Zenith Commercial Real Estate Trends 2025

Recently, several investors, financiers, and various media outlets have approached us with questions about the outlook for the Baltic commercial real estate market in 2025. Additionally, it has been observed that both Summus Capital and several other investors who have been active in the Baltics are now looking toward Poland. This has led to repeated inquiries about the reasons and motivations behind this shift. I have prepared a summary of these questions and topics that we have discussed internally within the Zenith team. These are not specific investment recommendations but may serve as additional input for strategic decisions.

What will be the biggest challenges for real estate owners and developers of commercial properties in the Baltics in 2025? Where should their focus lie?

In 2025, commercial property owners in the Baltics will face several significant challenges. While there is some optimism considering a declining interest rate environment, economic uncertainty remains high, and the demand for commercial space will continue to be low. Changing consumer behaviour, e-commerce, and remote work are reshaping the demand for office and retail spaces, and owners and developers must  consider these trends. Increasing ESG requirements and rising construction costs are no longer just challenges but a new reality. Inflation and the volatility of energy costs also persist, creating additional pressure on commercial property owners, especially with rising vacancy rates.

Priorities:

• Flexible and sustainable solutions: Focusing on certified, energy-efficient spaces and “built-to-suit” projects can help meet tenant demands and market conditions.
• Mixed-use projects: Combining residential and commercial spaces with public services creates demand and adds value to properties.
• Adaptability: As companies’ space requirements constantly evolve, developers should find technical solutions to allow spaces to be shared and modified at minimal cost.

What is the outlook for commercial property tenants  in the Baltics in 2025?

In 2025, tenants will prefer adaptable and energy-efficient spaces that meet hybrid work and ESG expectations. The need to optimize costs will drive companies toward smaller spaces. Efficiency in every aspect—both in base rent and operating expenses—will be crucial for decision-making. Office tenants will likely to have increasing opportunities to demand significant contributions from property owners toward regular interior finishing costs, like what is currently common in retail spaces. Retail is expected to follow the trends observed in the stock-office sector, such as consolidation into specialized centers based on specific fields or product groups (e.g., outlet stores and retail parks).

Key trends:

• Smart and value-added solutions: Smart building technologies, automated energy management, and workplace wellbeing features that support employee health—such as air and light quality, acoustics, noise levels, and movement opportunities—will become increasingly important.
• Community focus: There will be growing demand for the “15-minute city” concept, where tenants seek access to most services, including workplaces, within proximity.
• Lease durations: Average lease terms will shorten as tenants feel they hold more negotiation power, leading to fewer long-term binding agreements.

A shift from a tenant-centric to an owner-centric market: under what conditions and when could this happen?

A shift from a tenant-centric to an owner-centric market could only occur in narrow niche segments or under conditions of significant economic growth, which are not anticipated soon. Tenants’ business activities do not demonstrate growth that would support expansion or intense competition for new spaces. High vacancy rates limit rent increases and keep the market tenant-oriented. The need for ESG-compliant properties, especially among international companies, may increase demand for new developments in certain segments.

The Baltic commercial real estate market is small enough to respond quickly but also prone to overreaction. In the case of significant economic improvement, this could lead to new oversupply in certain sectors. Therefore, the goal should not be to shift the market from tenant-centric to owner-centric but rather to seek a reasonable balance.

Several funds, including Summus Capital, recently announced acquisitions in Poland. What does this development mean for the commercial real estate market in the Baltics?  Should Baltic investors now rename their home market to include Poland?

To some extent, itprimarily  concerns institutional investors and large-scale transactions. Whereas market players were previously active within the Baltics, I know  at least four or five investors and funds that are now actively exploring opportunities in Poland and have already closed deals.  One of these recent transactions, which concluded successfully in Warsaw, is Europe’s largest office-building deal this year, where the buyer was earlier pretty active in the Baltics.

Capital that can no longer find suitable investments in the Baltics will affect the local market. For example, in a relatively good year, the total volume of commercial real estate transactions in the Baltics is around €1 billion, which is likely to fall below that this year. If Poland offers more attractive opportunities, existing market players will have less free capital to allocate to the Baltics.

Yes, we have seen some good deals in the Baltics involving wealthy private individuals, either independently or as part of investment clubs. However, I doubt that these private investors could fully replace the earlier market participants now entering new markets.

From the perspective of the Baltic commercial real estate market, the paradox is that entering new markets also positively impacts these investors’ Baltic portfolios. Many funds and investors have portfolios nearly as large as or equal to the total annual transaction volume in the Baltics. To increase the liquidity of their portfolio, they must find alternatives. For example, this year, approximately €4.5 billion worth of commercial real estate transactions are expected in Poland, which is only half the volume of peak years. Therefore, entering the Polish market with a volume that would be significant for the Baltics does not substantially impact the Polish market but does increase the liquidity of the investor’s existing portfolio. Additionally, Poland’s current yields, which are still higher than those in the Baltics, also positively impact the investor’s portfolio.

What is the outlook for the office market 2025 in the Baltics? What significant developments can be expected?  When, if ever, might the price expectations of major investors and property owners align?

Indeed, the best projects will remain successful and sustainable, but given the limited demand, I would not place high bets on the office market’s prospects for 2025. We also see this reflected in our portfolio, where previously there was even a waiting list for vacant spaces in ourA-class buildings. But now, existing tenants prefer to downsize their premises, and there are no entirely newcomers. Changes are happening only in the space requirements of existing companies, aligning with hybrid offices and energy efficiency.

By comparison, in Poland, during good times, 120–150 entirely new companies would enter the market each year, with space requirements starting at several thousand square meters, and some transactions even reaching 20,000–30,000 m². Even now, considering recent crises, over sixty companies have opened their service centres and office spaces in Poland each year.

The interests of the major investors and asset owners in the Baltics could coincide if interest rates fall by a further third or  if not, the owners adjust their yield expectations in each asset class by the same magnitude as interest rates are expected to fall. While the former may become a reality, I would not be so optimistic about the latter. This is due to the previously mentioned lack of liquidity, which means that unless someone is highly motivated or compelled to sell, the owners should essentially have to transact with themselves.

Summary

Although the Baltic commercial real estate market developments seem uncertain at first glance, much can be done to improve your portfolio, considering new trends that are here to stay. The transaction market may revive somewhat, but this will not solve the liquidity issue in major investors’ portfolios. If you plan to grow, you should not wait for opportunistic deals in the Baltics but find more liquid markets offering attractive returns.