The 2022 commercial real estate market report outlines the most important macroeconomic indicators to provide a clear picture of the general state of Estonia’s economy. These include GDP, consumer price index, employment rate, and bank interest rates. This is followed by a detailed analysis of the office, retail, and industrial/logistics segments, covering current market rents, vacancy rates, and conditions in each segment. The report concludes with a summary of the year’s largest transactions and capitalization rates.

Macroeconomic Background

Despite the rapid rise in the cost of living, consumer response to high prices remained muted until autumn. Spending continued to grow, both in euro terms and volume. Strong consumption, supported by pandemic-era savings and withdrawals from the second pension pillar, allowed households to absorb sharp price increases. By now, most of those reserves have been depleted. However, this surge in consumer activity enabled companies to increase profits, even in an environment of rising costs.

Toward the end of 2022 and into the first half of 2023, diminished purchasing power and exhausted savings are expected to lead to a decline in consumption, putting pressure on corporate profitability. This year, GDP is forecast to shrink by 0.5%, while in 2024 it is expected to grow by 0.4%, driven mainly by increased government spending. Between 2024 and 2025, growth may accelerate to 3–4%, though the war in Ukraine continues to create heightened uncertainty around inflation and overall economic outlook.

Persistently high energy prices and increased costs for goods and services essential to production have not yet fully filtered through to end consumers. As a result, while inflation is expected to slow, it will do so gradually. Even though global raw food prices are declining, food inflation in Europe may persist due to delayed impacts from the energy crisis on food production. In 2023, inflation is expected to remain just under 20%, drop below 10% in 2024, and stabilize between 2–3% by 2025.

The biggest challenge for the economy remains expensive energy, which will persist until supply-side issues are resolved—a process likely to take years. In the meantime, targeted and temporary government support will be needed. Energy price inflation affects different income groups and sectors unevenly, so carefully designed support policies are essential to managing the broader inflationary impact.

According to Statistics Estonia, GDP contracted by 4.1% year-on-year in Q4 2022. Although household consumption also declined, the main driver of the economic downturn was a drop in exports. Factors behind falling exports included rising energy costs, supply chain disruptions, and reduced demand in key markets. Despite the slowdown, high inflation has kept pressure on wage growth, resulting in a sharp rise in unit labor costs. Company profits, however, have also remained strong—indicating that production costs in Estonia have increased significantly, which could threaten competitiveness and future growth.

In 2022, some sectors experienced surprising contractions: agriculture and mining declined by nearly 10%, energy by more than 20%, and forestry by over 40%. These sectors were expected to benefit from war-driven price changes but instead saw sharp downturns. In contrast, the accommodation and food services sector contributed positively to economic growth, rebounding strongly from the COVID-19 crisis.

Looking ahead, a critical issue for economic development will be whether rising production costs will significantly erode the competitiveness of the export sector. While energy prices are no longer driving inflation, production cost increases are increasingly dependent on domestic factors. In 2022, raw material price spikes pushed overall prices up quickly. Now, with declining input costs globally, prices in Estonia should begin to fall. A sustained price gap compared to competitors would damage Estonia’s competitiveness.

Due to high inflation and declining purchasing power, average gross wages are expected to continue rising this year. An increase of over 8% in gross wages is anticipated, though real wage purchasing power is not projected to return to 2021 levels for another four years.

In Q4 2022, the average gross monthly salary in Estonia was €1,775—an increase of 9.2% compared to the same period in 2021. By sector, the highest average gross wages were in information and communication (€3,169), financial and insurance activities (€2,717), and the energy sector (€2,352). Compared to Q4 2021, the most significant wage growth occurred in public real estate activities (18%) and the accommodation and food service sector (17%).

According to Statistics Estonia, consumer prices in January increased by 18.6% compared to the same month a year earlier. This price growth largely reflects the sharp surge that occurred in the first half of the previous year, as the consumer price index has remained relatively stable since August. Food prices rose by 24% year-over-year in January. However, a downward trend in food prices may be within reach, as the European market has seen significant declines in prices for several agricultural commodities, including grains, butter, and milk powder. Since it takes time for lower input prices to filter through to consumer prices, the average food basket is still expected to increase by around 10% this year.

Energy prices in January were 33% higher than a year ago, even with government subsidies helping to curb inflation. With market prices for electricity and gas having declined in recent months, the need for compensation has decreased, along with pressure on the state budget.

Core inflation—price increases excluding food and energy—shows no clear signs of easing. Seasonal discounts in clothing and footwear retail were smaller than last year. Among services, telecommunications providers have raised prices. Overall price pressure is weakening, as households continue to cut back on consumption. The gradual deceleration of inflation is expected to continue in the coming months, with the Bank of Estonia forecasting average annual inflation at 9.3% for this year.

In Q4 2022, the consumer price index had eased to around 20%, though Estonia still recorded one of the highest inflation rates in the EU. The main contributors to inflation in Q4 were housing costs (39%) and the prices of food and non-alcoholic beverages (29%). Significant increases were also seen in transport (18%) and household goods and services (17%). The smallest increase was in communications (1%).

To date, Estonia has received nearly 30,000 war refugees, approximately two-thirds of whom are adults. It is estimated that around 10,000 of them will enter the labor market. In the short term, this will increase the number of job seekers, but in the longer term, the labor market is expected to adapt, with companies gradually creating new jobs.

The impact of the changing economic environment on the competitiveness of Estonian companies—and, consequently, on employment—is difficult to predict. The greater the share of energy and gas in a product or service’s cost structure, the more severely that sector will be affected by the energy crisis. At the same time, declining household purchasing power and rising loan interest payments may reduce demand, particularly for producers and service providers not offering essential goods or services.

Due to a lagging effect, a slowdown in employment growth—and even a reduction in employment—is expected to follow the broader economic deceleration. Companies’ decreasing willingness to recruit will be reflected in labor market indicators with a delay, and employment is projected to decline in 2023. Unemployment is expected to peak at around 9% in 2024, partly due to Ukrainian refugees who are actively seeking employment in Estonia and will begin to be reflected in labor statistics.

In Q4 2022, the unemployment rate stood at 5.4%, a slight decrease from the previous quarter’s 5.6%. Over the past year, the unemployment rate has remained relatively stable; a year earlier, it was 5.2%. The employment rate in Q4 was 69.6%, with 38,800 registered unemployed—about 2,500 more than in the same period the year before. The number of employed persons aged 15–74 was 680,600, with 84.6% working full-time. There were 109,500 part-time workers. The number of inactive persons was 259,000, primarily due to retirement age, illness or injury, and studies.

In Q4 2022, the components of the construction price index accelerated further, pushing the composite index to a new all-time high. Compared to the same period a year earlier, the composite index rose by nearly 37 percentage points, reaching 269.4 points. Year-over-year, construction material costs increased by 37.7 percentage points, and labor costs by 29.3 percentage points. The highest growth was seen in expenditures on construction machinery, which were driven by global supply chain disruptions and rapidly rising demand. Compared to the previous year, machinery-related costs rose by 38.1 percentage points.

According to the European Commission, Estonia’s Economic Sentiment Indicator stood at 83.1 in November 2022—well below both the long-term average (100) and the level from November of the previous year (106.7). A key concern has become the declining attractiveness of Estonia’s economic environment for foreign investors, as high energy prices continue to erode the international competitiveness of local companies.

The lowest consumer confidence reading over the past two years was recorded in September 2022, at -44. A year earlier, the index stood at +2—representing a dramatic 46-point drop within a year. This sharp decline was mainly driven by the Russia-Ukraine war, which severely impacted overall sentiment, compounded by soaring energy prices and rapidly rising inflation. Consumer confidence remained very low throughout Q4 2022, ending the year at -36.

The new year began on a more optimistic note, thanks to a mild winter and lower-than-expected energy prices. By February, the consumer confidence index had recovered somewhat to -25. However, this still represents a decline from the same period a year earlier, when the index was at -14.

Business sentiment indicators tend to move in tandem with consumer confidence, although typically with a delay and less volatility. At the beginning of 2023, construction companies posted the lowest confidence reading at -17, primarily due to shrinking construction volumes and continued uncertainty around material costs. In contrast, retail companies showed the highest confidence level at -9, likely driven by high inflation in consumer goods and the resulting increase in turnover.

In 2022, the real estate development market experienced rapid growth, as reflected in lending volume statistics. In 2021, a total of €1,204.8 million in new loans was issued—€272.4 million more than in 2020—surpassing even pre-pandemic levels. In 2022, total loan issuance reached €1,403 million, marking a €200 million increase compared to 2021.

The largest share of financing went to residential development projects, totaling €370.4 million. This was followed by loans for the acquisition of other commercial real estate (€238.3 million) and financing for warehouse and industrial premises (€227.1 million). Loans for the acquisition of office properties amounted to €211 million, while €179 million was allocated for owner-occupied real estate. The smallest loan volume was directed toward retail space acquisitions, totaling €177.7 million.

Since November 2015, when the European Central Bank introduced negative interest rates on reserves held at the central bank to encourage lending—primarily to businesses—interest rates have been kept low. Rates were further suppressed by the ECB’s large-scale asset purchase programs, essentially printing new money.

From that point onward, interest rates trended downward, reaching their lowest point in November 2020, when the 6-month EURIBOR dropped to -0.5%. As of now, EURIBOR has risen to levels last seen in August 2012, when the rate stood at 0.66%. By the end of 2022, the 6-month EURIBOR had climbed to 2.4%. The last time EURIBOR was in positive territory before this was at the end of 2015.

As EURIBOR continues to rise, loan interest rates for businesses have followed suit. In Q4 2022, the average interest rate for business loans was 4.8%. Given expectations of further EURIBOR increases in 2023, borrowing costs are set to rise further.

Office Spaces

In 2023, the office market is characterized by a low volume of new developments.
Due to the limited number of new projects, a decrease in vacancy rates is expected.
Lower vacancy will lead to higher rental prices, even for lower-grade office spaces.
Economic uncertainty and the limited pipeline of new developments have caused many companies to postpone relocation plans—unless growth in company size justifies the move.
Concerns about another spike in energy prices are increasing demand for energy-efficient office spaces.
Tallinn’s office market is concentrated in five main areas that encompass the majority of A- and B-class office spaces: the city center, Pärnu Road corridor, the beginning of Mustamäe Road, Mustamäe Tehnopol, and the Ülemiste business district. Office space is also expanding into North Tallinn, particularly in the emerging districts of Noblessner, Kalamaja, and Volta. These areas are expected to significantly increase office stock in the coming years.

The market is marked by strong competition between central and suburban locations, as well as between buildings under construction and those already completed. As of January 2023, Tallinn had over 1 million m² of modern office space.

Tallinn’s A-class (marked in blue) and B-class (marked in red) office buildings with a leasable area of at least 2,000 m²:

The economic crisis that began in 2007 brought office development to a complete standstill. Between 2009 and 2011, less than 60,000 m² of new A- and B-class office space was built—of which less than 4,000 m² was added in 2011 alone. A new growth phase began in 2013, and over the following five years (2015–2019), more than 280,000 m² of office space was delivered to the market, averaging just under 60,000 m² annually.

In 2020, over 60,000 m² of new office space was added. In 2021, uncertainty caused by the pandemic reduced the volume to just 30,000 m². In 2022, office stock grew by nearly 75,000 m². In 2023, development volumes will remain below average, with larger projects scheduled for completion in 2024.

In 2022, over 70,000 m² of new office space was delivered to the market, largely due to construction delays of buildings originally scheduled for completion in 2021. The most active area was the city center, accounting for nearly 50% of the newly completed office supply. The largest central Tallinn projects in 2022 included the second office building of the Avala Quarter (Polaris), the third building of the Porto Franco development (the first phase, a hotel, was completed in 2019; the largest phase is expected in 2023 or 2024), and Kawe City, located adjacent to Freedom Square.

Outside the city center, development continued mainly in established business zones. Notable projects included the Alma Tomingas building in Ülemiste City (approx. 14,000 m² of office space) and the third building in the Tehnopol campus (approx. 12,500 m²). A new development area emerged along Mustamäe Road—Lõvirahu—where G4S established its new headquarters next to previously completed residential buildings. In North Tallinn, the focus remained on multifunctional business campuses, with the most new office space added in the Volta Quarter. Its second building brought over 5,000 m² of new office space to the market.

In 2023, most new office developments are again concentrated in and around the city center. The largest projects set for completion include Maakri HUB—a redevelopment of the former Postimees headquarters into a modern 17-story office tower, originally planned for 2022—and the Park Tondi development, also postponed from the previous year. Additionally, the Viktor Masing building in Ülemiste City and another new building in the Porto Franco complex are expected to be completed by the end of 2023.

Office buildings scheduled for completion in 2023:

Although the market has largely absorbed the available supply, the volume of office space on offer remains high. This has kept rental rates stable for several years. However, in modern office buildings with high-quality tenants, indexed lease agreements have led to gradual rent increases.

In H2 2022, net rents in A-class office buildings in central Tallinn generally ranged between €16–18/m², with buildings in the Golden Mile commanding over €20/m². As of December, vacancy rates stood between 5–6%. Due to the energy crisis and rising construction costs, the volume of office space to be delivered in 2023 will decline, tightening supply. As a result, vacancy rates are expected to fall, which in turn will push up rents for available office space.

In suburban A-class buildings, vacancy rates were similar to those in the city center (7–8%), but rents were on average €4/m² lower. Top buildings in Ülemiste City, however, achieved rent levels approaching those of central A-class properties, at €15–16/m². The most attractive properties tend to be located in established business districts or offer advantages over central locations—such as better parking, more competitive pricing, or expansion opportunities.

Due to large development volumes, B-class buildings saw elevated vacancy rates, reaching 9% by the end of 2022—one of the highest levels in recent years. However, with fewer new office projects in the pipeline, B-class vacancy is also expected to decrease, leading to upward pressure on rents. Currently, B-class office rents in the city center mostly fall within the €10–16/m² range, while in suburban areas they range from €8–10/m²—roughly €2–4/m² lower than A-class rents in the same areas.

In recent years, the influx of new office space has introduced certain market shifts that, over the long term, are set to undermine the competitiveness of older office buildings. This is primarily due to the wave-like absorption of vacant space, whereby new buildings fill their vacancies largely at the expense of older properties in the same class. These older buildings, in turn, seek to fill space with tenants from B-class buildings. The main drivers are notable differences in functionality and energy efficiency, as well as the desire to improve corporate image. Since entirely new large corporate tenants are relatively rare, such reshuffling of existing tenants has become common practice. In some cases, spaces are repurposed for entirely different uses.

An additional market anomaly has emerged: rental prices in newly completed developments have risen only slightly, while rents in buildings completed 3–4 years ago have increased due to indexation. This has led to a situation where newer buildings may offer better lease terms upon contract renewal.

As the market becomes increasingly tenant-driven due to elevated supply, so-called convenience factors play a larger role. Developers are under pressure to deliver more competitive buildings, while owners of older assets are compelled to modernize as much as possible—though their ability to do so is often limited. These convenience factors include growing demands related to the visual appeal of offices, which are increasingly shaped by prevailing economic trends and a rising emphasis on environmental awareness.

Over the past five years, standard lease terms have shortened. While 10-year contracts used to be common, five-year leases have become the new norm. In today’s market, landlords are often open to even shorter terms. This shift has been indirectly driven by the fast-changing space needs of tech companies and the rapid developments within the sector.

As a result of this tenant-centric market, a typical price gap of €0.5–1.0/m² has emerged between asking rents and actual deal prices. This allows tenants either to secure better terms or to take additional time to identify the most suitable space for their operations. Increasingly, landlord flexibility, sales and marketing capabilities, and willingness to cooperate with brokerage firms are becoming key to successful leasing.

There has also been growing demand for coworking spaces or serviced office concepts, which address the shortage of small units in high-demand locations. For developers, this model is convenient—they lease the space to a single operator who then sublets it on a short-term basis. Strong demand is also being driven by companies seeking shorter-term leases or temporary office solutions.

This concept is now well-represented in central locations (Tornimäe Business Building, Metro Plaza, Hobujaama Business Center, Fahle Park) as well as in suburban areas (Ülemiste City, Manta Maja in Nõmme). Following international trends increasingly focused on flexibility and convenience, interest in coworking spaces remains high and is already impacting vacancy levels in older office buildings.

Retail and Service Premises

The release of pension funds from the second pillar and increased household savings have boosted retail turnover despite high inflation.
New developments are currently focused on neighborhood stores, primarily in suburban areas around Tallinn.
The fastest growth is in the neighborhood retail segment, with several retail chains actively constructing new outlets.
Street-level retail performs best in multifunctional urban quarters such as Noblessner, Rotermann, and Telliskivi.
Lidl’s market entry is putting pressure on the profitability of existing grocery chains.
Shopping center vacancy rates remain around 4%.
In the context of Harjumaa, the retail and service space market is highly concentrated in Tallinn, particularly around large shopping centers located along major arterial roads leading out of the city. Some of the most prominent shopping centers serving both the city and surrounding areas include Ülemiste, Rocca al Mare, and Kristiine, with strong competition in the city center from Tallinn Department Store and Viru Keskus.

In addition, Tallinn hosts a wide range of smaller, mostly local retail and service premises scattered across various districts. Street-level retail is most active in mixed-use districts where office, retail, services, and food & beverage functions are well integrated. The Rotermann, Telliskivi, and Noblessner quarters have successfully captured foot traffic that previously centered around the Old Town, especially during the pandemic.

Another characteristic of Tallinn’s retail space market is the geographical clustering of similar retail categories. For instance, many construction and home furnishing stores are concentrated along Peterburi Road in Lasnamäe and between the Osten Tor building and Järve Center along Pärnu Road. This type of clustering is increasingly seen in larger shopping centers as well, where category zoning has become the norm.

Major shopping centers in Tallinn (with leasable commercial space of at least 5,000 m²):

After a temporary downturn, retail and wholesale trade volumes recovered and, by the end of 2022, reached €5.93 billion and €2.83 billion respectively. Year-on-year, retail turnover grew by 21% and wholesale turnover by 23%, while consumer prices increased by 20% over the same period.

Wholesale turnover has been on a consistent upward trend since Q2 2020. Retail sales increased by €102 million in Q4 2022 compared to the previous quarter, driven primarily by holiday-related spending and higher food prices caused by inflation, which in turn boosted turnover figures.

As high inflation persists, retail turnover is expected to continue rising—though tempered somewhat by increasingly cautious consumer spending habits.

In recent years, due to increased risks and market saturation, the development of large multifunctional shopping centers has largely been abandoned. A notable exception is Porto Franco, whose development began in 2015 but has faced delays due to its scale, legal disputes, and a corruption scandal. As a result, full completion was not achieved by the end of 2022. Buildings I and III of Porto Franco were completed in late 2022, while Building II is scheduled for completion in 2025. Despite the challenges, its prime location and the scale of development in the harbor area ensure long-term potential and the attraction of high-quality tenants.

Development projects for other major centers—such as Tallinn Department Store and Rocca al Mare—have been put on hold. Kristiine Center’s plan to develop a multifunctional campus with residential and office components reflects a broader trend of creating urban environments similar to those already established in Ülemiste City and currently under development in Noblessner, Rotermann, and Telliskivi.

However, the realization of major new shopping center developments within Tallinn is not expected before 2025. The emergence of multifunctional urban campuses would help mitigate risks faced by traditional centers, particularly in the entertainment and food service segments, where profitability has declined. This, combined with the reduction in physical retail activity, has pushed vacancy rates in shopping centers from near zero to around 5%.

In recent years, the focus has shifted away from large-scale shopping centers toward the development of neighborhood and district-level retail stores. Increasingly, this role has been taken on by so-called Greater Tallinn—suburban areas surrounding the capital. Rapid population growth in Tallinn’s nearby municipalities has naturally increased the demand for local retail services.

In 2022, new Prisma stores were opened in Harkujärve village, the cities of Maardu and Saue, and a new Selver was launched in Tabasalu. Additionally, IKEA opened a new retail park in Kurna village.

Lidl, which currently operates five regional shopping centers in Tallinn with a combined retail area of over 13,600 m², plans to develop an additional 5,000 m² of retail space in the coming years.

In 2023, a new shopping center of approximately 20,000 m² is set to open next to IKEA in Kurna, of which 6,000 m² will be occupied by a Selver supermarket.

Major retail developments scheduled for completion in 2023:

In recent years, average rental rates in major shopping centers have remained in the range of €10–20/m², though internal price differences within centers are typically much wider. Rental prices have stayed stable, with the effects of the COVID-19 pandemic contributing to this stability, as well as a moderate increase in vacancy rates. By the end of 2022, average vacancy in shopping centers stood at around 4–5%.

Smaller retail units—such as pharmacies, florists, and pet shops—tend to pay rents ranging from €10 to €50/m² in popular shopping centers. The upper end of the rental spectrum exceeds €50/m², typically paid by tenants in high-traffic areas within central malls who generate the highest turnover per square meter. In larger shopping centers, tenants also pay turnover-based rent in addition to the base rent, usually in the range of 5–10%.

The highest rents are currently paid by tenants with the highest price margins, such as pharmacies and florists—often leased via in-store bidding. In contrast, anchor tenants pay significantly lower rents, typically between €7–12/m². However, new lease agreements are being signed at higher rates. Newly built anchor spaces are generally leased for €10–14/m², while smaller retail units typically range from €20–50/m². “Big-box” retail spaces (1,000–2,000 m²) rent for €8–10/m².

The rental pricing strategy for retail and service premises depends on several factors:

Location and foot traffic intensity
Unit size
Visibility (e.g., large display windows)
Competition in similar product categories
Tenant profile
Lease term length, etc.
Street-level spaces with direct access in central and Old Town locations with high foot traffic usually rent for €20–40/m² (on the “Golden Mile,” prices are €18–25/m²; in the core city center, up to €60/m²), while suburban rents typically range from €7–15/m². These significant differences reflect the uneven distribution of pedestrian and vehicle traffic.

Due to the pandemic, average rents for retail, service, and F&B spaces in the Old Town fell by 20–25%, though prices have since recovered. However, rising energy costs and the lack of state subsidies could lead to renewed rent pressure. In less active areas, rents have remained stable in recent years. In central and Old Town locations, average rents now range from €7–15/m²; in the suburbs, from €5–10/m². Comparable spaces in shopping centers generally command higher rents.

Typical rental price ranges in shopping centers:

Commercial and service premises with street access (50+ m2):

Warehouse and Industrial Premises

The majority of developments are driven by demand from the logistics sector as well as retail and wholesale trade.
Due to rapid e-commerce growth, the low share of speculative construction, and an increase in local investment activity, the warehouse and industrial sector has proven the most resilient during recent crises.
The risk of oversupply is low, thanks to short construction lead times and a high number of pre-lease agreements. However, fulfilling larger lease requests can be challenging within tight development timelines.
The most active development is taking place in the greater Tallinn area. In the near future, the new IKEA building is expected to boost the development potential of plots along the Tallinn ring road.
High demand continues to keep both rental prices and vacancy rates low.
The warehouse and industrial property market in Estonia is largely centered around Harjumaa. Within this region, the most attractive areas are located in and around Tallinn. Among the inner-city areas, the most preferred are the zones between Mustamäe Road, Kadaka, and Laki Street, as well as properties near Peterburi Road. Within city limits, warehouse and industrial spaces are also concentrated in North Tallinn’s Kopli and Paljassaare peninsula harbor areas, as well as in the Sõjamäe district between the railway and the airport, and in the Männiku and Kalmistu Road area in Nõmme.

Suburban areas tend to feature more modern building stock, especially where earlier development was limited. Key areas include the Tartu Road corridor in Rae municipality extending to Jüri borough—home to several major and smaller tech parks—as well as Tänassilma Tech Park along Pärnu Road, and the Vana-Narva Road and Peterburi Road corridors to the east of Tallinn. Outside these zones, the market is relatively small, mainly concentrated in larger towns such as Keila and Paldiski.

Preferred locations benefit from well-developed infrastructure, proximity to clients and business partners, access to labor, and excellent transport connections. These areas mostly feature modern buildings, and the number of undeveloped plots is steadily declining. In these markets, proximity to the city center or other urban nodes is less important than accessibility by various transport modes and location relative to major highways.

Main Warehouse and Industrial Areas in Tallinn and Surroundings
(1 – Laki-Kadaka area, 2 – Lasnamäe, 3 – Mõigu-Peetri-Jüri, 4 – Tänassilma, 5 – Loo-Maardu)

In recent years, construction activity has been strong, particularly concentrated in the greater Tallinn area, where there is still ample available land and development potential. The most active zones are along Tartu Road and in the Peterburi Road corridor. Within Tallinn, development is most active in the Laki Street business district on the border of Kristiine and Mustamäe districts, and in Lasnamäe, particularly around Peterburi Road and Suur-Sõjamäe Street.

This increased activity is driven by business growth and expansion, along with the desire to relocate from older, less functional premises to more modern, purpose-built facilities. Most newly developed properties have been built for a specific tenant or for owner-occupation. Speculative construction is relatively rare due to the complexity of accommodating diverse tenant needs and is more common for smaller units.

As a result of this development trend, nearly 825,000 m² of warehouse and industrial space has been delivered over the past five years—compared to less than 600,000 m² between 2012–2016, representing a 30% increase.

In 2021, construction activity remained high due to low vacancy rates and a balanced supply-demand environment. That year, over 130,000 m² of space was completed, while construction permits were issued for more than 250,000 m²—exceeding the volumes seen in 2017, 2018, or 2019, and on par with 2020.

In 2022, construction permits were applied for a total of 240,566 m², indicating a slight decline in developer readiness. A total of 133,720 m² received usage permits in 2022—just over 50% of the space for which permits were requested.

In 2022, the largest new industrial buildings were completed outside of Tallinn, yet in logistically strategic locations along key transport corridors. The largest building was a stock-office type facility at Rukki tee 2. Among owner-occupied properties, the most notable was Lotus Timber’s new production facility in Maardu. Other significant developments include Arras’ new production building in Kiili municipality and Kontek’s production facility in Tänassilma.

Among more speculative developments, in addition to the Rukki tee 2 building, the largest projects were Loo Kinnisvara’s facility at Ilunurme tee 7 and Vintselle’s stock-office in Saue.

Major warehouse and production buildings scheduled for completion in 2023:

Rental prices for modern warehouse spaces have generally risen to around €6.5–7.2/m², although some more affordable spaces can still be found at €5.5/m². Demand is highest for newer, modern facilities located on the outskirts of Tallinn and in nearby areas. Preferred properties typically include features such as heating, overhead crane capacity, loading platforms, dock levellers, proper ventilation, and good maneuvering space.

In attractive suburban areas, rental rates for warehouses and production facilities are around €6.5–7/m², while in Tallinn, warehouse spaces larger than 200 m² can command rents of up to €9/m². For older but still decent-quality spaces, rents typically range between €4.5–5.5/m². As supply tightens and vacancy rates decline, rental prices are expected to increase further.

Rents are higher in the terraced (row) warehouse segment. Outside Tallinn, prices generally start from €6.5/m² and can reach up to €8.5/m². In Tallinn, rates typically range from €7.5–9.0/m² and can exceed €10/m² in high-demand areas such as the Kadaka–Laki district. Strong demand for these spaces is reflected in their rapid market absorption.

Vacancy in older premises has increased, primarily due to tenant relocations and the fact that many of these properties are situated in logistically less favorable locations (e.g., North Tallinn, Kristiine, Nõmme). As a result, they are functionally inferior to the newer industrial zones on the city’s outskirts. Gradually, land use for older industrial plots is being redefined, replacing underutilized buildings with alternative property types.

Vacancy rates for new buildings remain low—below 5%—including for stock-office properties, where most urban developments are nearly 100% pre-leased. City-based developments continue to trend toward mixed-use buildings, driven by high land prices. As is typical for this phase in the market cycle, many companies that acquired plots or relocated at least five years ago are now expanding. Consequently, plot expansion potential and the developer’s or landlord’s willingness to offer added value—such as enhanced warehouse functionality or facility management services—are becoming key factors in future site selection.

Overall demand remains in line with recent years, meaning that interest in larger units (10,000 m² or more) is limited—usually countable on one hand. Vacancy in older buildings remains an ongoing issue.

For stock-office type premises, smaller units—often up to 200 m²—are currently more liquid. Interest in larger spaces (around 500 m²) is somewhat more subdued. Since stock-office formats require not only functional warehouse or production space but also high visibility and access in high-traffic areas, prime locations remain those along major roads leading out of the city, as well as urban in-fill developments.

In the current market, demand for row warehouse units has shifted from the Tartu Road corridor toward Tallinn and the Mõigu–Peetri area. In the greater Tallinn region, demand is more moderate. This is evident in slower project take-up, postponed construction starts, and longer lease-up periods for developments. In contrast, city-based stock-office projects continue to achieve near 100% occupancy upon completion—something not true for outlying areas, where slight oversupply is emerging.

Prevailing vacancy rate and forecast for warehouse and industrial space:

Investment Market

In 2022, the commercial real estate investment market remained active, with total investment volume reaching approximately €335 million—lower than the previous year. In 2021, investment volume amounted to €450 million. Only 2015 saw a higher result, with investment volumes peaking at €600 million.

The decline in investment activity in 2022 was driven by the war in Ukraine and the resulting energy crisis, double-digit inflation, and interest rate hikes by the European Central Bank. In contrast, the rapid growth seen in prior years was largely fueled by a search for safe-haven assets amid expansive monetary policy and attractive yields.

The statistics exclude development land transactions, the total turnover of which exceeded €100 million in 2022. In comparison, development deals in the previous year had a combined annual volume of over €370 million.

Over one-third of investment activity in 2022 occurred in the industrial real estate segment. In Q1 2022, the development company Restate sold one building in its stock-office development in Lasnamäe for €11.3 million. In Q2, a logistics complex comprising two new buildings in the suburbs of Tallinn was sold for €12.5 million. Another suburban warehouse complex changed hands for €8.8 million, and an industrial property was sold in a sale-and-leaseback transaction for €11.4 million. In Q3, a production facility in Pärnu was transacted for over €30 million.

Industrial development in Tallinn and its surrounding areas remained active—by mid-year, 28 projects totaling nearly 150,000 m² were under construction, several of them in their final stages. However, due to rising construction costs, the number and volume of new projects are declining. As a result, tenants are increasingly turning to existing or older buildings or renewing leases at higher rents. Office-warehouse developments (stock-offices) under construction cover 67,100 m² across 14 projects, although demand in this segment also appears to be declining.

In contrast, 2021’s largest transactions involved shopping centers: T1 Mall, Stockmann, and Mustamäe Keskus all changed ownership, with a combined transaction volume exceeding €135 million. These were the three largest commercial real estate deals of the year. In Q1 2022, a developer sold a retail-focused property portfolio (stock-offices and grocery stores in four locations across Estonia). Additionally, a shopping center in Kohtla-Järve changed hands for €16.5 million.

In the office segment, major H1 2022 transactions included the sale of a Kristiine office building for €6.5 million, a Central Tallinn office for €9.7 million, and a Northern Tallinn property for €7.5 million. In Q3, the largest deal in this segment occurred with the sale of a Central Tallinn office property for around €40 million.

In the alternative real estate segment, a 6,600 m² hotel with 92 rooms in a well-known resort town was sold for €12.2 million in H1 2022.

Capitalization rates have clearly declined in recent years. Prime office yields, which exceeded 7% in 2015 and were around 6.5% in 2017, dropped below 6% by 2022. Retail yields have also decreased—falling from 7% in 2015 to around 6.7% by the end of 2022. Industrial property yields, which were around 8% in 2015–2016, have also dropped to about 6.7%.

Yields remained relatively stable over the past year, but rising interest rates are expected to reduce investment activity. Prime assets—typically located in strong locations, with reputable tenants under long-term leases and potential for rent increases—are usually targeted by international investors and property funds. However, foreign investor interest is decreasing, and capital outflows from Estonia are becoming more frequent.

Given the rising interest rate environment, perceived investment risk has increased, and investors now expect higher returns on income-generating assets. If current economic conditions persist, we may see upward pressure on yields this year.

Summary

The commercial real estate market is influenced by a wide range of factors, including economic and political conditions, technological developments, and regulatory changes. In recent years, the market has grown—particularly in the office and retail sectors—and demand for flexible and sustainable buildings has increased. Declining development volumes suggest that the market will face a supply shortage in the coming periods, which will lead to reduced vacancy rates, even among lower-class commercial spaces, and increased demand for premises with lower operating costs.

Author: Kristofer Orupõld / Analyst / Uus Maa Headquarters