A landlord who for years has rented out their one-room apartment in Tallinn's Kadriorg neighborhood ran into an unwelcome surprise this fall: while the rental market was buzzing and rental apartments still going like hotcakes this spring, this owner's search for a new tenant is now stretching into months, and even reducing rent hasn't helped.

"That's actually what's happening," Uus Maa Real Estate analyst Risto Vähi confirmed to ERR. "Right now, people would rather rent a cheaper apartment with good accessory expenses."

According to Vähi, on the one hand, this is the winter slump the market sees every year, but it's also apparent that the scramble is over and price levels are starting to come down. Large numbers of more expensive rental apartments also entered the market in the meantime, and competition among them is fierce.

"Those are tending to stand [vacant]," he acknowledged. "Of course there are also apartments where people perhaps don't like the heating system — whether it's electric, gas or wood heating."

The real estate analyst noted that renters clearly prefer apartments with district heating, and despite the fact that the price of natural gas has gone down again in the meantime, they find that heating expenses are most predictable with district heating.

Mihkel Eliste, a certified appraiser and analyst at Arco Vara, said that the market can be divided into two distinct segments — rental apartments going for below €500 and those going for above €500 a month, in which trends are slightly different.

He noted that war refugees from Ukraine are on a tighter budget than the average Estonian, but there are a considerable number of them seeking rental homes and they're focusing on the cheaper side of the housing market — which in Tallinn means rental apartments going for under €500.

"Since the latter half of August, rental prices in the more expensive segment have rather fallen," Eliste said. "Typically you see a very sharp increase in rents at the beginning of September specifically in connection with the start of school, very much in Tartu in particular, but this year the rise in rent prices in both Tartu and Tallinn alike was seen in early summer or spring. By fall we were no longer seeing that demand had increased."

Eliste highlighted that renters have greater bargaining power in the city center and Põhja-Tallinn, where real estate is more expensive, than in the capital's residential areas.

Two-room apartment in good shape, residential area

According to Vähi, the easiest apartments to rent out are typical two- or three-room residential neighborhood apartments in good condition. Two-room apartments are going for €480-520 and three-room apartments €550-600 a month on average. This summer, two-room apartments in residential areas were going for an average of €550 a month.

"Of course, there are offers of all kinds, and those asking for more for their apartment in a prefab building also have to bear in mind that it will take longer to find a tenant and that they will probably have to bring their price down," he said.

He added that new apartments are likewise being put up for rent in residential areas, but naturally at higher prices, and within a much broader price range.

How fast one can find a tenant depends on whether the landlord is willing to agree to discount rent. According to Vähi, there are those who won't agree to reduce rent and are prepared to wait longer to find a tenant, but willingness to bring down rent nonetheless exists, especially on newer two-room apartments currently widely available on the market.

Nonetheless, it can still take months to find a tenant.

Bank: Investors could face trouble paying mortgage

Investors who have taken out loans to purchase rental properties are now facing difficult choices, as an increase in supply is putting pressure on them to reduce rent, but in doing so they may not be bringing in enough to cover the monthly mortgage payment, Luminor said Monday.

The Tallinn-based Baltic bank finds that there are also currently more offers available on the rental market because high energy prices have seen apartments put up for rent that had long been standing vacant. This is particularly evident in the increase in the number of offers of older apartments.

Luminor private banking director Tanel Rebane said that as the Euribor increasing also means bigger loan payments for landlords, investors don't have the buffer necessary to reduce rent on their apartments either.

"Landlords have to seriously consider here whether to rent out their property at a loss or not," Rebane said. "We're seeing that people are doing so, because otherwise the investor will be stuck with the loan cost in full while no one is living in the apartment."

He predicted that rowhome and detached home rents will see a more rapid decline than apartment rents.

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