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In the office sector, structural factors are exacerbating the downturn. Sluggish economic growth has weakened companies’ operating conditions, which is also reflected in the demand for office space. Combined with hybrid work, current market conditions, including a weak economy and cost pressures on companies, are further delaying the recovery of the office market.
The office market in the Helsinki Metropolitan Area has been characterised by polarisation since the financial crisis, which is increasingly reflected in the widening differences in office properties’ quality and risk classes. Users have stricter quality requirements for premises, which is manifested in increased rents for the most desired properties and areas in the property market, while in other places, underutilisation is increasing, and finding tenants for premises is more challenging.
“The volume of office transactions is expected to remain modest in 2024, as investors and lenders remain cautious about office investments. A positive development in the office market has been the slowing growth of underutilisation in key office areas in the Helsinki Metropolitan Area. However, underutilisation rates are still at a higher level than before the pandemic, which poses a challenge for office investors. In terms of office space demand, economic growth is important to support employment among knowledge workers, for example,” says Retta’s real estate analyst Anton Takkavuori .
The proportion of teleworkers has decreased since the peak years of the Covid pandemic, but remains higher than before the pandemic. In 2023, one in three employees worked remotely in Finland, according to Statistics Finland.
The International Labour Force Survey shows that Finland was the top country in terms of the regularity of teleworking in 2023. On the other hand, when measuring how many employed people work from home at least occasionally, many EU countries are still ahead of Finland (See statistics here: Statistics | Eurostat (europa.eu).
Even in light of the statistics, it is clear that companies are still trying to get their employees back to the office. This is one reason companies are looking for high-quality spaces in desired locations. This partly explains why there is a higher level of underutilisation outside key locations and in lower-quality office properties.
Determination of rents for office properties is greatly affected by the quality and location of the space, and especially the services provided by the office. Environmental and social factors are also increasingly important for tenants and investors. The demand for office facilities strongly reflects the changes in working methods accelerated by the Covid pandemic.
At the end of 24Q2, the underutilisation rate for the main office areas in the Helsinki Metropolitan Area was 14.7%, up by about 0.2 percentage points from the previous quarter. Despite the high underutilisation rate, a large quantity of office space will be completed for the prime part market during the year. The level of new office construction in the Helsinki Metropolitan Area has continued to be quite high in recent years. Between 2013 and 2023, an average of 71,000 square metres of new office space was completed annually, according to KTI. Companies’ stricter requirements are one of the factors explaining the continued high level of new construction.
The volume of commercial space construction remained high during the zero-interest period of 2015–2022. Now, according to the RAKSU construction trends group led by the Ministry of Finance, continued uncertainty in the economic outlook, high interest rates and continued high bidding prices are reflected in the moderate short-term growth of commercial premises construction.
During the period of zero interest rates, significantly more capital flowed into office properties than is currently the case. Now, in the new market situation, liquidity has been very low in the investment market for offices, with transactions at a remarkably low level. The share of office property deals was historically low in 24H1, accounting for only 6% of the total volume. The fall in interest rates and increased access to finance are expected to boost investor confidence, gradually stimulating the office investment market.
“Because of the increased competition, the owners of office premises are striving to make their premises more competitive and rentable. The expected easing of interest rates and improved access to finance are expected to increase investor interest, especially in prime office buildings in the best submarkets. However, new market conditions after the adjustment will create opportunities and potential for investors who are ready to gain a view of the market,” Takkavuori summarises.
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Anton TakkavuoriKiinteistöanalyytikkoRetta Managementanton.takkavuori@retta.fiPuh. 0400 853 528
* The figures are based on the publications and materials of KTI, Ilmarinen, the Bank of Finland, the Helsinki Research Forum and Statistics Finland
