OFFICE as a Real Estate Segment
Gabriele Gegeviciute
Investment Project Manager of Real Estate at Capitalica AM
Local companies are significant components that drive any city’s economy and generate employment. When we say the “Company”, we understand that as people, their know-how and management systems to maintain the development of the business activity.
And many companies need offices. But those days when the office was used as a place for employees to perform their duties are in the past. Now, when we say “office”, we assume it is a place to connect people and systems, to share their experiences, to collaborate, and to generate ideas.
For many companies, the office became one of the most important criteria for success and image. But not only. The office also became a tool for motivating and inspiring people. Nowadays here you can find your own baristas, massage and relaxation rooms, private kitchens, catering facilities with your own chefs, fitness centers, lounges with table games, and even beauty parlors. The person stands at the center of the office philosophy, while the space only serves his/her well-being needs.
Experienced tenants, when studying offers on the market from different business centers, are primarily interested in which category the object belongs to. The market is always striving for classification and order - and office real estate is no exception. To simplify the assessment of office space, a general classification has been developed that takes into account almost all characteristics of real estate. According to this typology, all objects are divided into classes A, B, and C.
Main Classification Attributes for Office Buildings
Picture above: Office complex Verde in Riga
To begin with, let's figure out what principal criteria we will evaluate for office buildings:
The table below gives a more detailed description of the different office building types into 3 main categories. There are no strict classification rules - rather based on general market understanding. But it allows to group of the key building and management features under a similar methodology. Because of that, it also should be noted that the distinctions between categories A, B, or C can be quite blurry.
Picture above: Space solution in the office lobby
Class A
So let’s look at how those classifications are defined for each building class.
A Class Office Buildings
Picture above: Office complex Verde in Riga
A Class buildings represent the benchmark for office space and are cream de la cream in the market. They are assigned to that office real estate, which has an outstanding location and great transport accessibility. Usually, we are talking about business centers in modern well-maintained buildings and using energy-efficient technologies, having high-quality finishes and a rational layout. Mandatory conditions for belonging to this class are the presence of all possible communications, developed infrastructure, security, parking, and recreation areas. This is the most prestigious and expensive option.
Flexibility in office space planning is one of the key benefits for lessees. They can expect to tailor office areas according to their needs by creating different open-plan layouts and separated offices with a variating number of workstations.
A Class buildings are managed by professional real estate firms like CBRE, Colliers, or Newsec - to name a few. They ensure the building itself and its services are kept in top condition for tenants. It goes with 24/7 security, receptionist services, maintenance and cleaning, care of the surrounding area, and emergency management.
Nowadays you expect them all to fit with sustainability and wellbeing certificates like LEED (matching the green building status), BREEAM (adoption of top quality methods in building planning and sustainability), and nZEB (nearly Zero Energy Building).
Examples of A Class buildings are Quadrum, Green Hall in Vilnius, Verde in Riga and Skyon in Tallinn.
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B Class Office Buildings
Picture above: Technopolis Ülemiste Office Complex in Tallinn
If you are offered vacant B Class space for rent, then these should be premises located in a new or qualitatively reconstructed building with convenient access and good transport accessibility. These are objects that in many respects correspond to the A Class, but differ in a more modest location and a smaller range of available services. Somewhat inferior in terms of level to A Class buildings, they belong to economy class offices, and are characterized by a lower rental rate. Therefore B Class office is considered optimal in terms of price and quality ratio.
Designed to accommodate the main staff of the company, B Class offices are classified as working, not representative premises. Usually, they are chosen by reputable banks, representative offices of international companies, public companies, and the media.
B Class offices can be located in reconstructed but modern buildings or modernized from former A Class business centers that have been in operation for more than 5 years.
B Class buildings have the same parameters as class A, but the range of services may be narrower. Thus, B Class offices are characterized by the presence of ground parking, often there is no automated building management system. Buildings with class B offices are subject to less stringent requirements for the quality of interior decoration, the level of engineering, and ventilation systems.
Examples of B Class buildings are Duetto in Vilnius, Vastint Business Garden in Riga and Technopolis Tallinn.
C Class Office Buildings
Picture above: MCity Ulbrokas Office Building in Riga
C Class offices are in many ways similar to class B, but because they do not meet at least one or two criteria mentioned in the above table, they lose quality. C Class premises are located in non-modernized buildings. They have an outdated layout and modest finishes.
Often, C Class offices are located in buildings that were not originally conceived as business spaces. Not always, but premises might be sited far from transport interchanges and have an inconvenient entrance. Among the other negative moments are poorly developed infrastructure and corridor-office layout. Parking facilities might vary from limited and inconvenient to a vast area.
Buildings deteriorate in city suburbs or not too prestigious surroundings. As it has an outdated facade and interior, cosmetic repairs of the facade can be carried out, while interior repair works are left for tenants to decide.
A structure of this type of premises often lacks modern air conditioning systems, as well as a number of other engineering components. However, they have a generally accepted IT and communication infrastructure repurposed for office space and have been in operation for an extended period. A limited set of office-class services include central heating, a communication network with the internet, a conventional ventilation system, security, and the presence of a canteen or cafe.
As a result, C Class buildings have the lowest rental rates but the highest utility expenses per square meter, shorter terms, and often have more vacancies and higher tenant turnover than B Class or A Class.
Office tenants are usually small companies and organizations. C Class is often a good option for new or young businesses or those with limited or reduced resources.
Examples of C Class buildings are Business Center Laisvės pr. 125 or Vingis in Vilnius, MCITY ULBROKAS in Riga and Flora Maja in Tallinn.
Let’s talk about money…
Picture above: The chilling work environment on the open office terrace in Riga
If you are a company employee, you might miss the office for good reasons. After the pandemic period, when you had to share limited home space with family and pets, the motivation to return to an ergonomic, multi-service, and modern office can be extremely high. Especially think about A Class buildings. You can also save time by using the benefits of office complex infrastructure and save home costs for electricity, heating, and water (don’t underestimate the rising utility bills in today’s economic environment).
If you are a tenant company, you usually strive for maximum team engagement and efficient rent costs management. And that’s where the A Class buildings will shine. The office rent is higher here, but you can save on efficient floor usage, good net effective rent price, and lower utility costs.
Baltic markets wrap-up
Picture above: Tallinn cityscape
All 3 office building classes are present in Baltic countries, though situation with A and B varies in each of them.
Based on 2022 Q1 data, most of the A Class office space was in Vilnius, it contains almost 400 thous. sq.m. Tallinn is lagging behind with around 300 thous. sq.m. and Riga has slightly more than 100 thous. sq.m.
Due to the same reason, the top list sequence in B Class is the opposite. Riga is the leader in B Class with over 700 thous. sq.m. office space. Tallinn is following with around 600 sq.m. and Vilnius completes the list with 550 thous. sq.m.
There is a clear trend among tenant companies to upgrade for higher class offices in all Baltic capitals. Developers are responding to the demand - 22 new office projects are on the pipeline until the end of 2023:
While A Class office space supply can’t catch up with demand, the vacancy rate in A Class is lower compared to B Class.
Important to note, sustainability certifications are shaping the market. Having BREEAM, LEED, WELL ratings is no longer the nice-to-have attribute for both, A and B Class buildings. Tenants increasingly raise their expectations and demand for workspace quality and well-being factors for their employees.
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2yI am increasingly disillusioned seeing ESG reduced to ‘ratings and certifications’. This paper pushing explains much of peoples skepticism about this concept. In times when utility costs are a clear distinguisher between different types of office qualities, developers attitude in this field become crucial to their success.