The future of commercial real estate in Latvia: stagnation or strategic opportunity

The commercial property market is one of the strongest indicators of a country’s economic health. Although the office market in Latvia is developing at a slower pace than in the other Baltic countries, the sector is undergoing a significant transformation — shaped by pandemic-related challenges and the shifts in the working environment. Demand for modern, energy-efficient office space continues to grow, yet vacancy rates remain high. Arnolds Romeiko, Asset Manager at EfTEN Capital, outlines the current trends and what to expect in the future of Latvia’s commercial real estate sector.

Development Trends in the Baltics

Compared to Lithuania and Estonia, Latvia’s market for new commercial real estate projects has remained relatively underdeveloped since the 2008 financial crisis — a turning point that made developers in Latvia more risk-averse. In contrast, Estonian and Lithuanian developers have been more willing to take risks, often pursuing speculative projects and relying on future tenants rather than pre-signed contracts.

"Lithuania benefits from its proximity to Poland and Germany, offering greater opportunities to attract international tenants — a factor that contributes to higher yields and stronger development potential. Estonia, on the other hand, gains from its closeness to Scandinavia, which attracts Scandinavian companies to lease and even develop office buildings — particularly in Estonia’s major cities.

Latvia is geographically positioned between these two countries and, in theory, could benefit from the best of both worlds. However, we have not yet fully capitalised on this strategic advantage," says Arnolds Romeiko, Asset Manager at EfTEN Capital.

Investment trends    
Across the Baltics, real estate investment returns are relatively consistent across major asset classes — including office buildings, logistics centres, and shopping centres. However, a clearer divergence appears when compared to investments in Polish or Scandinavian markets, where investors perceive lower risk. This is largely attributed to factors such as population growth, more advanced economies, better job accessibility, and proximity to larger consumer markets.

As a result, investment yields in Latvia remain higher — around 6–7% — compared to approximately 4% in more mature Western European markets, reflecting the higher perceived risk.

Currently, several real estate investment structures are available in Latvia, ranging from fixed-income bonds to open-ended funds with no defined maturity. For long-term investors, index-style vehicles are also emerging, offering regular dividend payouts alongside the potential for capital appreciation over time.

Smaller, but more modern facilities    
The office market has undergone significant change in the wake of the COVID-19 pandemic, particularly due to shifting work habits and restrictions. Hybrid working has become the norm, with companies now designing spaces with lower capacity but higher quality standards to motivate employees to return to the office and improve employee productivity. This shift highlights two key trends. First, employers are incentivising office attendance by relocating to newer, more modern, energy-efficient spaces that are often closer to where employees live. Second, with hybrid work limiting the number of people in the office at any given time, the need for large office spaces has diminished. As a result, many companies are moving out of buildings with rigid layouts and into newer premises that offer more flexible configurations.

Taking these factors into account, along with the recent wave of high-end office projects, the supply of vacant office space in Riga is now notably extensive. According to Colliers, by the end of 2024, vacancy in Riga will reach 120,000 sqm, with an average vacancy of 18-20% in Class A and 13-15% in Class B. In addition, there are approximately 75,000 sqm currently under construction, half of which will be completed this year. 

"Last year demonstrated that the market could absorb around 50,000 sqm annually. However, this year may prove more challenging, as many tenants have already relocated to new premises. It is likely that this type of supply will take several years to fill, but it is also an opportunity for strategic investors with a long-term view of the market, as demand for modern office space remains very strong. There are still many companies located in the historic centre of Riga, in century-old apartment buildings that do not meet modern standards. So, the potential to absorb modern buildings is still there," says Romeiko.     

About EfTEN Capital    
EfTEN Capital is a leading real estate fund management company in the Baltic region, focusing on commercial real estate investments and offering comprehensive asset management services. With a solid track record in diversified property portfolio management, the company aims to provide investors with attractive returns while focusing on responsible investment practices. 

"EfTEN Capital's Latvian portfolio includes: Domina Shopping shopping centre, office complex Jaunā Teika, office buildings Tērbatas Biznesa Centrs, Duntes biroji and Blaumaņa Centrs, headquarters of the Latvian national airline airBaltic, logistics centres "EfTEN Logistics Berģi", "EfTEN Logistics Piepilsētas", "EfTEN Logistics Ķekava" and "DSV logistics centre", business and industrial complex "Tehnoloģiskais parks Jūrkalne" and shopping centre "RAF Centrs" in Jelgava. 

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