Newsec Tallinn Office Outlook 2023 H1

Tallinn Office Outlook 2023 H1 Building: Maakri Hub Developer: Fausto Capital

Your Partner in the Baltics Newsec is the solid choice of partner within Advisory and Property Asset Management. With sharp analyses, hard facts and just the right skill set, we’ve got you covered.

Tallinn Office Market  |  Tallinn Office Outlook, 2023 H1 3  Tallinn Office Market MACRO FORECASTS FOR 2023 Tenants have become more reluctant to relocate -1.0% Insights Frozen investment market. Shrinking economy. The office investment market saw very little activity GDP Real GDP fell 0.5% in 2022 amid a sharp increase in in H1 2023. The main reason is a difference in prices, according to Eesti Pank. In 2023 it expects buyers’ and sellers’ price expectations. +9.1% GDP to decline by -1%. Office stock reached a remarkable milestone in HICP Decelerating inflation. H1 2023 Estonia had one of the highest inflation rates in The Tallinn office market reached a significant 6.5% the EU in 2022. The annual rate was 19.4%. In June milestone in H1 2023, with the total office stock 2023, prices increased an annual 9.2% and full-year surpassing 1 million square meters. This reflects the Unemployment inflation is expected to be about 9.1%. city’s growing importance as a business hub and the continuous development of commercial real estate +11.4% Rising interest rates. there. Interest rates are steadily moving upwards. A few Wages more rate hikes are expected in H2 2023 as the During H1, 30,600 sqm of new office space was goal of 2% inflation in the Eurozone has not been delivered to the market. A majority of the new OFFICE MARKET IN 2023 H1 achieved yet. developments were class B buildings. One notable addition was the Mäealuse 2/4 office building, 1,001,100 sqm Jobs stronger than expected. located in Mustamäe close to Taltech, with a total of Job figures have withstood a shrinking economy and roughly 12,000 sqm. Total stock high interest rates unexpectedly well. Unfortunately, the strong job market makes it harder to fight high Looking ahead, in H2 about 27,000 sqm of additional 7.3% inflation. new office space is expected to be brought to the market. There are also some large-scale projects Vacancy Supply reached a magical milestone. under construction which will reach the market in 2 During H1 2023, the supply of office premises years’ time: the Porto Franco, Tule Maja, Golden Gate 101,900 sqm reached 1 million sqm and continues to grow despite and Arter Quarter. The total size of those 4 buildings economic challenges. is roughly 76,000 sqm. Under construction Cautious market. Caution among tenants OFFICE MARKET FORECASTS Given the instability of the economy, tenants are Despite the solid growth of new office supply, the FOR 2023 more cautious about relocating. Lease contracts are market shows signs of slowing, primarily due to taking longer to sign. 1,028,200 sqm Total stock 7%-8% Vacancy 58,000 sqm New supply

4 Tallinn Office Outlook, 2023 H1  |  Tallinn Office Market   economic instability and reduced hiring. These factors are behind a drop in demand for new larger offices as companies adopt a more cautious attitude to expansion. Instead, businesses are more focused on optimising their current spaces to meet evolving needs. Another factor affecting office demand is home offices. Despite many efforts to bring people back to the office, home offices are here to stay. Work-from- home options are one of the factors employees look at in choosing to work for one company or another. Thus, fewer people are regularly present at the office, creating a need for companies to optimise the size of their offices. For all these reasons, demand for new larger office premises has declined. Businesses are exploring alternative work setups and embracing flexible work models that allow employees to work remotely, thereby reducing their office space needs. New tenants are now less likely to rent a new office to get more space for expansion, and more likely to seek a smaller one with a more modern layout. “Start-ups will see down rounds, acquisitions, and bankruptcies. The situation is much more complicated for early-stage start-ups, which have smaller revenues,” said Martin Orgna, the founder of Planet42. Source: Äripäev

Tallinn Office Market  |  Tallinn Office Outlook, 2023 H1 5  Signs of a slowdown can also be seen in vacancy demand for office space in Tallinn. However, as the levels, which have increased slightly. During H1 ECB has acted to fight off high inflation by raising 2023, the average vacancy rate grew from 6.5% to interest rates, start-up investors have shifted their 7.3%. The biggest growth was seen among the class focus to companies’ profitability rather than their A buildings reaching to 6.5% level. At the end of rapid expansion. This change in what investors are H1 class B vacancy was about 7.5%. Vacancy rates seeking combined with lower company valuations clearly point toward a drop in office demand. It is has made it more difficult for start-ups to raise taking longer to fill vacant space and, with office capital to continue their operations. As a result, stock continuing to increase, the vacancy rate is some companies are facing bankruptcy, the result of slowly climbing higher. which is higher vacancy in the office market. Multiple companies have announced staff-reduction Rental rates are relatively stable plans and the impact of that is becoming visible. For years, the Estonian start-up sector fuelled growing Amid high inflation, a shortage of new offices and persistent demand, office rental rates rose sharply “Under these conditions, it is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached,” said Christine Lagarde, the president of the ECB. Source: www.ecb.europa.eu Macro Indicators of Estonia Source: Statistics Estonia, Social Indicators of Estonia Source: Statistics Estonia, F-forecast by Eesti Pank F-forecast by Eesti Pank Percentage Percentage 20 15 15 12 10 9 5 6 0 3 -5 2018 2019 2020 2021 2022 2023F 2024F 0 2018 2019 2020 2021 2022 2023F 2024F 2017 HICP 2017 Gross Wage GDP Unemployment

6 Tallinn Office Outlook, 2023 H1  |  Tallinn Office Market   during 2022 and in early 2023. Lease rates for class during H2 2022 and continued throughout H1 2023. Office Stock Source: Newsec, F-forecast A range from 16.5 to 22.0 EUR/sqm, while for class Investment yields have risen. At the end of H1 2023, B they are 12.5 to 17.5 EUR/sqm. The average rental the average prime office yield was 6%. But there were Thousand, sqm rates has climbed slowly but steadily, meaning less no significant investments in the office segment in 1500 space is available at the lower end of the range. But H1. That is due to differing price expectations among as demand for new office space has declined, rental sellers and buyers. Buyers are looking for properties 1200 rates will likely change little during the rest of this with lower values than before, while sellers still year. want to get the same prices as in previous years. 900 Higher interest rates will eventually mean higher Buyers and sellers live in different worlds capital expenditures, and some investors might be 600 forced to sell their property at a lower price. The investment market started to decline already 300 0 2018 2019 2020 2021 2022 2023F 2017 Existing Stock Additional Stock Absorbtion Source: Newsec, F-forecast Thousand, sqm 80 60 40 “One trend that has emerged recently is that 20 companies create offices on purpose where there are fewer working stations than there are people working 0 in the company. Many people work from home, and the office is more of a meeting place,” said Eeva Metssalu, -20 2018 2019 2020 2021 2022 2023F project manager at Salv. 2017 Q1 Q2 Q3 Q4 Forecast Source: www.occo.ee

Tallinn Office Market  |  Tallinn Office Outlook, 2023 H1 7  Vacancy Rate Source: Newsec, F-forecast “Rising interest rates are what has primarily affected the real estate sector, but buying up Percentage assets by creating an Excel on a zero-interest 15 basis couldn’t be sustainable anyway,” said Risto Vahimets, Head of Transactions at Ellex Raidla. 12 Source: Ellex Raidla 9 6 3 0 2018 2019 2020 2021 2022 2023F 2017 A Class B Class Total Average Rental Rates Source: Newsec EUR/sqm/month 16.5-23.5 16.5-22.0 12.5-17.5 Prime A Class B Class

8 Tallinn Office Outlook, 2023 H1  |  Tallinn Office Market

About Newsec  |  Tallinn Office Outlook, 2023 H1 9  Transforming real estate, and beyond Newsec manages more properties and carries Newsec was founded in 1994 and is today a partner- Finland out more transactions, more lettings and more owned company with some 2 400 co-workers spread valuations than any other firm in Northern Europe. across the seven Nordic and Baltic countries. Newsec Estonia Through this great volume, and the knowledge has approx. EUR 68 billion under management Latvia and depth of our various operations, we acquire and annually signs lease agreements of approx. 1.5 extensive and detailed knowledge of the real estate million square meters, manages transactions of Lithuania market. In turn, we can quickly identify business some EUR 3 billion and does real estate valuations of opportunities that create added value. underlying property worth almost EUR 265 billion. Thanks to large volumes, one of the largest property Our prime market is Northern Europe, but through databases, a local presence combined with in-depth our alliance membership with BNP Paribas Real unders­ tanding of a range of businesses, Newsec Estate, we offer our services on the global market. has a unique expertise of the real estate market in This makes Newsec Northern Europe’s only full northern Europe. service property house, and provides us with a unique ability to forecast the future. Sweden A history of growth Norway Newsec is the result of a unique history of growth, characterised by constant originality of thinking. Denmark The first issue of the comprehensive market analysis, Newsec Property Outlook, was published in 2001. The Group expanded internationally into Finland in 2001, Norway in 2005, the Baltic countries in 2009 and Denmark in 2016. The Norwegian asset and property management companies First Newsec Asset Management and TM Partner were acquired in 2012. In 2013, Newsec acquired Jones Lang LaSalle’s Swedish property management operation. In 2017, Newsec grew with the acquisitions of Norwegian Basale and Danish Datea, further strengthening the position within Property Asset Management.

10 Tallinn Office Outlook, 2023 H1 |  Newsec in the Baltics market reports   Newsec in the Baltics market reports Request any data to suit your needs Thanks to Newsec having one of the most comprehensive data bases for real estate related data in the Nordics and Baltics we are able to offer [email protected] tailormade data deliveries and analyses. We also offer analyses and segment market reports which provide you with a valuable summary of the property market. Newsec Baltic Property Outlook Newsec Property Outlook Newsec Baltic Property Outlook Spring 2023 Autumn 2022 Autumn 2022 Vilnius Office Outlook Kaunas Office Outlook Riga Office Outlook Tallinn Office Outlook 2023 H1 2023 H1 2023 H1 2023 H1 Access Newsec’s market report portal here: www.newsec.lt For more information about data deliveries and analyses customized to your needs contact: [email protected]

Contact and addresses  |  Tallinn Office Outlook, 2023 H1 11  Contact and addresses Lithuania More analytical Office solutions at information at Newsec Estonia: [email protected] Newsec: Head of Sales Vilnius Head of Strategic Analysis, Reimo Simsalu Konstitucijos ave. 21C Newsec Advisory in the Tel: +372 533 05313 Quadrum North, 8th floor Baltics [email protected] LT-08130 Vilnius Mindaugas Kulbokas Lithuania Tel: +370 652 10556 Office FIT-OUT Service Tel: +370 5 252 6444 [email protected] Head of Project Management Darius Balčiūnas Latvia Head of Research and Tel: +370 615 70206 Analytics Group [email protected] [email protected] Ramunė Aškinienė Tel: +370 618 48709 Head of Commercial PM, Riga [email protected] PAM Baltics Vesetas iela 7 Justas Bandza LV-1013 Riga Analyst Tel: +370 655 58989 Latvia Mihkel Mannik [email protected] Tel: +371 6750 84 00 Tel: +372 5344 7317 [email protected] Estonia Newsec in Estonia: [email protected] Country Manager, Tallinn PAM Estonia Viru väljak 2 Janek Hinstov Tallinn 10111 Tel: +372 505 8803 Estonia [email protected] Tel. +372 533 05313