During the last two years, Tallinn's real estate market has expanded by nearly 100,000 square meters, or almost 30 percent. Ongoing construction means some 80,000 more square meters are on the way, and this growth rate will continue for the next couple of year at least.
Between 2003 and 2005, the 500,000-square-meter Linstow Center in Tartu and the 25,000-square-meter Viru Center in Tallinn will open their doors.
Tallinn is witnessing a growth of retail areas so rapid that it exceeds the income growth of the population by two to three times and experts say this development is cutting into retail profits. Both salesmen and construction companies worry about overhasty development in an atmosphere in which consumers cannot keep pace.
There are some 0.9 square meters of shopping area per resident in Tallinn, while in Europe the number is roughly two square meters. But while the retail level has not reached its optimal level according to European standards, Tallinners' purchasing power is lower than their European counterparts'.
The most developable space is in the residential district of Lasnamae, but the buying ability and consumer preferences of Lasnamae residents are underdeveloped compared to other districts of Tallinn.
The absence of a clear district center in Lasnamae also inhibits construction of malls and supermarkets, prompting developers to build closer to central Tallinn.
But banks appear unenthusiastic about funding so many new projects.
Another problem is the difficulty the situation presents for smaller retailers, who are finding it hard to compete with the big foreign firms.
It is virtually impossible to find free space to rent in Tallinn's many supermarket complexes and malls, largely because mall owners are picky about to whom they rent. Usually, a 15,000-to 30,000-square meter mall has just 200 square meters of temporarily free space, so they look very closely at the background and the product variety of each potential renter.
This is resulting in leveling off of demands for rental space, but it's hurting the small stores which try to compete on their own against the big guys. Many of the smaller retail chains have sold themselves to bigger competitors.
The size of a retail sale company is getting more and more important and local businesses have not managed to accumulate enough capital and know-how to stand competition with foreign chains.
Tough competition in the retail -area market has forced all the local companies to carry huge research and development expenses, causing many to end last year in red.
Only a powerful foreign chain can afford to work without profit for a long time, and this suggests that the many mergers and acquisitions already seen are not complete yet.
The largest local chains are endangered species – sooner or later the market will be divided between the big foreign retail chains.
In this tough competition, firms that target price-sensitive consumers have the best conditions for a long struggle. Lowering prices is the best instrument for taking over a competitor's clientele. The main growth of demand for additional retails areas will be connected to taking over clientele from the open markets.
At the same time, the open markets will always keep a certain part of loyal customers. Pressure aimed to decrease the retail-area prices will likely appear after the market divides.
A relatively small number of major renters would hold the majority of areas, thus being able to dictate their conditions to landlords. Rent prices will be down due to inflation because landlords will not be able to raise the prices by their will.