Key Drivers from 2020–2023: Remote Work, Automation, and Geopolitical Turmoil
The real estate market over the past few years has been shaped by three dominant factors. First, the rise of remote work and automation has significantly altered space requirements. Second, the sharp increase in the Euribor has changed the investment landscape. And third, the war in Ukraine continues to have ripple effects across markets.
In the office segment, there is a clear trend of rising vacancy rates in older B- and C-class buildings. In some properties, up to 50% of space remains unleased. In contrast, the logistics and industrial sector shows strong momentum, driven by the expansion of logistics firms and the shift away from Asian supply chains. Rents for newly built logistics warehouses range between €5.5–7/m², while stock-office type spaces command €10–12/m².
Higher Risk in Investment Deals
For over a decade, global capital markets have seen falling capitalization rates, driving up real estate values. This was further intensified during the COVID-19 crisis through expansionary monetary policy and massive government stimulus. In Estonia, the pension reform injected an additional €1 billion into the economy, boosting both consumption and transaction prices. Combined, these factors drove property prices higher than in many other EU countries.
That said, commercial banks deserve credit for maintaining prudent lending standards, helping prevent a real estate bubble. Since 2022, lenders have generally required higher equity contributions for financing investment properties.
Still, with rising book values and declining yields, today’s high-interest environment has made transactions more complex. Business plans and financial models developed just a year ago often no longer hold. In 2022, commercial yields of 5.5–6% are now almost equal to financing costs alone. The upside is that the broader economy remains functional and vacancy rates have not spiked. Property owners are holding onto their assets: cash flow is steady, loans are serviced, debt levels are decreasing, and although profits have declined due to higher interest costs, the businesses remain viable. However, realizing assets at traditional prices and yields has become difficult—often impossible. Now more than ever, landlords must maintain their assets, invest in upgrades, and foster strong tenant relationships.
One Market Segment Defies the Trend
While the above challenges apply to most asset classes, land and undeveloped plots are the exception. This segment is booming. The key reason: banks generally don’t finance land acquisitions, which means buyers use equity or collateral from other assets. Financing conditions remain unchanged, but inflation has altered investor behavior. In an environment of high volatility and risk, land offers a relatively safe hedge against inflation and long-term value growth—provided buyers are selective and well-informed.
Two Structural Challenges Persist
First, regional development—or rather, its stagnation—is a concern. In many areas, new development and even renovation are economically unfeasible, leading to rapid depreciation of existing buildings and infrastructure, with a negative impact on living standards.
Second, roadworks and prolonged traffic disruptions in urban areas continue to harm businesses located along affected streets. It is not uncommon for several businesses to shut down permanently during lengthy infrastructure projects.
Green Certification Becomes the Norm
Sustainability certification for buildings, infrastructure, and processes is now a standard requirement in developed markets—and Estonia’s economic integration means these expectations apply here as well.
Many international companies now require their branches to operate only from green-certified premises. This has positively influenced local development: most new commercial buildings are either already certified or designed with future certification in mind, effectively meeting international green building standards.
The newly created Ministry of Climate intends to tackle sustainable construction and operations from a comprehensive and systematic perspective. Major shifts always bring side effects—especially where there is a lack of preparation or awareness. By planning consciously, developers, investors, landlords, and managers can align with the global green transition and stay ahead of regulatory and market changes.
Energy production and storage in buildings is poised to be the next major revolution in real estate design and construction.
Four Key Reforms Are Needed
To inject new momentum into the real estate sector and its related industries—construction, finance, agriculture, and forestry—reforms are needed at both the national and local levels.
