OREANDA-NEWS. April 07, 2008. The recent Market Review of the Baltics and Belarus by Colliers International describes last year in Estonian real estate market as a year of stabilization, marked with growth of professionalism of market players, speculative investors leaving the market and pressure for better quality in real estate both from the side of investors as well as developer, reported the press-centre of Colliers International.
 
Office Market. In 2007 the office market in Tallinn continued to grow, though the majority of new office development projects in Tallinn continue to move to suburban locations. Outside of the CBD, new areas of business activity concentration such as Ulemiste area, Lasnamae Toostuspark and Kalev quarter are continuing to form. The office market started to stabilize as several new large office projects were put into operation.

The shortage of land plots for new office development in the CBD area as well as continual strong demand for Class A office space is driving owners to start on the reconstruction of existing office buildings in the CBD. In 2007 the supply of newly constructed or reconstructed Class A and B office premises amounted to approx. 57 800 m2, of which Class A office premises accounted for 13%, Class B1 for 55% and Class B2 for 32%.

Only one Class A office building, Tornimae Business Centre with GLA 7400 m2, was put into operation in Tallinn during 2007. By location, 2/3 of the new supply was developed outside of the CBD and 1/3 inside the CBD area. The largest supply of new office premises was in Lasnamae and Kristiine districts, increasing by 18 000 m2 and 13 000 m2 respectively.
 
The demand for high-quality office premises continued to grow. The net absorption amounted to about 70 000 m2, with pre-lease deals still being prevalent in net absorption. Most demanded are Class A office premises, which are typically 100% fully leased out before the completion of the office building construction. Growing demand for modern office space has influenced the rental rated during the last years.

In 2007 the rental growth was very intensive, with office rents increasing on average by 15%. Rents increased in all office categories, but most considerably for Class A office facilities. Average rental prices for Class A properties changed because of strong growth in the upper end prices, whereas in Class B1 and B2 properties prices have mostly increased because of increases in the lower end prices. A strong supply of new offices resulted in an increase in vacancy rates. By the end of 2007 the average vacancy rate for Class B offices amounted to 5,3%. The average vacancy rate for Class A office still remained very low, at about 1,9%.
 
Despite that in 2008 a record high amount of office space will be delivered, over-saturation of the office market is not expected. Projects under construction are mainly covered by pre-lease agreements in place either by the beginning of or during the early stages of construction, and absorption remains at a high level. However, the vacancy rate is expected to increase and rent growth will slow down due to increasing competition in the office market.
 
Retail Market. Despite a decline in private consumption, the demand for retail space remains high and the development of new retail space continues. In 2007 the stock of Tallinn retail space increased by 23 000 m2, amounting to about 365 000 m2 (0,9 m2 per capita). The delivery of new retail space has occurred due to the extension of existing shopping centers as well as the completion of new retail outlets. Finally, in Tallinn there are currently 8 shopping centers with leaseable area of more than 15 000 m2. The total retail space of these centers is approx. 218 000 m2.
 
Demand for modern retail space again exceeded the supply. In Tallinn it is practically impossible for new retailers to find space in the existing large shopping centers, and the overall vacancy rate remains around zero. In regards to new retail space delivered in 2007, said space was fully leased out prior to completion. Though potential tenants are both local and international retailers, it is the well known international retailers that have a better chance of getting the retail space. Newly added retail space in 2007 was basically fully taken by high quality international brands. On average, rents in the local market shopping centers grew between 5-25%, depending on the tenant‘s commodity group. Rents increased more significantly for tenants with business in clothing, footwear, jewellery, and household goods, while rental rates for anchor tenants have remained generally stable.
 
The vacancy rate in the next two years will remain almost at zero, with the demand for space remaining unsatisfied. International brands will continue to enter the local market, especially in Tallinn. The trend of extending shopping centers will be continued with GLA of the largest centers exceeding 50 000 m2. Shopping centers are also changing to become more of destination place, and in addition to shopping are offering other activities for spending spare time.
 
Industrial Market. In 2007 the development of the warehouse sector was more active than in 2006. The development of several large-scale business parks was announced in 2007, including American Corner Business Park (land area 85 ha) and Nordshore Corporate Park (land area 78 ha).

During the last few years the most intensive development of new industrial and warehouse facilities has been concentrated in the Tallinn suburbs. By the end of 2007 the total supply of new industrial and warehouse premises amounted to 157 700 m2 and the total stock amounted to 567 000 m2 (157 000 m2 speculative, plus 410 000 m2 of built-to-suit). Amongst the new supply the largest premises, approx. 123 000 m2 (77%) were from built-to-suit projects while speculative projects comprised the rest, approx. 36 000 m2 (23%). In comparison to previous years, the proportions of speculative projects to built-to-suit projects remained virtually the same.
 
The demand for modern industrial and warehouse premises has grown. Warehouse space in 2007 had the greatest demand for premises from 5 000 to 10 000 m2 in size. The demanded size of warehouse space thus increased twofold from 2006, when space demanded was 2 000 to 5 000 m2. After an increase of rents in 2006 by on average 10%, the beginning of 2007 saw rents remaining stable. However, by the second half of 2007 there were observed increases in rents. The increase in rents was caused by a consistently strong construction costs and financing costs. Rents increased mainly for Class A industrial and warehouse facilities located in industrial parks, on average by 10%.
 
Demand for high quality warehouse facilities will remain strong. The built-to-suit projects will continue to represent the largest part of new warehouse projects. Rents will remain generally stable.
 
Investment Market. 2008 is a year of stabilization in regards to prices and supply. Transaction activity has dropped to 50% of 2007. Market recovery prognosis is for not earlier than of late 2009. Yields are moving upwards to meet higher credit costs and lower LTV. The quality of product is improving and the volume of single transactions is expected to grow. The share of owners‘ equity financed investments increases. Realization periods are to return to 3-6 months like seen in the early 2000-ies.
 
The full text of yearly Market Review by Colliers International is available at Colliers‘ website www.colliers.ee.