The further development and growth of industry and logistics across the EU will play a major role in determining our overall economic development course.
What should you expect across the Baltics states and within Lithuania in particular?
By Vytis Kapocius, Head of Industrial Newsec Baltics
The manufacturing sector employs around 30 million people in the EU, and some additional 10 million employees within the transport, warehousing, and logistics industries. While the economies of most of the EU member states are forecast to recover by late 2022, the European Commission still calls for us to roll up our sleeves. That is no coincidence: the further development and growth of industry and logistics across the EU will play a major role in determining our overall economic development course.
What should you expect across the Baltics states and within Lithuania in particular?
Remaining very active
If you had to pick a colour for the industrial and logistics segment in 2021 – it would be surely green.
The first half of 2021 has already shown that industrial real estate objects are no longer just the niche class of an alternative investment. The total transaction volume of industrial real estate accounted for €164 million in the Baltics – that is a striking 42% share of all investment transactions. The growth of attention to the industrial real estate market has been fuelled by market players realizing that industrial investment objects often offer favourable investment yields and good risk diversification as opposed to other classes of real estate. Unsurprisingly, the Baltic market continues to see the new dedicated industrial, logistics or infrastructure investment funds coming into play. One should expect this trend of capital flow into the industrial and logistics segment to continue well into 2022.
Equally important, the year 2021 has already demonstrated that a strategic shift towards a more sustainable “green” economy is taking place at an unprecedented pace. This is not only due to the European Green Deal whereby member states pledged a €0.6 trillion investment to finance it. Businesses across the Baltic states are taking the initiative on their own to embrace digitalization, supply chain transformation, and energy and resource efficiency. There is a clear understanding that these are 'must-haves' to stay competitive on the global scale over the years to come. As a result, the industrial real estate segment adapts to the new energy efficiency requirements and considers if materials used for construction are sustainably sourced, which leads to a rising demand for sustainability certifications.
While in many developed European markets, land scarcity is already becoming a serious issue threatening to constrain growth potential, all three Baltic states – Lithuania, Latvia and Estonia – benefit from still being unsaturated and manufacturers can still find suitable locations for erecting their modern factories and responding to the global demand for various goods.
Untapped potential
I trust the regular Baltic Business Quarterly readers are already familiar with the success stories of international investors – both manufacturers and service providers – benefiting from the high-quality labour force and good infrastructure in the capital cities of the Baltic Tigers. I would argue that international investors can still reap the untapped investment opportunities of the mid-size regional cities. This is particularly relevant for manufacturers.
For example, take Lithuania. Besides the 7 Free Economic Zones, there are multiple regional industrial parks that also offer ready-made infrastructure, close proximity to the municipal decision-makers, and often less competition for skilled labour, not to mention the fact that the employees face no traffic jams in mid-size cities.
The operators of such industrial parks understand that international investors’ long-term success is their own long-term success as well. Therefore, they are willing to innovate and make the necessary commitments.
The bigger cities are also experiencing significant developments as purchasing power continues to rise across all three Baltic states.
Real estate innovations
The pandemic had a significant short-term impact on the hospitality, leisure and office segments, all of which saw an increase in vacancy levels. Unsurprisingly, this means intensified competition for tenants. Despite this, we see a new supply being offered to the market, which specializes in quality, flexibility and delivery times as important differentiators among projects in the bigger cities. The pandemic has to some extent changed our daily habits – from the way we work and go shopping to the way we spend our leisure time. There is a much greater emphasis on health, safety and well-being than there was just a few years ago. Real estate developers now have to take these needs into account.
The market was quick to adapt and we see multiple active construction sites with tall cranes working to supply the new complex buildings in H2 2021 and next year. This is not only the revival of building modern offices, but also the emergence of new categories as well.
The pandemic in the Baltics has created favourable conditions for spurring the rise of so-called stock offices. These are the type of real estate buildings that blend warehousing, administrative and shop-floor space, often with a separate entrance for customers and conveniently reachable by personal transport. Of course, the location remains important for this type of industrial premises, yet the stock offices create a good basis for mid-size businesses to flexibly grow their economic activity in the post-pandemic economy.
Scalability and sustainability of any real estate product is important in order to be attractive on the market. With plenty of global opportunities, businesses want to be able to scale-up (or sometimes scale-down) at their own pace. This concept is especially important for start-ups to be able to grow and gain scale.
The active development of science parks shapes the attractiveness of the city, as it illustrates that there is already a critical mass of talented young minds who are capable of innovating on a global scale and performing value-added R&D operations and related services.
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