As market analysts put it, an offering of new offices that meet high standards in the Vilnius Old Town would be like a cool breeze on a hot summer day, but many obstacles prevent that breeze from blowing. That is why every new project that appears on the market in the coming several years will be absorbed fast. Moreover, already this year we can expect to feel the effects of some unanticipated factors – like the impact of a hard Brexit on the Vilnius office market.
Finding quality and modernity is a challenge
According to Aurimas Astramskas, head of the real estate consulting firm Solid Real Advisors, the need for quality contemporary offices in the capital's Old Town consistently exceeds supply due both to limited resources and to the growing number of companies that want to locate in the heart of the city.
"The vacancy level for the roughly 24,000 square meters of Class A facilities in the Vilnius Old Town is minimal, so you can fearlessly say demand for modern office space considerably exceeds supply in this part of the city. Further evidence is that, by our forecasts, the overall vacancy level for administrative premises in the Old Town in the first quarter of this year will be quite a bit higher," the expert says.
There is agreement in the market that companies that set up in the Old Town usually stay for a long time. The ample opportunities and benefits that fully urbanized parts of the city offer outweigh possibly lower rental prices on the outskirts of the city.
"Many times the work setting in authentic premises and the chance for employees to enjoy the city center's advantages when they are not working become part of a company's ethos and identify. So when the need arises for the organization to move to more spacious or more technologically advanced premises without giving up those advantages, it's a big challenge. The list of possible options tends to be extremely short," Astramskas notes.
Sandra Jovaišaitė, a partner at the real estate services firm Colliers International Advisers, observes that the development of new modern projects in the Old Town is limited by the number of available land plots and restrictions related to the historic part of the city and heritage requirements.
"After a pause of sorts, over the coming year several new projects are expected on the market in the Vilnius Old Town. Among them, the Paupys district that Darnu Group is building meets key criteria like abundant food and other services near the workplace. It should be attractive for tenants who want exclusive contemporary office space that is in line with market trends and stands out for modern technological solutions. But options for that type of office space in the Old Town will remain limited in the coming years, with more active development in other parts of the city," she says.
Achieving a balance will take time
Specialists say the main reasons for the shortage of supply are a lack of locations suitable for development and a variety of architectural and heritage protection restrictions. The pool of potential investors is also reduced by the relatively bigger investments and longer implementation times that such projects involve.
"Experience shows that investments like this only interest experienced developers with long-term strategic objectives," Solid Real Advisors' Astramskas says of new projects in the Vilnius Old Town. It is also true, he notes, that the vast majority of the space in the Old Town market at present is in historic buildings that have been reconstructed.
"Understandably, due to certain limitations in buildings like that, like for example having a lot of capital walls, often the leased areas can't be used as efficiently as in new build projects. So modern office complexes in the Old Town have essential advantages and can offer a rare mix of authentic surroundings with modern technological, engineering and construction solutions," Astramskas says.
Despite the insistent need for modern offices in the center of Vilnius, market professionals see little hope for balancing demand and supply in the coming years. Mindaugas Kulbokas, the head of the Research and Analysis Group at Newsec, says that even if the supply of modern offices in and around the Vilnius Old Town doubles in the next 3-4 years, it would not be enough to meet the market's needs.
"That's due to both the typical internal factors and also new external ones," Kulbokas says.
Speaking of external factors, experts note that service and technology companies from abroad that are opening offices in the Lithuanian capital are having a growing impact on Vilnius's office market. On top of that, even more oil may be poured on the fire of demand by factors that previously were not envisaged – like the threat of Great Britain exiting the European Union (so-called "Brexit"), already on 29 March, without an agreement on the terms of withdrawal, which is forcing financial technology companies to seek alternative locations to London for their offices. According to the experts, Lithuania is extremely attractive to these companies for a number of reasons.
"Foreign-capital companies are attracted to Lithuania by well-educated employees who speak multiple languages, a supply of office space that meets quality standards, competitive costs, and other factors. A lot of financial technology companies are drawn to Lithuania by the favorable regulatory environment. External factors like Brexit just offer a chance to attract new players to our country," stresses Jovaišaitė from Colliers.
Newsec's Kulbokas is cautious about Brexit's impact, but sees opportunities for the whole country.
"It looks like this situation took a lot of people by surprise. There were companies that prepared for Brexit, but startups, it appears, didn't believe it would happen. Now it seems they believe in the prospects for a 'hard Brexit' and, I'd say, are desperately searching all over Europe for the location that's best for startups legally. In this context, Lithuania's initiatives abroad, presenting the chance to set up in the country and obtain needed licenses quickly, are suddenly making the country very visible and attractive," the analyst notes.
In his view, the needs that financial startups have for their offices are rather similar all over the world.
"A good, hipsterish city-center location with certain benefits that add value: food, life, quality and the possibility of moving in," Kulbokas says, summarizing financial startups' needs. "So the demand pressure on the center of Vilnius will continue to grow, but the supply is sharply limited by a variety of factors, some of which depend very little on developers."
Lack of all-inclusive districts
Analysts agree that what most effectively responds to the needs mix of today's companies are modern multifunctional districts, but creating them in the center of a city is a big challenge.
"Multifunctional solutions in many cases pay off for both the user and the leaser. Everyone dreams of developing a multifunctional property, but some don't have the necessary financial resources, others lack the resolve, and still others lack the expertise. Multifunctionality makes it possible to diversify the risks that real estate sectors pose even more, and business space tenants gain a bigger advantage ensuring a choice for the employees who work there in the future," Kulbokas explains.
According to Astramskas, because of developers' small projects, in old towns you can often see two extremes side by side: a wonderful building that still smells of paint, and beside it one that is falling down and forgotten.
"That's why, for instance, talking about multifunctional solutions in Vilnius, the Paupys project stands out in making it possible to bring together in one large territory in the center of the city an all-embracing conceptually refined product. The main reason there aren't a lot of similar projects is a lack of territories of that size. Another aspect is that there are currently only a few investors operating in Lithuania who potentially have the resources required to develop projects like that," Astramskas says.
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