Ardi Roosimaa: The commercial real estate market will not recover until 2023

The novel coronavirus has taken the world by storm and rewritten the rules in many areas of life and business. The impact on commercial real estate has been big but still not as big as what is happening with residential real estate. Keywords such as increased demand, space shortage and rising prices are the new norm in the commercial real estate market.

Residential market activity increased by 75%

The decrease in tourism and transnational mobility has had a severe impact on the real estate market. At the beginning of the pandemic, a large number of vacant apartments were suddenly put onto real estate portals – in a few months, the number rental apartment offers increased by as much as 75%, which initially reduced prices by 11%. It took over a year for the market to recover – in the autumn of 2021, the rental prices of apartments first rose back to pre-pandemic levels and have now exceeded it. The number of vacant apartments also decreased to the level they were at in 2019.

The demand for rental apartments is currently high and if the prices are right, the apartments will be rented out in a matter of days. Considering that the sales prices of apartments set records every month and the purchase of an apartment is becoming more and more difficult for the average buyer, the rental market for apartments will remain active and the rental prices of apartments will continue to rise this year.

Commercial real estate rental prices did not see a similar drop. The business market is generally more stable, as the impact of each decision on the parties is long-lasting. At the beginning of the pandemic, flexible long-term leases prevented a major collapse. In 2020, the commercial real estate market was primarily on standby, earning it the title of the year of silence among commercial real estate brokers. The market recovered by the spring of 2021.

The shortage of commercial space will ease by 2023

Today, finding commercial space for rent with a suitable size, function and location for the short term is becoming increasingly more challenging. At the moment, we are seeing a temporary deficit in the commercial real estate market, which, in a sense, matches the residential market. The objects on offer have decreased by a third compared the ten-year average. Some of the projects were put on hold last year and now that demand has recovered, they have not been finished yet. In addition, there are significantly fewer new commercial spaces on the market in 2021 and the spaces that had been vacant for a long time in 2020 are already occupied. The situation is expected to get better with major new developments this year and in 2023.

Today's commercial real estate market is best illustrated by its small selection and the scarcity of real estate that meets specific needs, i.e. the existing supply does not cover the demand. Compared to a year ago, the number of commercial real estate ads decreased by a third. This caused the rental prices of vacant spaces to rise again. In addition, over a long period of time, some landlords have the opportunity to increase the rent of existing properties by as much as 8.8% (consumer price index for November). The rise in energy prices and wage pressure will keep inflation above average in 2022, which will provide an opportunity to further increase the price in contracts with no fixed rental price. In other words, in two years, the total increase in rental prices on the existing non-fixed rental price areas may reach 12–14%. In the case of new developments, the rental price of new properties will be affected by a sharp increase of more than 20% in construction prices, the effect of which will be strong in 2022 as well.

In other words, the rent of commercial real estate is increasing due to both the demand and the providers. The pandemic has only amplified and accelerated some of the natural elements of the commercial real estate landscape. If the business environment continues to be in a constantly changing and unpredictable state that requires keeping pace and reacting quickly, being as flexible as possible in terms of commercial properties and buildings will become key – creating universal, multifunctional and economical alternatives, which requires the possibility of providing several alternative solutions for the building during design.

Commercial real estate must be like a chameleon

All this will bring more and more different forms of combined commercial premises to the market in the near future. For example, stock-office and loft-office projects with well-thought-out locations, functionality and concepts also found tenants and buyers in 2020, a year with a stagnant commercial real estate market, as they allow tenants flexibility and greater independence from economic anomalies compared to mono-functional spaces. Due to the success of e-commerce, smaller retail spaces are used for advertising and showrooms, as well as dispensing and assembly spaces for orders. In other words, the warehousing and sales function, often also the office space, are combined for the purpose of cost optimisation and management synergy.

In the future, many shopping centres will likely be turned into entertainment and leisure centres and local businesses will likely be used for advertising and as showrooms. Office buildings will use more and more residential functions. It is possible that some accommodation establishments will offer a variety of flexible office space solutions in addition to conference facilities and entertainment. In this way, the market adapts to the changing circumstances, providing spaces with thoughtful functionality and concepts. The beginning of the year promises to be more active than in the previous two years – the keywords are fast responses, flexibility, multifunctionality and a continuous increase in prices.