The Commercial Real Estate Market Prospects for the Year 2024

At the end of the year, the Baltic investment market delivered positive news across all member states: Pontos sold a 72% stake in Viru Keskus in Estonia, East Capital acquired Rimi Baltic’s logistics center in Latvia, and in Lithuania, Lords LB Asset Management acquired Technopolis business campus. Each of these transactions marked the largest investment deal in their respective countries this year, with a combined total value of approximately 400 million euros. Consequently, the total volume of the Baltic investment market is expected to hover around 900 million euros in 2023, experiencing a modest 30% decrease compared to the previous year. In contrast, the Scandinavian investment market has seen a more significant decline of approximately 60% during the same period. While the positive news acts as a breath of fresh air for the commercial real estate market, we will now examine the factors that need to be considered in the commercial real estate market in 2024.

Interest Rates

Central bank interest rates influence the cost of money, essentially regulating the supply of money in the economy. The rapid increase in interest rates is driven by the desire to control inflation. A higher cost of money also translates into increased loan servicing expenses, pushing up investment yields, as the growth in other revenues may not offset the rise in loan costs. In recent months, the annual inflation rate in the Eurozone has fallen more than twice in year-on-year comparison, reaching as low as 2.4% according to the rapid estimate for November. The decline is largely attributed to the decrease in energy and other raw material prices. However, increasing attention is being given to core inflation, as wages and services have become the primary drivers of price increases. The latest core inflation figures (3.6%) provide optimism to enthusiasts, suggesting the possibility of the first interest rate cut around the middle of the next year. A stable or slightly decreasing interest rate environment in the coming year instills confidence in investors and helps reconcile differences between sellers and buyers more expeditiously.

Rental Prices

Six consecutive quarters of economic contraction in Estonia have translated into challenging lease negotiations in the real estate sector. The manufacturing industry, which is the largest employer and exporting sector in Estonia, has been particularly hard hit. Unfortunately, the continued growth in unemployment is anticipated. This inevitably results in desires for rent reductions, payment deferrals, downsizing of rental space, etc., especially in the warehouse and production space segment. Other segments are not immune to this impact, although the effect is less pronounced. Given that the warehouse and production space segment has more properties used for own purposes on average, sale-leaseback deals may be observed to raise equity. Consequently, growing rental income at the same pace is increasingly challenging. As vacancies temporarily tend to increase rather than decrease, Net Operating Income (NOI) is under pressure. In summary, sellers are likely to face a more challenging period where the impact on property prices is twofold: through suppressed NOI and increased yields.

Alternative Capital Sources

The triumph of alternative investors continues: as banks have become more conservative in real estate lending, there is an ongoing desire to find flexible investors with significantly simpler loan terms, albeit at a higher cost of borrowing. Whether it be a temporary senior loan or junior loan, gradually increasing ownership, or deals with buyback options – such alternative capital placements offer far more opportunities than bank loans. These types of investments are seen in both development properties and cash flow assets. An excellent example is Tristafan, which partially funds the Viru Keskus transaction.

What about Yields?

As the table below indicates, the movement of yields has been different across segments. Yields in office spaces have increased by 1 percentage point or more, while warehouse and production spaces have been better able to maintain their prices. For listed real estate, a halt in the growth of yields is predicted in the first half of next year. However, in the unlisted real estate market, a continued upward movement is expected, although at a much slower pace than before. The major movement in yields occurred in 2023. Opportunistic transactions at higher yield levels can still be expected in the market.”

Expected Prime-Yield Returns 2Q 2022 vs. 4Q 2023


While the transactions concluded at the end of 2023 indicate that significant cash flow transactions continue to take place in the Baltics, the coming year presents sufficient challenges. These challenges include maintaining and increasing Net Operating Income (NOI), adapting to the continued growth in yield expectations, and finding alternative sources of capital. If we do not witness transactions of similar magnitude next year, it is likely that the investment volumes will fall below the levels seen this year. We are living in an exciting and dynamic time where achieving success requires even more flexibility and risk appetite than before.

Igor Habal




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