The recently ended coronavirus pandemic and the war in Ukraine that began in February have brought a new reality to the office space market. The demand for office spaces has not disappeared, and the feared invasion of home offices did not materialize. However, it is increasingly difficult to construct new buildings and complete existing projects.
Construction time is extended
Issues with the availability of materials that arose at the beginning of the Russian military actions and overall uncertainty have resulted in delays in the construction of several buildings or the commencement of planned projects. Office building developers continue with their planned developments, but completion dates have been pushed forward to some extent.
As a result, fewer new office buildings will be completed this year and the next because some projects have been postponed until 2024. Companies planning to move to new offices next year should consider this and start the process of selecting a new location well in advance. Otherwise, the available choices may unexpectedly become limited.
Rising rental prices
Rental prices for new office spaces, which had remained stable for years, have now sharply increased. Bad news for tenants, good for developers? Unfortunately, that’s not the case, as no one is in a favorable position today.
Developers have been forced to raise prices due to the unexpected increase in construction material costs, which, depending on the product category, range from 20% to 30%. According to Statistics Estonia, the construction price index in the first quarter of this year increased by 19.3% compared to the same period last year, with construction materials becoming more expensive by an average of 27%.
While the problem of material availability that emerged at the beginning of the war has mostly been resolved, the new supply chains have led to significantly higher prices. It is no longer possible to build at previously offered prices, resulting in rental prices in developed buildings rising to a greater or lesser extent, depending on the construction stage of the building.
It is unheard of and unpleasant for tenants when the rental price increases during negotiations or just before signing the lease agreement. However, this is the reality today. Nevertheless, most parties perceive it as unavoidable, as understandably, construction companies and developers cannot fully bear the increased construction costs.
In simple terms – everyone is bearing the burden together. Naturally, the market is not ready for a 20-30% increase in rental prices, so despite the increase in rental prices, developer profits are decreasing.
Major developers continue as planned
Collaborators with projects under construction or planned to be completed within the next couple of years confirm that despite the challenging situation, they are proceeding with their plans. For example, Fausto Capital, which currently has both an under-construction office building and the start of a new building, plans to continue with both projects. The Maakri HUB, which is being reconstructed in the city center, will be completed by the beginning of next year, and at the same time, a new unique office building will be constructed in Fahle Park.
There is demand, and although some foreign companies have put their office search on hold, Estonian companies are quite active. Many have been working from home for the past two years, and their office space needs have changed. Despite the higher-than-usual rental prices, there is interest in new office buildings. As office spaces in Estonia are mostly not several thousand square meters large, the increase in rental prices per square meter is not a significant amount in the end, and successful companies can manage it.
Considering the changed world, there is no reason to expect that construction materials and rental prices will become more affordable in the coming years. They are still far from reaching Nordic levels, but 20 EUR/m2 or higher rent for a new Class A office in the Tallinn city center area will likely become the norm.
