Ober-Haus presented its annual real estate market report 2023 on the Baltic States capitals, confirming slow, but steady growth in Tallinn, Riga, and Vilnius. The overview covers office, commercial, storage and residential markets, as well as plots of land in each of the capital cities. Legal notes for the report were prepared by our Baltic-wide team of real estate legal experts.
Slow and steady growth
The Baltic capitals experienced various geopolitical challenges presented by being located between Russia and Belarus, along with record high inflation in the previous year. Despite bleak predictions for 2022, the worst forecasts never materialised. “We have to accept that in 2023 we will not see any record-breaking prices or exceptional activity in both the housing and commercial property markets. It seems that we have reached a period where the market will move forward, just at a slower pace,” says Ober-Haus Real Estate Advisors CEO Tarmo Kase.
All three countries experienced record-high inflation provided a significant amount of bilateral aid to Ukraine and received a substantial number of refugees. Throughout, each country managed to remain strong with relatively low unemployment and wage growth hovering at around 10%. Meanwhile, the whole Eurozone experienced the first interest rate hike in 11 years, which directly impacts every aspect of the real estate market.
Baltic outlook
Despite continuous growth predictions, the report highlights that there is no recovery boom expected in 2023 when it comes to new development. “It is likely that real estate market participants will remain cautious, try to avoid opportunistic investments and take longer to make decisions. Such prevailing sentiments may lead to a decline in construction volumes and a certain general sluggishness of market activity,” says Kase.
When it comes to property prices it’s a different story. “Over the course of the year, this may also lead to negative changes in the prices for some property segments,” continued Kase. The report has an overall positive outlook for the future, as low household debt and population growth insulate the Baltic capitals against larger negative consequences.
Lithuanian overview
Despite a decline to 1.9% growth in GDP in 2022 (compared to 4.8% in 2021), foreign direct investment totaled EUR 29.7 billion in the same year. This is a 9.7% increase from 2021. The amount of Lithuanian goods exports also increased by 28.1% in 2022, yet only 17% of consumers believed that their economic situation would improve in December of last year.
While the country is a prime example of cautiousness both on the part of investors and consumers, we have yet to see if a predicted recession materialises in 2023. Commercial property investment fell by 12% 2022, however the number is one of the best annual results in the Lithuanian history.
In 2022 ten new projects brought 75,000 sqm of office space into the market, growing the total by 8%. 2023 will bring around 90,000 sqm more space on the heels of the record-high uptake during 2021-2022. The public sector is becoming an important player in the rental market, however private companies are also creating supply for themselves by investing in new projects.
Retail trade increased by 17.8% in 2022, however this drops to just 0.8% if inflation is taken into account. Despite the post-pandemic recovery, landlords for retail spaces were unable to increase rents to cover significantly increased maintenance costs. Warehousing development skyrocketed during 2022 as transport-related activities reached record highs. Seven new projects completed 76% more square metres than in 2021.
In the housing market record-high prices persisted through the end of 2022. Prices increased by 22%, reaching an all-time high. Prices stabilised by the end of the year, and the market began to cool in 2023. The report predicts protracted stagnation as consumers remain cautious amidst geopolitical and economic challenges. Predictions range from a 5% decrease in apartment prices to a slight increase over the year. On the other hand, prices for plots of land were remarkably cooler in 2021 after a hot year in 2021.
Latvian overview
After an initially positive outlook after the Covid-19 pandemic, the Bank of Latvia has now turned the tables and forecasts a shallow, short-term recession. GDP growth predictions for 2022 were adjusted from 4.2% to only 2.1%. A recovery to 4.2% growth in GDP is now only predicted for 2024. The forecast for 2023 is a decrease of 0.3% in GDP growth.
Retail turnover shot up by 22% in 2022, spurred on by a larger workforce, increased incomes, and pandemic savings. However, when considering inflation, real net wages decreased by 12.9%. The unemployment rate is expected to rise slightly in 2023 to 7.8% from 6.9% in 2022 but remain above 7% for the next two years.
Although more businesses were looking for office space in the second half of 2022, only one office space project was completed that year. Vacancies are in decline, and the report signals that office space in Riga will increase by 20% over the next two years to stabilise rent prices. As the hybrid work model continues, companies increasingly prefer smaller, energy-efficient, and functional spaces.
Pandemic safety measures took a real toll on the retail market, whereas inflation and energy costs have had less of a negative impact. The total leasable retail area in Riga increased to 848,200 sqm in 2022. Vacancies increased slightly in the same year, however rent prices remained stable and have not significantly increased. Increased development and energy costs negatively hit the industrial market as well, however this trend is expected to reverse. Clients are looking to rent newer, more energy-efficient spaces.
In the residential market we also saw a throughout 2022. Demand and prices both fell during the second half of the year, however there was an overall apartment price increase of 4.5%. The land market experienced a more significant price decrease, especially for larger plots of land. This was largely due to speculation that housing prices would fall.
Estonian overview
Post-pandemic saving provided a slight cushion amid high inflation, but the economy still shrank by 1.3% in 2022. While energy prices will remain high, tightening monetary policy and government spending will help to diminish inflation. Higher interest rates for loans will reduce overheating in the real estate market, and overall economic growth estimates for 2023 sit at a steady 0.4% for 2023.
2022 saw the completion of five new office projects, along with a few mixed-use spaces. These projects added 50,000 sqm of office space to the market. This trend is expected to continue, as 2023 will see the completion of five larger office buildings, and in 2024 an additional ten projects will be completed. Vacancies hover around 5-8% but are expected to increase with the coming staff layoffs. Rent prices have not changed significantly.
Despite consumption rising in 2021, this trend slowed in 2022 and no large new retail projects were completed in Tallinn in 2022. In the same year there was a 5-20% increase in rent prices. In the industrial market eight new stock-office spaces were created due to a growth in e-commerce. There is great interest in spaces near the city, and rents for warehouses increase as well. The report predicts a continued rise in 2023 due to inflation.
Tallinn apartments experienced a drastic price increase of 22.1% in 2022, setting a new record. This was due to several factors including inflation, low interest rates, and increasing incomes and demand. The rental market experienced similar increases due to the number of refugees from the war in Ukraine. Supply decreased by 50%, while prices increased by 20%. On the other hand, residential land transactions decreased by 70%. Despite this, prices for plots of land increased on average by 50%.
About the authors
Ober-Haus provides all real estate services in Lithuania and the Baltic region. The company opened its first office in Tallinn in 1994. Today, it has 20 representative offices in the major cities of Lithuania, Latvia, and Estonia and over 240 employees. The company provides services based on a comprehensive knowledge of local markets and more than 20 years of experience in the real estate sector. Find the complete report here.
The overview includes information related to taxes, which was drawn up by audit, accounting, and consulting company PricewaterhouseCoopers.
Legal information was prepared by the Sorainen law firm. Authors include Andra Grünberg and Paul Künnap from Estonia; Lelde Laviņa, Jorens Jaunozols, and Annija Straupe from Latvia; and Kęstutis Adamonis, Simonas Šlitas, and Emilė Navickaitė from Lithuania.
