Kaunas office market is rapidly catching up with the capitals of the Baltics
In 2018 Kaunas saw the opening of eight new office buildings, which expanded the area of modern office space by 36,400 sqm. By the end of the year the Kaunas office space area reached a record-breaking 182,000 sqm. Due to the increased supply of offices in Kaunas the percentage of vacant area still grew slightly during the second half of the year and reached 11.9 percent, as reported in the Kaunas Office Outlook of the 4th quarter of the year 2018 published by the international real estate consulting services company Newsec.
"For the second year in a row the Kaunas office space market is expanding with numerous new projects, while the growing area of vacant office space creates highly flexible options for lessees. A relatively high number of vacant spaces, if compared to the main cities of neighbouring countries, allows more choice than from one project. These trends in Kaunas are likely to persist as new objects are underway and are to be opened in 2019. Their collective area shall break all records and exceed 60,000 sqm," said Newsec analyst Gintaras Toločka.
The expert explained that growing supply of office space is not an alarming trend, because more than a third of business centres that were planned to be opened this year had already been leased: forward contracts are becoming increasingly popular in Kaunas.
"At the moment the Kaunas office space market experiences intense development: the supply of new offices in this city is to increase rapidly in the future. Several years ago, this market segment in Kaunas was in stagnation with only individual projects for building business centres underway, while A class offices were non-existent. Now, rapidly increasing supply of new high-quality area is a sign of the maturing market," Newsec analyst explained.
Supply grows, lease price remains stable
The lion share of modern office space in Kaunas consists of B class offices encompassing as much as 94 percent of the entire office space area, while A class offices are clustered in the remaining 6 percent represented by A class office buildings Arka and Nemuno 3, which opened in 2018. Successfully and fully leased A class office buildings encouraged further development of this type of offices in the city: this year the developers plan to open two more A class business centres BLC2 and Magnum, the total area of which shall be 34 thousand square meters. These two new objects shall slightly correct relative ratio of Kaunas office space area and increase the area of A class offices to 20 percent in turn reducing the area of B class offices to 80 percent.
"The quality of real estate objects in Kaunas is clearly improving, however, it still does not reflect on lease prices. In 2018 the lease prices of new business centres remained stable and shall remain as such in the near future. Fierce competition among real estate developers prevents owners of the new business centres from increasing lease prices, however, owners of the older office buildings feel pressured to lower their prices, especially for spaces in remote areas," remarked Toločka.
Opportunity to attract small lessees
The Newsec analyst has emphasised that with the growing supply of modern office space the owners of older office buildings in Kaunas should not only drop their lease prices, but also consider more flexible terms for the lessees, for instance, offer shorter lease periods or more options in terms of office space sizes. These options are not available for the developers of modern office buildings as their spaces are designed for large enterprises, which in a way is disappointing to smaller lessees.
"New real estate objects in Kaunas, as in Vilnius, target the largest local market players and major foreign investors, therefore, newly opened office spaces usually have nothing to offer to smaller enterprises. This situation may be beneficial to the owners of older office buildings who, by targeting smaller lessees, may remain in the market," Toločka said.
Market dominated by lessees
According to the Newsec analyst, a situation regarding Kaunas office space is highly favourable to lessees and they devote more time to selecting their new office.
"The lessees can afford to be choosy: for the first time in the Kaunas office space market the lessees have a real opportunity to choose from several different class office projects. It has been observed that apart form the price, the lessees now focus on other factors, such as building quality, design, prestige, location, other lessees, etc," the expert said.
He also added that the choice of a building also depends on its international certification. According to him, such assessments guarantee high quality working, eco-friendly and energy-efficient environment, and the lessees often tend to value comfort, professional management and quality. Along with fierce competition, these factors trigger the owners’ interest in the requirements for international certification.