Still waiting for Latvia's office rental boom

Despite Latvia's relatively robust economy and increasing foreign investment, there is still little demand for high-quality office space for rent.

The total stock of so-called "class A" office space in Riga is just 15,127 square meters. High vacancy rates in existing buildings and a low return on investments discourages further construction, according to market observers.

Nearly half of the space is in Valdemara Centrs, a class A building constructed in 1993, which is a glaring example of a lack of market demand. It has been heralded as the most modern office building in Riga.

"Our safety standards are very high," said general manager Mara Liepina. "When the building was built safety standards from Sweden and Latvia were used.

"We have our own security personnel and an emergency power generator. It is also possible for our clients to custom design their office space."

In spite of all the features, the building's 7,300 square meters of office space stands about half empty.

"There is some demand for class A office space in Latvia, but it's not that great," she said. "Local companies see it as more prestigious to own their office space.

"With foreign companies it is different. The foreigners come and look, and they know what they want for their money."

While Riga does not have an abundance of class A office space, there is plenty of class B office space available.

The difference, said Girts Grinbergs of the real estate firm Ober-Haus, is that class A office space is located in a new building while class B space is normally renovated.

"The difference is that with the A class offices you get an office which is built as a modern office," he said. "The B class offices could be located in a building which was first built to serve other purposes.

"I don't think companies in Latvia are looking so much for class A office space when there is so little difference between class A and class B."

But Grinbergs believes that demand will increase when Latvia joins the European Union and NATO, and foreign companies allocate more resources here.

Although the market is sluggish now, firms are still planning projects with membership in the EU as the main motivation.

"The demand will not be immediate, but it will increase gradually," said Liepina.

The real estate firm Spire Baltic constructed a class A building in Riga last year and it sat vacant for almost a year, until it recently closed a deal with its current tenant Aizkraukles Banka.

Spire Baltic manager Janis Vanags reiterated the lack of demand for high-quality office space and said his company would likely avoid building more at least for now.

"It will not be a problem to find somebody to invest in this type of office buildings if the demand goes up," he said.

The real estate firm Felix Holding operates a 6,000-square-meter business center close to the heart of Riga. About 55 percent is occupied.

"The demand was active till 1999, then it declined, and we can see that from the beginning of 2002 the demand is growing again due to the growth of Eastern European economics," said Felix Holding President Eriks Igaunis.

Igaunis believes that Riga has so much class A space available because companies offering it are not flexible enough on rental rates.

Prices currently range from $15 to $29 per square meter per month.

"If we look at today's market, there is a risk that there will not be enough class A office space," said Igaunis "But judging from the activity of clients' demand and looking ahead to Latvia entering the EU, we may conclude that the business has a future, since the big corporations are looking only for class A offices."