallinn and primarily concentrated in large shopping centers located along the main roads leading out of the city. Distinct from the rest are the major shopping centers serving the entire city and its surroundings, such as Ülemiste, Rocca al Mare, and Kristiine, which are rivaled in the city center by Tallinna Kaubamaja and Viru Keskus.

Additionally, a wide range of retail and service premises of various sizes are scattered throughout the city, mostly serving local neighborhoods. In the central and Old Town areas, first-floor commercial units with display windows in high-footfall pedestrian zones are common. Unlike many European capitals, Tallinn lacks a well-established shopping street; Viru Street is somewhat comparable with its stores and cafés, though its offerings are geared more toward tourists than locals. Besides the city center and Old Town, Rotermanni and Telliskivi quarters have become key areas for street retail.

Another characteristic of Tallinn’s retail space market is the regional clustering of similar store types. For example, many construction and interior design stores are located along Peterburi Road in Lasnamäe, and along Pärnu Road between Osten Tor House and Järve Center. Likewise, major shopping centers also display regional grouping of similar product categories.

Tallinn’s largest shopping centers (leased commercial space of at least 5,000 m²):

Retail sales recovered from the downturn faster than wholesale – Q4 of 2020 marked a record in terms of retail turnover, and Q1 of 2021 also showed better results compared to the same quarter in previous years. The total retail turnover reached €1,764.5 million, which was 1.7% higher than during the same period the year before.

Wholesale, however, has not returned to peak levels – although Q1 2021 wholesale turnover was 7.5% higher year-on-year, it still remained below the figures seen in 2018 and 2019. Wholesale growth has been hindered by production struggles to meet the rapidly increasing demand, resulting in long wait times.

The keyword of the year is the continued expansion of retail chains, with most updating their stores and many opening new ones. Laagri will get its first Maxima, and a new Maxima XX store will open in Lasnamäe during the year. Selver will become the anchor tenant of the nearly 13,000 m² Tabasalu Centre – a three-storey community hub that will also offer office spaces, an outdoor market, and a food street aimed at small producers. Rimi is opening a new 1,600 m² supermarket on the site of the former Szolnoki centre and market. Prisma will anchor both the Tiskre shopping centre and Linnamäe Centre, with plans to open up to ten local store concept locations.

Lidl will open its first Estonian stores at the end of the year. Its arrival could further squeeze the already narrow profit margins of existing grocery chains.

In the first half of the year, the owner of T1 Mall of Tallinn filed for bankruptcy. However, its main creditor, a fund named Lintgen, does not plan to close the centre, but instead invest millions more to revive it.

From 2015 to 2019, the retail space in shopping centres grew by a third – over 150,000 m². Including DIY and industrial goods centres and smaller shops, the total increase in commercial space exceeded 200,000 m². The development problems related to T1 and Porto Franco have shown that the risks of building large shopping centres have increased. As a result, developers are focusing more on express and local store formats. Long-term effects include a shrinking share of traditional retail, more experimentation with different formats, consolidation of retail chains, and declining profitability.

Clouds have gathered over the Porto Franco shopping centre, which was initially set to open in 2021, due to a corruption scandal. The more optimistic forecasts now place the opening in 2022. Several central Tallinn shopping centres are also due for upgrades. In the coming years, we may see the merger of Postimaja and Coca-Cola Plaza, the demolition and redevelopment of the old Tallinna Kaubamaja complex, and the modernization of Viru Keskus. Stockmann, which has long posted negative results, has decided under its restructuring plan to sell its Tallinn department store.

Among suburban centres, Rocca al Mare Shopping Centre is planning a complete redevelopment of its area, aiming to build over its outdoor parking lot within the next 10 years and move parking into a separate multi-storey facility. The planned 88,000 m² will be divided as follows: 50% office and parking building, 25% retail space, and 25% hotel and residential units.

Outside Tallinn, the largest upcoming development is the IKEA store, opening in autumn 2022 along the Tallinn ring road in Kurna village. Several business buildings will be constructed around the 30,000 m² store over the next few years, forming a comprehensive retail park.

Major retail buildings completed in 2020 and 2021:

The average rental price level in major shopping centres has remained between €10–20/m² in recent years, although price variations within centres are typically much greater. Prices have been stable, with the impact of the COVID-19 pandemic—temporary rent reductions and increased vacancies—proving short-lived. Since summer, retail volumes have recovered and have been growing at a pace close to the historical average. In the second half of 2020, average vacancy stood between 3%–5%.

Small retail units in popular shopping centres typically rent for €20–50/m², with top rents exceeding €50/m²—affordable only for tenants in high-traffic central areas with the highest turnover per square metre. In addition to base rent, tenants in large centres usually pay a turnover-based rent, typically 5%–10%. The highest rents are currently paid by tenants with the highest margin businesses, such as pharmacies and florists, often selected through in-store bidding. Anchor tenants, by contrast, typically pay €7–12/m².

Retail and service space rent pricing depends on several factors: location (traffic intensity), unit size, availability of large display windows, competition within product categories, tenant profile, lease duration, and more.

Street-level premises in central and Old Town areas with high pedestrian traffic generally rent for €20–40/m²; in the suburbs, rents are usually €7–15/m². These large differences are due to highly uneven traffic flows. The pandemic caused a 20–25% drop in retail, service, and restaurant rents in the Old Town, and pre-crisis levels have not yet recovered. In lower-traffic areas, rents have remained stable: central and Old Town spaces generally rent for €7–15/m², while suburban rates are €5–10/m². Comparable spaces in shopping centres usually have higher rents.

Prevailing rent ranges in shopping centres:

Commercial and service premises with street access (commercial premises 50+ m)

Warehouse and Production Spaces

The majority of developments are driven by logistics and wholesale/retail demand.
Due to rapid e-commerce growth, low speculative property share, and growing local investment, the warehouse and production sector has weathered the crisis best.
Risk of oversupply is low because of quick readiness times and many build-to-suit agreements, but fulfilling large lease requests on short notice remains difficult.
The most active development occurs around Tallinn; the new IKEA store is expected to boost the development potential of plots along the ring road.
Due to strong demand, rental prices and vacancy rates remain stable.
The warehouse and production space market in Estonia is concentrated in Harju County. The most attractive areas are in and around Tallinn. Within the city, preferred zones include the area between Mustamäe Road and Kadaka and Laki streets, and properties near Peterburi Road. Other clustered urban warehouse zones are in North Tallinn—Kopli and Paljassaare port areas—and around Sõjamäe (between the railway and airport), as well as near Männiku and Kalmistu roads in Nõmme.

Out-of-city locations tend to have newer buildings, especially where previous development was sparse. Key zones include areas along Tartu Highway in Rae municipality up to Jüri, where several large and small technology parks are located; Tänassilma Technopark near Pärnu Highway; and in eastern Tallinn on Vana-Narva Highway and Peterburi Road. Outside these areas, the market is smaller and concentrated in towns like Keila and Paldiski.

Preferred locations feature good infrastructure, proximity to clients and partners, workforce availability, and access. Most buildings are modern, and vacant plots are rapidly diminishing. Distance from city centers is less critical; access by various transport modes and location relative to main roads is more important.

Main warehouse and production areas in and around Tallinn:

The past few years have been marked by active construction, primarily concentrated around the outskirts of Tallinn, where there is still ample land and development potential. The most active areas are located along the Tartu Highway and in the direction of Peterburi Road. Within Tallinn, development is particularly active in the Laki Street business area on the border of the Kristiine and Mustamäe districts, as well as in Lasnamäe (around Peterburi Road and Suur-Sõjamäe Street).

The increase in activity is driven by business growth and expansion, as well as the desire to move from older and less functional spaces to more efficient ones. Most of the newly built spaces have been developed for specific tenants or for owner-occupation, since speculative construction is more complex due to the diverse needs of tenants and is mostly limited to smaller spaces.

As a result of this development, nearly 850,000 m² of warehouse and production space has been completed in the last five years, compared to under 600,000 m² during 2011–2015 — a 30% increase. The year 2020 demonstrated that due to low vacancy and a balanced supply-demand ratio, construction activity remains high: more than 100,000 m² was completed, and over 250,000 m² received building permits — more than in 2018 or 2019. This indicates that the readiness for development is currently very high and major developers have a strong project pipeline.

Most of the buildings completed this year have been constructed to meet the specific needs of clients, either as owners or tenants. One of the expected completions is the W-Glass glass product factory, located near the city of Saue along Pärnu Road. Among buildings larger than 10,000 m², the first phase of the Baltic States’ largest data center will also be completed in Saue Municipality. Additionally, if suitable tenants are secured, a business district along Peterburi Road, developed by Hepsor, will be finalized. This represents the largest speculative development, with over 17,000 m² of space across two buildings.

Among the larger stock-office-type developments, buildings will be completed in Tallinn on Suur-Sõjamäe Street (10,500 m²), Kadaka Street (6,883 m²), and Tähesaju Street (5,838 m²).

Major warehouse and production buildings completed in 2021:

Rental prices in 2021 remain largely at previous years’ levels — the high volume of supply prevents significant upward price pressure. For larger, modern warehouse and production spaces with standard solutions, rental rates mostly range between €4.5–€5.5/m².

There is higher demand for newer and more modern spaces near the Tallinn city border and surrounding areas, where heated premises with various features (crane access, loading docks, ramps, proper ventilation, and good maneuverability) are preferred.

For older properties, where rental rates are around €3.0–€3.5/m² for decent spaces, demand is declining, and an increase in supply and vacancy, along with falling rental prices, is expected. An exception is the Laki area, where demand for older warehouse-production spaces remains stable.

Higher rental rates are seen in row warehouse segments:

Outside Tallinn: starting at €6/m², reaching up to €7.5/m².
In Tallinn: starting at €7.5–€8.0/m², reaching over €10/m² in the Kadaka-Laki area.
Demand for these spaces is high, as shown by rapid absorption of available supply.

Vacancy in older premises has increased due to companies relocating and the fact that many older spaces are in logistically less favorable locations (e.g. Põhja-Tallinn, Kristiine, Nõmme), making them functionally inferior to newer industrial zones near the city. Gradually, older industrial plots are being rezoned to replace underutilized buildings with different property types.

Vacancy for new buildings remains low — below 5%, including stock-office units, where intra-city developments are nearly 100% leased. In-city developments continue to follow the mixed-use trend, driven by high land prices. It’s increasingly common to see food service or gyms in row warehouse units — for example, Kadaka tee 4 evolved from the original concept into a virtually pure retail building.

A typical market-cycle phenomenon is the expansion of companies that bought land or relocated five or more years ago. Plot-internal expansion possibilities have become a major factor in new site selection.

Overall, demand remains consistent with the past couple of years, meaning interest in larger spaces (≥10,000 m²) is limited (countable on one hand), and older properties continue to face persistent vacancy issues.

For stock-office premises, the most liquid units are smaller bays, often up to 200 m². Interest in larger units (~500 m²) is more modest. These properties require not only functional warehousing and production capacity but also high visibility and good location in high-traffic areas. Therefore, locations along major roads out of Tallinn and in-city zones are favored.

Currently, the center of gravity for row warehouse development has shifted from the Tartu highway corridor toward Tallinn and Mõigu–Peetri. In Tallinn’s immediate surroundings, demand is weaker, reflected in:

delayed absorption,
postponed construction starts,
and longer lease-up periods.
City developments are nearly 100% leased at completion, which is not the case for out-of-town developments, where a slight oversupply exists.

Forecasted average vacancy rates for warehouse/production spaces in H2 2021:

Investments Market

The first half of 2021 started off very actively, with total investment volume exceeding 150 million euros, indicating that the total volume may surpass the 300 million euro mark. The previous negative trend of declining investments was reversed in 2020 thanks to several previously initiated transactions that were put on hold due to the coronavirus pandemic, particularly due to a very active final quarter, during which more than a third of the year’s total volume was transacted. The peak year remains 2015, when real estate investment volume reached 600 million euros. In 2016, the total volume was 420 million euros; in 2017, 325 million euros; in 2018 and 2019, below 300 million euros; and in 2020, 325 million euros.

The main trigger for investment decisions has become the search for a safe haven in a money-printing environment, yet due to a lack of properties for sale, the shortage of suitable assets is expected to become an increasing concern in the coming years. As a result, investors, despite greater economic uncertainty, have made long-term and forward-looking decisions. In search of better yield expectations, larger investors have increasingly turned their attention to alternative real estate such as rental apartments, data centers, or care homes, and have also started engaging in build-to-core investments, meaning either developing properties themselves or acquiring buildings under construction. There is active interest in investing in logistics and industrial real estate, and office real estate remains attractive, whereas interest in the hotel sector is relatively low or, if there is interest, it comes with the expectation of a significantly lower price tag.

Major Real Estate Transactions in H1 2021 (Harju County)

Confido Health Centre (Veerenni) – The largest investment of the first half of 2021. The developers, Tarmo Laanetu and Fredrik Gyllenhammar, sold the ownership company of the health centre for an estimated €25–30 million.
Buyer: Zenith Family Office, majority owned by Boris Skvortsov (via Summus Capital), a key investor in Baltic companies and real estate.
Via3L Logistics Centre (near Tallinn) – Sale-leaseback transaction worth over €20 million.
Buyer: East Capital, which thus secured its position as the largest logistics property owner in Estonia.
Hotel Transactions:
Vana Wiru Hotel and St. Petersbourg Hotel both changed ownership in separate transactions.
Combined deal value: Approx. €13 million.
Kadaka tee 63 Office Building –
Seller: EfTEN
Buyer: US Real Estate
These deals reflect continued strong interest in healthcare, logistics, and selected hospitality assets despite broader market uncertainties.

Real estate capitalization rates have clearly declined in recent years. The yields for prime office spaces, which were still above 7% in 2015 and at 6.5% in 2017, have fallen to around 6% by 2021. The yields for retail spaces have also decreased more gradually—from around 7% for better-quality buildings in 2015 to 6.5% in 2021. The yields for warehouse and industrial properties, which were around 8% in 2015 and 2016, have declined to 7.1–7.2% by 2021.

This decline in yields has been driven by the environment of negative interest rates, a stable economic climate, and active development in the commercial real estate market. Prime properties are primarily targeted by international investors or real estate funds, which typically value assets with good locations, strong and long-term tenants, and the ability to adjust rental rates upwards.

Market signals indicate a further yield compression in logistics and industrial properties this year, while retail property yields may face slight upward pressure in case of deteriorating conditions. Office space yields are expected to remain stable throughout 2021.