Aira Veelmaa, a commercial real estate broker at Uus Maa, told ERR that new buildings are continually being built, and tenants are mostly moving into these from older buildings they're vacating.

"When 300-square-meter or larger spaces are left empty, it's been pretty difficult in recent years to find a tenant for them," she acknowledged. "Especially if there are high utility costs, which is often the case in older buildings. A lot of businesses ask first thing whether a building is energy efficient."

According to the broker, it's typical for prices to gradually be brought down if there is no interest, but there are few large tenants on the move, and for the most part, they're not interested in older spaces. As a result, even very low rent isn't enough to attract clients to older buildings.

Roman Raivet, head of credit analysis for corporate banking at Luminor, said the main reason for the increase in vacant office space isn't the growing popularity of remote work, but rather the addition of new commercial spaces in the capital.

"For example, the largest development areas include Ülemiste, the harbor, downtown's Arter and Fahle quarters," Raivet listed. "Põhja-Tallinn is developing too."

Before the COVID-19 pandemic began, the share of vacant office space hovered around 5 percent. Over the past couple of years, however, that share started to rise, and has since reached around 10 percent.

Raivet noted that while the number of people working from home rose significantly during the early pandemic years, companies still didn't start giving up their existing office space en masse.

Veelmaa noted that most businesses are actually scaling back and optimizing instead.

It's also typical, according to the real estate broker, for a company to downsize at the end of their five-year lease, even if their contract had initially included the option to expand.

Economic and world uncertainty is not boosting business confidence, which is why companies are very cautious about investing in the future and anything that brings additional costs.

Tenants want commercial centers

Another trend seen in recent years has been companies increasingly valuing established commercial centers with a large number of offices, options to expand if needed, as well as various services that make the work environment more attractive.

"It's getting increasingly difficult to find a tenant for a lone large older building," Veelmaa acknowledged.

She couldn't think of any buildings where low interest from potential tenants has forced the owner to radically overhaul the building's function, but that's definitely a topic for the future.

"If a building currently has some vacant spaces and the vacancies keep growing, then at some point, the owner has to ask whether it even makes sense to keep it running — the costs end up outweighing the rental income," the Uus Maa broker explained. "Then they have to start thinking about what to do next. Experience shows that even renovating old buildings may not be cost-effective; they can't compete with new ones, and companies still prefer brand new spaces."

That said, it isn't easy to find tenants for newly built buildings either.

Veelmaa admitted that everyone has to put in the effort, and those who get lucky may land a major tenant, but it definitely takes longer than it did before the pandemic.

Difficult to forecast any trends

Even so, prices aren't going down; they remain stable, because construction costs set a minimum threshold for rent — there's no point in developing if you're not making a profit.

"In older buildings, price reductions are definitely a topic of discussion, and when it comes to larger tenants, landlords are flexible, interested in negotiating and offering better terms," the broker said. "You could say that for anyone who needs a space, now is a very good time."

At Luminor, Rivet pointed out that leases are typically signed for five-year terms, and due to rapid inflation, more attention is being paid to indexing rent rates in lease agreements. Landlords see that reasonable rent combined with ongoing indexation can still help them earn a profit.

As for future price trends in the commercial real estate market, Veelmaa said it's very difficult to forecast anything, considering everything going on in the world.

"Before, economists were generally moreso optimistic, expecting modest economic growth and believing the hardest times were over," she said. "Now I've also heard differing opinions — that maybe the worst of times aren't yet over. Even today, I don't know what to think."

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