VILNIUS - Office building owners are competing for a dwindling base of clients and empty stalls are becoming increasingly apparent in malls as retail sales plummet. But some Lithuanian commercial real estate developers see a light at the end of the tunnel.
Although the economic crisis doesn't show any signs of abating soon, this hasn't deterred the German company ECE Projektmanagement, which manages malls all over Europe, from building a new large shopping mall in Vilnius this year.
"What doesn't kill you makes you stronger," said Laurynas Mituzas, the leasing manager for the new location. "It doesn't change our opinion that Lithuania is an attractive place for high-profile retail developers."
The mall, called the Ozas Gallery, will feature 180 stores and a cinema among other attractions. It plans to open in August. Real estate market analysts say ECE could hardly have picked a worse time to open, citing tough market conditions.
"Talking about large projects, this is not the best time," Saulis Vaugonis, the head of market research division at the Ober Haus realty company, told The Baltic Times. "The GDP is decreasing at this time dramatically, unemployment is increasing. It's very difficult to find potential clients and potential customers."
According to Lithuania's Department of Statistics, retail trade in March was down more than 30 percent from the previous year, which has had a major impact on retail real estate.
Meanwhile, Kestutis Kristinaitis, the president of real estate market research company Matininkai, said vacancies at Lithuanian shopping malls had doubled from last year from 7 percent to 14 percent and mall owners are being forced to cut rent prices to keep struggling stores.
"The synopsis is negative," Kristinaitis told TBT.
Some analysts also point to a glut of shopping malls, saying that too many were built during the high-growth years. Vilnius has seen several new ones recently, such as the enormous Akropolis, which includes an Olympic-sized ice rink, and last year's Panorama, which opened just in time for the economic crisis. But unlike in its Baltic counterparts, in Lithuania over exuberance for shopping behemoths was not just confined to the capital city.
"Siauliai, this town has a very, very big oversupply of shopping centers," Vaugonis said.
"Siauliai is the most oversupplied of shopping centers in Lithuania. Excluding Akropolis, all shopping centers in Siauliai have big problems and rent prices have dropped in the last three months from 15 to 30 percent because of the opening of Akropolis," he said.
IF YOU BUILD IT, THEY WILL COME
Mituzas disagrees that Vilnius has too many shopping malls.
"First of all, I would not agree with this statement that it's oversupplied, if we take the situation in Vilnius," he said. "If we take most of the cities in Central Europe, with the amount of shopping centers there, Vilnius is undersupplied."
During the high-growth years Lithuania's average annual salary rose from about 25 percent to 65 percent of the European Union average and with this increased prosperity came the glittering shopping centers to spend the newfound money.
Mituzas said ECE is taking a long-term approach to its investment in Vilnius as the country works to overcome the crisis and continue its climb to Western European income levels.
"We are building long-term retail infrastructure," Mituzas. "We are looking on the perspective of many years."
Mituzas noted that other European cities will see new shopping malls this year despite the recession and said stalls at Vilnius' newest mall are already fully booked.
"In every larger city in Europe you see the new shopping center coming. If you see a big city in Central Europe, there are 10 shopping centers working and more arriving," he said. "We belong to a company that has built shopping centers for the last 40 years and has built shopping centers in much more competitive markets."
According to the Re&Solution real estate consultancy firm, Ozas Gallery won't face competition from any new shopping centers anywhere else in the country this year.
"Only one large-scale project is currently under construction in Lithuania, the Ozas shopping center in Vilnius, scheduled to be opened by the end of the year," Ricardas Cepas, Re&Solution Group CEO, told TBT. "There were several new projects planned to be commenced in 2009, however, these projects have not been started yet."
Existing office buildings in Lithuania will face a swath of new buildings this year, even though the market already has a glut of vacancies.
"We have 60,000 square meters of free office space in Vilnius in buildings that are open for potential tenants," Vaugonis said. "We have a coming supply of 60,000 or 70,000 square meters of office space in unfinished buildings in Vilnius. It's possible that free, not rented space could reach 100,000 square meters or more."
Vaugonis said this was the case throughout the country, too.
"In Kaunas and Klaipeda they also have very big problems with office space," he said. "They also have at this moment a big vacant space, approximately 20 percent."
The number of empty cubicles is a direct result of the economic crisis. As companies either go bankrupt, cut staff or have employees work from home, they're using less and less office space. The drop in demand has sent the price of rental office space into freefall. In newer buildings it's down 30 percent from Jan. 2008, while in older buildings rent has been halved, according to Ober Haus figures.
A GREEN SOLUTION
Given the range of choices in this buyer's market, office building owners face stiff competition. One developer has decided to go green to stand out in the crowd.
In June the Green Hall Business Centre, a steel and glass tower in downtown Vilnius, will use a combination of central location and sustainable design to attract clients.
"I can't say we're not suffering as a result of this crisis. It's more difficult to compete," Tadas Dovybysas, director of the River Project, which is developing the Green Hall, told TBT.
"We are using the latest green technologies â€¦ and in this day and age it's very important to save on costs. That's one of the key things that make us succeed on the market and not to sacrifice convenience," he said.
Dovybysas said the building will open in June with about 30 percent vacancy and has already had to cut rent prices. However, he noted that it was able to save on construction costs, which have fallen along with real estate prices, and asserted that quality still triumphs in today's market.
"We are the only ones in Lithuania who dared to invest, who dared to invest more now, to have a really high-quality product," Dovybysas said. "You have to work three times harder to get the tenants but it's going quite well."
Most investors, however, consider it too high risk to buy now and are instead waiting for prices to bottom out.
"When prices aren't going to drop more, that's when they're going to buy," Vaugonis said. "At this moment foreign investors are fearful of buying overpriced properties â€¦ and they're afraid of the devaluation of our currency."
With the depth of Lithuania's downturn still unknown, the amount of real estate transactions has come to a standstill.
"No larger-scale commercial property transactions [have been] concluded in 2009 not only in Lithuania, but in all three Baltic countries as well," Cepas said.