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Not competing on price: modern and smart office buildings are more desirable to tenants.

At the end of the third quarter of 2017 the occupancy rate in these four newly completed buildings was 78 per cent (over 4,200 square metres of the usable office space was vacant). These latest projects didn't have a major impact on the overall market indicators, and the general vacancy rate over the third quarter of 2017 increased from 5.1 per cent to a mere 5.3 per cent.

The third quarter of 2017 was active in the modern offices market. Projects of various sizes contributed to the increase of modern office space in the country's major cities. The largest projects were implemented in Vilnius, where construction of four new office buildings were completed during the third quarter at Liepyno Verslo Namai, Narbuto 5, Eleven 11 and Green Hall 2. These projects added a total of 19,200 square metres of usable office area to the market in Vilnius which now totals 666,600 square metres.

At the end of the third quarter of 2017 the occupancy rate in these four newly completed buildings was 78 per cent (over 4,200 square metres of the usable office space was vacant). These latest projects didn't have a major impact on the overall market indicators, and the general vacancy rate over the third quarter of 2017 increased from 5.1 per cent to a mere 5.3 per cent. The vacancy rate for A class offices was 3.5 per cent and B class 6.3 per cent.

According to Ober-Haus, the current office vacancy rate in Vilnius (5.3 per cent) remains fairly stable and exceeds the average of the past 10 quarters (4.8 per cent) by only half a percentage point.

"The business centres that will be completed by the end of 2017 won't make a major difference to the situation in the market, because these buildings have already been leased. In the context of the current development rate of companies, the supply of new office space in 2018 doesn't appear threatening. The projects scheduled for the coming year will offer nearly 62,000 square metres of usable office space," said Saulius Vagonis, Head of Valuation & Analysis Department at Ober-Haus.

"New projects are attractive to companies aiming to optimise their physical workspace costs and to attract (or retain) employees by offering them modern, technologically smart and attractive workspaces. So the trends are sufficiently clear. In order to compete in today's market, owners of new office buildings must offer an appropriate product and those owning older office buildings must upgrade their property. A steady and significant increase in supply is useful both for potential tenants and the economic climate in Vilnius in general", continued Vagonis.

Competition between business centres dictates that the base rent for office space hasn't changed substantially since the end of 2015. According to Ober-Haus, the rate currently stands at between 8 and 13 euros per square metre for B class offices and between 13.50 and 16.50 euros per square metre for A class offices.

However, in order to attract larger and better known tenants, building owners must be much more flexible in their negotiations with the tenants, especially compared to the 2014-2015 period. Medium and larger leasing transactions concluded today for new and top-class office buildings usually feature rents of under 15 or 16 euros per square metre.

"If the landlord agrees to negotiate on the base rent, the standing practice in the market is that the tenant will pay all additional building maintenance costs (particularly in top-class business centres). That is, the tenants will compensate not only the operation and maintenance costs of the building and premises, but also real estate and land taxes, property insurance, and property management costs. Tenants also normally pay a fee for all parking spaces allocated to them," Vagonis said.

Kaunas sees an increase in the number of vacant office premises

In anticipation of the completion and opening of lager office building projects in Kaunas, smaller scale projects continue to supplement the market. According to OberHaus, two projects were completed in the third quarter of 2017, namely Jonava 30 near the city centre and S3 in the prestigious suburb of Zaliakalnis, which offered a combined 3,800 square metres of useful office space. Total modern office space in Kaunas now stands at 115,600 square metres.

After a sudden increase in the vacancy rate in second quarter of 2017 (from 2.4 per cent to 7.9 per cent), the figure stabilised and stood at 7.5 percent in third quarter. It's likely that due to the active implementation of new office projects in Kaunas, the vacancy rate will remain relatively high in the future.

"It would be too optimistic to expect that the market in Kaunas will be able to absorb the office space offered to the market in a short period of time, even with the help of international companies. However, a sufficiently broad choice of office premises should be seen as the economic growth potential in Kaunas, because workspaces which meet the needs of the market are one of the essential factors for business development. Some office building developers may face competitive challenges, and while certain projects will enjoy high occupancy rates and well-known tenants, others may have to be more pro-active in attracting prospective tenants," continued Vagonis.

In all, 11 projects of different scale and for different purpose are planned in Kaunas in 2017. They are offering a total of 35,700 square metres of modern office space. Although new and top-class business centres slightly increased the rents in Kaunas, the price range for modern office premises remains very broad. According to Ober-Haus, at the end of the third quarter of 2017, rent for A class offices stood at between 11 and 14 euros per square metre and between 6 and 10.50 euros per square metre for B class.

Small signs of recovery in he Klaipeda office market

The development of small projects continues to dominate the modern office market in Klaipeda. During the third quarter of 2017, development of a new 1,000 square metre building was completed on S. Neries Street. The premises were leased to a dental clinic, a sports and wellness studio and other tenants.

"Although businesses are slowly trying to activate the stagnating market by repurposing the existing sites and buildings," Vagonis said.

For example, Vakaru Laivu Gamykla (Western Shipyard) together with the Klaipeda Science and Technology Park founded the Pilies Dirbtuves in an old administrative building on Pilies Street which offers premises to representatives from the creative industries sector for a small fee. A former industrial site on Liepu Street will accommodate the new Innovation and Business Valley technology park for educational institutions, which will train specialists in information technology, digital design and other innovative areas. The site will also accommodate the co-working centre Spiecius, due to be completed in the middle of 2018.

Meanwhile in 2018 Stemma Management plans to complete the reconstruction of an old administrative building on the former site of Klaipedos Kranai (Verslo Biurai 103) and offer about 2,500 square metres of retail and office premises to the market. If this project is implemented successfully, by the end of 2017 modern office space in Klaipeda will total 68,500 square metres, annual growth rate of almost 4 per cent.

Although at the end of the third quarter of 2017 the vacancy rate of modern office space in Klaipeda was 17.9 per cent, a large portion of vacant offices are in buildings constructed earlier (mostly before 2009) such as the Business Centre Vite, and negotiations regarding the property lease on these buildings haven't been fruitful for a number of reasons. Newly developed projects and a more flexible approach by the owners to the needs of the customer could contribute to the more successful implementation of new projects in Klaipeda than shown by the general market indicators. According to Ober-Haus, office rents remain stable in Klaipeda. Currently the rents in B class buildings stand at between 6 and 9 euros per square metre, and in A class buildings between 9 and 12.50 euros per square metre.

Caption: The largest projects were implemented in Vilnius, where construction of four new office buildings were completed during the third quarter at Liepyno Verslo Namai, Narbuto 5. ww.ell-realestate.lt

Caption: Saulius Vagonis is Head of Valuation & Analysis Department at Ober-Haus www.ober-haus.lt
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Title Annotation:REAL ESTATE
Publication:The Baltic Times (Riga, Latvia)
Date:Dec 28, 2017
Words:1400
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