Kajar Kruus and Tarmo Loog: real estate development is a marathon

Tehnopol has been expanding for some time now – a new 8-storey commercial building is being constructed at Mäealuse 2-4. At the same time, the situation in the construction sector and the real estate market is difficult – the price of construction materials and the conditions of subcontractors put real estate developers in difficult situations. Together with Tarmo Loog, Tehnopol’s real estate manager, and Kajar Kruus, director of Astlanda Ehitus’ housing and real estate development division, we discussed how the current crisis is affecting the work of Astlanda Ehitus, which is developing the new Tehnopol building, the future of commercial real estate, work culture and science parks.

What new trends have you noticed in the commercial real estate market over the past year?

Tarmo Loog: I have had a few cases where companies have found that expansion does not require an increase in office space, but rotation – there are a certain number of people at the workspace and the workers can choose whether they work from home or office.

Another predominant trend was to ask for a discount because there is no need to use an office. Fixed costs began to be reduced in a number of areas: some were completely shut down, others were having difficulty moving goods and money, and others were fishing, so to speak, taking advantage of the situation and the opportunity, although there was no real need.

I think that the future of office space depends the most on the specifics of the company – whoever needs to be physically present will not change anything, who has discovered that a home office is efficient will go for a hybrid solution.

Kajar Kruus: From the developer’s point of view, I have noticed a tendency that companies do not want to commit to an office space for a long period of time, because they cannot predict their space needs for five to ten years. This fact is not only related to COVID. We want to be dynamic and we want flexible solutions so that the office space can be reduced or increased.

I do not think that the need for an office will disappear completely. Businesses need to create and maintain a common sense of teamwork because if everyone worked in the home office all the time and didn’t see each other, at some point they wouldn’t even know who their co-workers were. Offices will probably remain as places for joint meetings, events, but it may happen that companies whose employees can work part-time from home will make more active use of this opportunity.

There has been a lot of talk lately that private real estate is booming, but at the same time, there is silence in commercial real estate. What do you think of this situation?

Kajar Kruus: The housing market is very active now, there are a lot of transactions and everyone wants to buy. Over time it has actually been the case that the commercial real estate market is following the housing market. If a lot of apartments are bought today, then the commercial real estate market is a year or two behind, while companies are waiting for what will happen with the COVID situation. I believe that when the outbreak is over, companies will start reviewing their relocation and expansion plans again.

I think that at the moment the reason for buying private real estate is the risk of inflation. Many people think that tomorrow you will get less for the same amount of money, so you have to buy today. That is why some people are currently buying apartments as investments. People are looking for a safe place for their savings. An ordinary Estonian does not dare to go to the stock market, they do not understand it very much. Estonians believe in real estate and think that if they put their funds in real estate, it is a certain place that will grow.

Despite the stagnation in the commercial real estate sector, Astlanda is developing a new large commercial building in Tehnopol. What future do you see for this building?

Kajar Kruus: Real estate development is not like a hundred-meter run, it’s more of a marathon. Processes don’t happen fast – it takes about three to four years to bring a new house to the market. We are making these decisions in the long run – 10-20 years forward, so now is the right time to build the house. If there was already a very high demand today, it would be too late, because then it would take three years to build a new space. We have companies in two houses here who are interested in expanding, this new building is an opportunity for them to do so.

Tarmo Loog: A thing of the future for commercial real estate is to keep a vacancy because flexibility is important for the developer. Otherwise, it is not possible to keep the buffer when changing and resizing the rooms. To ensure flexibility, it is necessary to maintain a certain amount of free space.

As designing Tehnopol’s new building started before the COVID crisis, does it allow sufficient flexibility that is needed in current circumstances?

Kajar Kruus: We are working on it every day as much as we can.

Tarmo Loog: The initial task of designing the building was basically a modular system, where partitions can be moved, their installation and removal is quick and cheap, which also allows flexibility. Renovations are generally expensive and ultimately have a strong impact on the rental price of office space.

Why should companies prefer to move to a science or business park instead of a separate office building? What is the value of business parks for the people who work in them?

Kajar Kruus: First of all, we should explain what we mean by a business campus. If we are talking about Tehnopol, then in my opinion the advantage here is the proximity of Tallinn University of Technology, which enables comfortable cooperation. Tehnopol also provides additional support to companies with its business support services. The third, of course, is that businesses should be able to use additional services in the business park, such as sports, food and leisure. It is possible to consume more services in a business park than in a single office building.

Tarmo Loog: First, the business park has an advantage in terms of comfort. If you take a single commercial building with no other services, it is in use from nine to five. Nothing happens the rest of the time. However, people often do certain personal errands during working hours, such as going to a hairdresser or manicure. When working in an individual commercial building, it takes quite a considerable amount of time to move to and from the building. However, in the business park, all services are available on-site, which is more productive from the employer’s point of view and more convenient for the employee.

It is also important in terms of sustainability because people get everything they need from the campus without having to move across the city. People have more time for themselves because there is no need to travel around the city for different services.

It is also important that the services of the business park become attractive to the surrounding residents. This will help extend the active use time of the campus. For example, the Tehnopol Gym! extends the usage time of our car park, because in the evenings there is more space in the parking lot and it is more convenient for those interested in training. The bigger goal is the longer use of the entire infrastructure and it is practically impossible to achieve it in a single commercial building.

What is the next leap in development for Estonian business parks?

Tarmo Loog: Certainly accessibility is an important keyword. In the field of real estate, it is a common saying that the things that make a house attractive are location, location and location. Accessibility with different modes of transport is important for science and business parks.

The proximity of important ancillary services also affects attractiveness. This is important because people increasingly value their personal time for family, hobbies, etc.

Third, within companies, there is a concentration of certain areas. For example, there are mostly IT companies operating in Tehnopol, but we are trying to bring more and more green-tech and health-tech companies here. It will continue to be a trend for cities to focus on certain areas.

Has Astlanda somehow made its developments more sustainable, and if so, how?

Kajar Kruus: Of course we have. This is partly due to legislation and norms, but partly due to a change in people’s way of thinking. For example, we have improved the energy class of apartments in apartment buildings by installing solar panels and making them more energy efficient. We are also building a charging network for electric cars at both commercial and private buildings. Apparently, in the perspective of 10-20 years, the production of cars running on fossil fuels will decrease. In addition, we pay attention to waste management in the construction process.

Tarmo Loog: The question is, is the consumer willing to pay for all this?

Kajar Kruus: Generally not.

How are you dealing with the situation in the construction sector, where there is a shortage of building materials and subcontracting offers that are valid for a very short time?

Kajar Kruus: It is very difficult. At the moment, input prices change every day and delivery times for materials are also significantly longer. Materials have to be ordered earlier and we are also in a very volatile situation in terms of input prices, where the prices of construction timber, metal glass and aluminium cables are rising. The subcontractors do not want to take these risks and we have agreed to cover the material costs ourselves. An inflationary environment is probably ahead.

Tarmo Loog: At the moment, it is quite difficult to calculate the final cost of construction, because in general, the minimum construction time of a building is about 1.5 years. I have heard it said that the rise in prices depends on the current construction boom in the United States. Since you can ask for a price three times higher for building material there, more material will be sent there. Here, however, a deficit arises and prices rise. It is said that the situation is expected to stabilize in the autumn.

Kajar Kruus: We believe that we will be able to meet the deadline for the completion of the new Tehnopol building, we plan our activities and procurements long in advance. At present, professional project management, procurement schedules and planning are very important in construction. Fortunately, prices cannot rise indefinitely, otherwise our finance would collapse. An inflationary environment is ahead, but we do not know how severe and for how long.

Tarmo Loog: We have a small economy, and if a big player in the economic spider web changes something, it gives vibrations to the whole network, affecting us as well.