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Market Research - Estonia

Estonia : Tallinn office market - March 2018

- Activity in Tallinn’s office market was high with a strong demand from occupiers and investors
- The record amount of new deliveries expected will be mostly absorbed by the market
- Strong investment demand is resulting in yield compression

The record amount of new deliveries expected will be mostly absorbed by the market

Deliveries of new office buildings amounted to 23,500 m² in 2017, which was significantly fewer than in recent years. However, a significant number of new office buildings are under construction. About 70,000 m² is expected to be completed this year, mostly in H2 2018, with the largest project being “Maakri quarter” in CBD at over 18,700 m². 2018 should thus see the highest completion figure of the decade and it would be more but for postponement of some large projects to 2019. The quality of new office buildings also continues to improve especially with regards to energy efficiency.

In the medium term, rapidly increasing construction prices will put pressure on developers and will start limiting supply. At the moment demand is sufficient to absorb most of the new supply, so much so that office rent rates have been stable for a few years and are expected to remain so in 2018. Prime rent stands at €210/m²/year. Positive economic conditions continue to fuel office demand along with Tallinn’s increasing population. Grade A offices between 150 and 300 m² are the most sought-after offices, with vacancy for prime properties below 5%. Demand for Grade B is lower but can still be considered strong. Vacancy rates might increase slightly in the second half of the year.

Strong investment demand is resulting in yield compression

Both domestic and international real estate funds show strong interest in Tallinn’s real estate market. Three office buildings changed owners during 2017. High demand and the low interest rate environment have put downward pressure on yields. Prime office yields have been decreasing at a steady pace every year since 2009 and currently stand at 6.50 - 6.75%. Yield compression is expected to continue but a large gap will remain with yields in Western European countries.

estonia EOM 2018
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