How we each perceive telework is influenced by our individual circumstances, both at home and in the office. Over the last year, we have seen “pandemic work” rather than “teleworking”, as many workers still have to support children in school in addition to their work. With the opening of schools, teleworking can become even more attractive, but much will depend on how easily visiting the office fits into day-to-day logistics.
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It is likely that some employees will continue to work remotely after the pandemic, but the model where employees will work a few days a week from home will dominate, which will reduce the required office space. For example, if a company currently rents 1000 sqm in a Class B office for 9 EUR / sqm, in the future it may lease 500 sqm in a BREEAM or LEED certified Class A office for 15 EUR / sqm. As a result, the company will not only have lower costs, but a significant benefit for employees – certification of buildings means a certain quality standard, which focuses on air quality, employee well-being and resource consumption, which reduces utility costs. However, even this is not so simple and will require significant planning from both the company and the employees. If all employees work remotely on Mondays and Fridays, but the rest of the days are in person, such a model will not make it possible to reduce the area of existing offices.
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This segment is likely to see strong pressure from tenants on lease terms, both in terms of flexibility in terms of leased space and lease terms, as well as an increase in tenants’ demands for office quality and sustainability.
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The warehousing segment has survived the pandemic best, as the volume of goods delivered has increased significantly due to the breakthrough of e-commerce. At the same time, the high demands of buyers to ensure the speed of delivery of goods pose a significant challenge to corporate logistics chains and additional demand for warehouse space.
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This has also been noticed by investors, and demand for logistics assets has contributed to rising prices in this segment, as evidenced by declining profitability or investor returns – for the first time in history, yields on Europe’s best logistics properties fell below the retail segment in 2020. Historically, the office segment has accounted for around 40% of European real estate investor portfolios, while logistics properties have accounted for only 10-15%, but given current trends, it is safe to say that capital flows will be redistributed in favor of the logistics segment.
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The situation in the Baltics is similar – the return on logistics properties is even much higher than in other European markets and makes the Baltics an attractive investment destination. At the same time, it should be taken into account that the Baltics are a small market and no large logistics centers will be established here, as in Germany or Poland. We are more dominated by logistics centers, which are the last in the entire supply chain, so property prices will still depend on the location of the property and the composition of tenants in the specific property.
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Investors have access to the financial resources they need to invest, and while returns in the real estate segment in the Baltics will be higher than in Scandinavia and Central Europe, investors will try to take advantage of these opportunities. Currently, the biggest problem of the real estate market in Latvia is the lack of new and high-quality assets, which is also confirmed by the largest investment transactions in 2020, in which already well-known names appear. The development of new projects is more risky, but in the future it may make the Latvian and Baltic markets even more attractive to new foreign investors. Also, with the emergence of new assets, the pressure of rents on older properties will increase, forcing them to invest in maintaining their competitiveness.
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Real estate in the EU is responsible for around 36% of total CO2 emissions, so significant attention will be paid by both investors and banks and tenants to the energy efficiency of buildings and property certification. Many pieces of legislation at European level are still being drafted, but the direction in which we are heading is clear. According to the World Bank, in order to achieve the set climate goals, the real estate sector must reduce C02 emissions by 36% by 2030. We are already seeing changes in Latvian legislation and increasing energy efficiency requirements. A higher quality product also means higher construction costs, so it will also affect the price of the final product, but at the same time savings are achieved from reduced utility costs.
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