Are you curious about the Baltic real estate prospects in 2024 – how similar and different they are across Estonia, Latvia, and Lithuania? Our team can help you with that!
2023 has been a challenging year due to persistent inflation and a 15-year high in interest rates, both of which negatively impacted economic growth and real estate markets. Across Europe, investment volumes have plummeted as investors grappled with declining asset values and increased borrowing costs. Although the Baltics have remained more resilient, the growth is fueled by local investment and lease markets. We enter 2024 with falling inflation and expectations for a reduction in interest rates.
The CBRE Baltics Research team is working on the full Market Outlook report which will highlight key trends in commercial real estate sectors set to unfold in 2024. Vilnius, Riga, Tallinn, stay tuned for the full publication and presentation. And for now, let’s take a sneak peek into some of the key trends shaping Baltic commercial properties.
Investment
As yields stabilize, the mismatch between buyers and sellers should narrow, with transactions picking up in the second half of 2024. Despite an overall decline in investment transaction numbers throughout 2023, the year-end witnessed a rebound in activity across Europe and the Baltics, offering cautiously optimistic prospects for 2024. Expectations include decompressing interest rates and improving overall market conditions.
Looking ahead to 2024, the commercial real estate landscape is poised for numerous bond redemptions and refinancing, sparking intense negotiations between property owners and financial institutions. Regarding yields, although they have both risen and stabilized, a price misalignment persists, contributing to reduced market activity. The anticipation is that, as financing costs decrease, there will be a subsequent increase in demand for new deals.
Sustainability
In the area of sustainability, the changing regulatory landscape, especially the introduction of CSRD, is expected to encourage various players in the commercial real estate market to enhance their ESG alignment throughout 2024. The CBRE study on green European properties already demonstrates extended benefits of ESG, including increased rent premiums, lower maintenance and utility costs, improved ROI, and more favorable financing terms.
Beyond 2024, a growing performance gap is anticipated between sustainable and non-sustainable buildings. Building sustainability is increasingly marked by certificates such as BREEAM or LEED, although certification trends are not yet as prominent among all retail and industrial players. However, in the office segment, nearly 50% of the stock is already certified across the Baltic capitals. Driven by the potential for rental premiums and supported by green lease agreements, owners and landlords are likely to step up their sustainability effort.
Office
The current dynamics of the office market in the Baltic capitals are primarily shaped by local companies. Despite a robust pipeline of modern office spaces, concerns arise about potential oversupply and increased vacancies, given presumably longer timeframes needed to secure foreign direct investments. This uncertainty may result in a potential decrease in take-up aggregates in 2024. Furthermore, the surge in sub-lease options, fueled by downsizing and work-from-home policies, is expected to taper off, potentially resulting in a structural vacancy rate in the double digits across the Baltic capitals over the next 2-3 years.
In the current office market, tenants wield increased negotiating power, turning it into a tenant’s market. In response to evolving market dynamics, landlords are adopting strategic measures to attract and retain tenants. One notable trend is a significant increase in fit-out contributions over the last two years.
Industrial & Logistics
Although the industrial segment continues to stand strong, driving secondary cities’ growth, potential barriers to sustained expansion emerge in the form of labor shortages and challenges in attracting foreign players. However, the increasing interest in nearshoring to the CEE region brings hope for more foreign activity in the Baltics. With expectations of a better economy in 2024, the appeal of nearshoring to the Baltics is likely to grow.
On the other hand, urban logistics are becoming more prominent across the Baltics, with a rise in activity in stock office and self-storage unit developments. This increased interest hints at the sector’s potential, anticipated to unfold gradually through 2024.
Retail
Presently, the majority of Baltic retail stock exceeds 10 years in age, and a substantial portion surpasses the two-decade mark. Renovation, expansions and modernization are currently actively pursued within the Baltics to bring back the commercialization of the retail assets. To create attractive and inclusive retail destinations, some developers have also started leveraging multifunctional spaces and increasing the scale. The cornerstone for such a concept is to make use of the expertise of operators from different sectors.
In the realm of e-commerce, an ongoing transformation of the traditional retail market is evident, with the integration of online and in-store purchases being notably high in the Baltics. Consumers typically initiate product searches online and then visit physical stores to experience or assess the product before making a purchase.
Residential
The evolving residential landscape is prompting local developers and institutional investors to broaden their engagement in the Built-to-Rent segment. Fueled by the enticing potential for increased profitability and growing demand, a surge in new participants entering the market is anticipated in the coming years. The demand for rental units is driven by the fact that, currently, renting an apartment in any of the Baltic capitals is about 30% more cost-effective than purchasing it using credit (considering the year-end Euribor rate). As a result, the housing affordability index is dropping, leading residents to opt for rentals. Subsequently, co-living is garnering growing interest from Baltic investors as well.
Hospitality
In Europe, global travel is nearly back to 2019 levels, with short-haul leisure travel being the primary driver, while long-haul and business travel face challenges due to a weakened economic backdrop. Although regionally, travel trends are recuperating, the Baltics show the highest decrease in Europe in foreign visits, impacted by ongoing regional uncertainties and one of the highest inflations in Europe. Nurturing the experience will be crucial to ensuring a positive impact and attracting more tourists. Various airlines and bus companies, together with Rail Baltica developments, are set to play significant roles in enhancing connectivity, contributing to a more comprehensive network for travelers in the region.