Latio: Activity in the office space lease market has fallen
28 April 2010
Riga
Even though office space lease prices have fallen by 50–70% since 2007, the activity of tenants has decreased in the beginning of the year, and the proportion of vacant premises has reached 30–40%, shows the Latio commercial property market report on the first quarter of 2010.
In the A-class office space segment, the current lease payment is 7–8 euros per square meter per month;in the B-class segment: 5–7 euros per month. Since 2007, when the office space lease prices in Riga reached their highest level, they have fallen by 50–70%.
The proportion of vacant premises in the office space segment in Riga was 30–40% during the first quarter of this year. In new office buildings, depending on their location, quality, layout, adaptability and lease payment policy, the amount of unused space was anywhere from 20% up to 80%.
“The low occupancy of several of the new office buildings is connected with various factors. Often, the bank that has financed the construction does not permit the developer to reduce the lease price of the premises. The potential tenants must often be agreed upon by the bank, as well. If, after examining the tenant, the credit institution is not sure about its solvency or reputation, the lease is refused. Many of the new office buildings are almost empty, because the owners of these projects have been overly optimistic during construction in their judgment of the development of the economic situation, and have incorrectly assessed the size of the space to be leased out and the possibilities of attracting the so-called anchor tenants. Buildings without large tenants that could occupy up to 50% of the office space find it very hard to attract other tenants,” explains Jānis Šīns, head of Latio’s commercial property sale department.
In assessing the changes of offer, he points out that part of the currently-vacant or unfinished office premises will soon become the property of subsidiaries established by banks. “Whether this space is leased out or not will depend on the banks’ policy. So far, this policy does not foresee leasing. If the stance of the banks changes, then the offer of premises will slightly increase,” notes Šīns.
Like in 2009, the most in-demand offices this year are ones with an area of up to 120 square meters. According to Latio’s data, last year, 27% of businesses wished to lease offices sized 31–80 square meters, while 22% required offices with an area of 81–120 square meters. Interest in premises sized 121–200 square meters was shown by 17% of the potential tenants, but offices sized above 1000 square meters were required by 5% of businesses.
The demand is greatest for offices in the center of Riga. Businesses wish to lease well-renovated premises in buildings with good management and high level of service. An important factor is the availability of a parking lot. Owners manage to lease out their small office premises relatively quickly, while premises sized 500–800 square meters do not attract much interest. The owners of such premises should consider dividing them into smaller parcels.
“Currently, when selecting office space, the most important factor for tenants is not just being able to find the cheapest offer, but also conformity of the lease payment with the quality. Many tenants, especially international companies, also find it very important for the landlord to be a stable company with experience and good reputation,” points out Šīns.
When comparing the fields of business, the largest demand for office space in the beginning of this year has been generated by companies working in the areas of finance, law, consultations, transport and logistics. Some of the demand is also created by foreign companies providing transport and financial services. Demand for premises by government agencies has fallen this year.
“Considering the current state of the economy and the development forecasts, significant changes in the office space segment, as well as in the field of commercial properties in general, are not expected in the near future. Lease costs will still continue to fall, as there are many vacant premises, but the demand will not rapidly increase. Increased activity in the segment of commercial properties could be expected in the spring of next year,” predicts Šīns.
