The new work arrangements established during the years of the pandemic and the consistent construction of new office buildings have brought challenging times for decent B-class office buildings, where vacancy rates are increasing. It’s particularly time-consuming to find tenants for larger spaces over 500 square meters.
Last year, around 70,000 square meters of new office space entered the market, much of which has now been filled by tenants. This year, the volume of completed office space is significantly smaller, but in the next couple of years, this number is expected to grow again, especially if all planned developments are realized.
The majority of tenants for new buildings are Estonian companies, which means that as each new building is completed, some spaces in older office buildings become vacant, and there is no longer sufficient demand for such offices. Even in buildings constructed less than 20 years ago, which are otherwise representative, it’s challenging to find new tenants for large office spaces.
Energy efficiency and new technologies are crucial
Large companies, who plan relocations well in advance, prefer to rent a new office space built specifically for them rather than adapting an existing space. Furthermore, companies are increasingly valuing a green mindset, which is why environmental-friendliness and sustainability are considered when selecting office spaces.
Building energy efficiency is also crucial, especially in light of drastic increases in energy prices. Solar panels, district cooling, sun-repellent exterior curtains, and other modern technologies that help reduce energy consumption are understandably important to tenants. New buildings have an advantage here since the standards have changed over the past decades.
Speed of relocation matters
In a rapidly changing world, companies have shorter lead times for planning relocations, and lease agreements are not recommended to be signed before the building’s construction begins. Therefore, opting for leasing space in a completed building might speak for a shorter waiting period. However, this waiting period is not significantly shorter, especially if office spaces need to be customized for the tenant.
In recent years, construction activity has been consistent, which means there’s always a new office building nearing completion, and waiting for relocation no longer takes a year or more (unless dealing with spaces several thousand square meters in size).
A recent trend is the emergence of subleased spaces from new buildings. As many companies now combine office and remote work, portions of the office are left empty. Therefore, subtenants are sought or replacement tenants are pursued, allowing companies needing office space to move into nearly new offices immediately.
Demand for older office space declines
Consequently, leasing out large spaces in older B-class office buildings is becoming increasingly challenging. Whether a significant reduction in rental prices would help is not certain, as the better companies perform, the more they can afford new and attractive office spaces.
The nature of an office has changed for many companies – it’s no longer just a place to work but must be an inspiring environment that gives employees a reason to leave their home offices.
Converting large vacant office spaces into smaller ones is costly, and tenants are not willing to pay rents in older buildings that come close to the price level of new buildings. And there certainly wouldn’t be demand for such a large number of small offices.
Hopefully, in the coming years, we will see several environmentally-friendly reconstruction projects, as updating existing buildings could be preferred over densifying urban areas with new construction. However, as the rapid growth of office space needs is not expected in the near future, some older office buildings could find new life as residential buildings, considering the aging population, why not as retirement homes or other care facilities.
