Office Real Estate Heads West, Northwest, South
- By Alec Luhn
- Jun. 01 2011 00:00
If, in Russia, "all roads lead to Moscow," then the capital itself has its own destination point. All subway lines run into the city center, four concentric circles of transport rings radiate outward from Moscow's midpoint, and the price of real estate, with few exceptions, is determined largely by its proximity to the Kremlin.
Office real estate in Moscow, however, could soon begin to buck this centralization trend. As the echoes of the global financial crisis fade away and the city center nears its saturation point, companies are beginning to seek office space outside the Garden Ring but within the MKAD — and developers are following suit with new projects, according to developers and consultants.
The result will be a decentralization of office real estate in Moscow, they said, and possibly the formation of noncentral office clusters with large amounts of Class A and Class B+ office space. Possible new business hubs include the areas around Kutuzovsky Prospekt, the Gazprom headquarters near metro station Kaluzhskaya, and the corridor between the Belorusskaya and Sokol metro stations.
With space in the center limited and most new office space being built between the Third Transport Ring and the MKAD, or fourth and outermost ring road, the Moscow office real estate market can only become more dispersed, said Irina Florova, head of analytics at CB Richard Ellis.
"There is no other way for the market to go besides decentralization," Florova said.
Similarly, developer Sistema-Hals, which is building the Class A office complex Sky Light on Leningradsky Prospekt in what consultants said is a burgeoning office corridor, said it selected that location near the Aeroport metro station because of the outward geographic shift in office construction.
"We chose this place because a kind of decentralization tendency exists" on the office market, said Natalya Mikhailyuk-Shugayeva, head of communications at Sistema-Hals.
The situation has come full circle since the real estate boom that preceded the crisis, when high rental rates in the central business district — roughly the area within the Garden Ring — drove companies to other areas of Moscow. During the crisis, rents fell to the point that many businesses relocated to the capital's "CBD," or central business district, for the same rental prices as outside the center. At the peak of the crisis, half of all office space deals were signed for sites in the center, which is remarkable given how small this area is in comparison with the rest of Moscow, Florova said.
There is no other way for the market to go besides decentralization.
CB Richard Ellis
"Now we see the opposite process," she said. "In terms of deals [outside the center] we don't see a serious increase for now, but it will soon appear because in the center there's just no free space left, and companies simply won't have any other choice but to again move outside the boundaries of the Third Ring."
The free space that does exist is going for higher and higher rental rates, consultants agreed, even as rental rates outside the center are falling. Vacancy rates in the center will bottom out within the next two years, and rents could rise to as much as $1,500 per square meter, predicted David Godchaux, chief executive of commercial real estate consultant NAI Becar. Currently, the rates can reach up to $1,200 per square meter, he said.
"The rentals are going to go up. That's another argument for the demand to go somewhere else," Godchaux said.
Already, many office space clients are refocusing on areas outside the CBD. Godchaux maintained that his firm is currently observing a "shift" out of the center as companies move out of the CBD rather than pay a high premium for space there. Initially, companies will often come to his firm seeking Class A office space in the most prime area of Moscow, the center, he said.
"And then they see the rent … and they see it's not going to be that easy to find the right type of office space," Godchaux said. "And then they find out about the traffic jams … and start thinking, 'OK, well, maybe I can get better rent for the same quality office slightly outside the Garden Ring, and I will commute better.'"
Shrinking Deals, Growing Exodus
In the first quarter of 2011, CBRE observed a shrinking number of deals inside the CBD and a growing number of deals outside the Third Transport Ring, Florova said. But Natalya Dementyeva, associate director of office real estate at Knight Frank, also pointed to the area between the Garden and Third Transport rings, noting in an e-mail interview that it is a particularly promising destination for companies given the decreasing vacancies and newly limited supply in the center.
"We think that this trend will promote a more-active uptake of premium-class office space inside the Third Transport Ring, especially considering the ban on new construction in the center of the city," she said.
In the first quarter of 2011, major deals not located within or near the Garden Ring included the rental by ProfMedia Business Solutions of 5,200 square meters in the Danilovskaya Manufactory near the Tulskaya metro station; the rental by consultant Neo Centre of about 4,000 square meters in Business Center Chaika near the Mendeleyevskaya metro station; and the rental by supermarket chain O'Key Group of 3,500 square meters in Business Center Pallau-NK near the Baumanskaya metro, according to S.A. Ricci/King Sturge.
The rental market as a whole is growing: Vacancy rates are decreasing everywhere except outside the MKAD, where they remain static, consultants said. They did note, however, that the uniformity of this trend is caused by a lack of new supply, which stems from the slowdown in project planning during the crisis.
Fueling the increasing competition for office space in the center is the de facto freeze by City Hall since last year on new construction in the area, although existing projects will likely be completed, Florova said. Mayor Sergei Sobyanin has been tasked with addressing Moscow's notorious traffic, and the fundamental step needed to curtail congestion is reducing office stock, she added, leaving the future for office development in the center bleak. On May 11, Sobyanin suspended the issuance of building permits in the center and ordered the review of all previously issued permits. As a result, no new supply will be built to meet the growing demand for office space in the CBD.
On the whole, the city's urban planning policy will provide an "impetus for decentralization," said Pyotr Isayev, head of the commercial property department at Capital Group.
"I think that in the midterm, this trend will be influential on the development of office real estate," Isayev said.
Moreover, the supply of high-quality office space, already low in Moscow in general, is especially constricted in the CBD, and large-scale office premises are rare there, Godchaux said.
"If you're looking for one block of 50,000 square meters inside the Garden Ring, it's very difficult to find right now," he said.
In addition, Russia's fledgling green building trend could promote decentralization in conjunction with the center's building restrictions, Godchaux said, since it is easier and more cost-efficient to build new green projects than retrofit old buildings. In December, Ducat Place III, a Moscow office complex, became the first building in Russia to be certified according to the BREEAM international green standard.
One thing that won't be driving the decentralization trend in the short term is large-scale investment, since few investment deals in office real estate are being closed right now, consultants said.
Building Office Clusters
In all likelihood, the decentralization of office real estate will not only mean dispersal of companies outside the center, but also the conglomeration of businesses in new hubs around the city. Office development will likely snowball in certain prospective areas, since developers tend to go where other developers are building. Particularly promising regions have already begun to amass new office projects.
Of the 400,000 to 450,000 square meters of Class A office space coming on the market in 2011, 20 percent is located outside the Garden Ring, according to Knight Frank. Most developers have projects outside the CBD, and they are constructing the greatest number of offices between the third ring and MKAD, where most stock currently is Class B, Florova said.
Low vacancy and limited supply in the city center will promote a more active uptake of premium-class office space inside the Third Transport Ring.
There has already been an inorganic attempt at business district creation in Moscow, and it has fetched mixed results. The government-backed Moskva-City business district has suffered a slew of financial woes and construction delays since building started there in 1995. About 408,000 square meters of office space is already functioning, but 22 percent of this space is unoccupied, according to CB Richard Ellis. The ongoing construction, which will last for at least another five years, creates an inconvenience for current tenants and is considered by many prospective tenants to be bad for company image, she said.
Nonetheless, prospects have greatly improved as of late, and the long-delayed opening of AFIMall City in May alleviated some of the infrastructure concerns.
"The area has a large vacancy but as it is central, this vacancy will be filled," Florova said. "I think this year and next year this vacancy will be filled."
Another government-endorsed project, the burgeoning business hub near the Belorusskaya metro station, has developed with far fewer growing pains. The anchor of this district is undoubtedly the 75,000-square-meter, Class A complex White Square, a joint venture between AIG/Lincoln and Coalco that opened in 2009. One of its tenants is Microsoft. Currently, Coalco is building White Gardens, a Class A complex with 64,000 square meters of office space, directly behind White Square.
The northwest is considered the most promising area for office real estate.
The Belorusskaya area is already considered a prime zone, with rental rates almost as high as in the CBD, Florova said. This style of business park outside the city center will become more common, Godchaux said, especially if developers can find large anchor tenants ahead of time.
"That's probably a trend that we will see," he said. But when and where "is also difficult to say."
The Belorusskaya cluster and the cluster of office buildings near the Paveletskaya metro station are two of the most developed mini-business districts in Moscow. Unlike the Paveletskaya cluster, however, Belorusskaya will likely expand, consultants said. Eventually, an office corridor starting there could stretch as far as the Sokol metro station on the Green Line as new office developments crop up along Leningradsky Prospekt, where traffic congestion isn't as bad as in the south, consultants said. New office projects are also being constructed farther north, on Leningradskoye Shosse, including the Class A office centers Alcon (102,000 square meters of office space) and Olimpia Park (45,000 square meters of office space). The Class A complex Metropolis also recently opened on Leningradskoye (78,500 square meters of office space).
"In this direction, northwest, Leningradsky Prospekt, there will probably soon be a kind of office cluster," Florova said.
The area's greatest advantage is its existing concentration of quality office space, which can attract more developers. No other thoroughfare has as many Class A and B+ office centers as Leningradsky Prospekt, Florova said.
Located on the Green Line and Ring Line of the metro, Belorusskaya offers convenient transit to other points of the city, as well as to Sheremyetevo Airport in the form of the Aeroexpress rail link. Once the reconstruction of Leningradsky Prospekt is completed, easy road access will further promote growth in the area, Dementyeva said.
Furthermore, Godchaux called the northwest corridor a prestigious residential area where companies want their employees to live. Moreover, some members of a company's top brass could already live there, providing another incentive.
"Like in most other large cities, the supply of office space goes where the top management lives," Florova explained.
Besides White Gardens, other office projects in the area include the recently opened Class A business center Linkor and the proposed reconstruction of the Slava watch factory on Leningradsky Prospekt.
In addition, the Class A complex Sky Light on Leningradsky Prospekt, a project with twin 27-story towers and 55,000 square meters of office space, is slated for completion in 2012. This area is especially attractive to developers, Mikhailyuk-Shugayeva of Sistema-Hals said.
"The northwest is considered the most promising area for office real estate," she explained.
Premium-class offices near the third ring area will be especially salable, she added.
The corridor stretching from the end of Kutuzovsky Prospekt to Novy Arbat has also been attracting developers, many of whom are considering projects to redevelop residential areas into offices, Godchaux said. Pluses include a prime location near the center — as well as proximity to Moskva-City — and the government's encouragement of development in the area, which will mean easier authorization of projects by the city, he noted.
"You don't have too much supply of Class B+ and A office space in this part of Western Moscow … I believe that it will be developed," Godchaux said.
Existing offices in this area include Kutuzoff Tower, a 20-story Class A project with 30,000 square meters of office space. In addition, now-defunct developer Mirax group has promised its Class A office complex Mirax Plaza near the intersection of Kutuzovsky Prospekt and the Third Transport Ring will still be completed. The complex, which includes a 47-story tower and a 41-story tower, is within view of Moskva-City across the river.
Gazprom and Nagatino Clusters
A concentrated office cluster has already popped up around state energy giant Gazprom's headquarters near metro Kaluzhskaya, and consultants said the area will likely see further office development. Recently realized office complexes here include Gazoil Plaza, Gas Field, Krugozor and the new Nine Acres business center, and as of March, the area held around 160,000 square meters of office space, according to research by NAI Becar. Rents are almost as high as the center, Florova said, with even Class B+ centers going for $800 per square meter or more.
The business park outside the city center is probably a trend that we will see. Now when and where is also difficult to say.
The area's main asset by far is the Gazprom headquarters, which attracts other office clients, Florova said. Companies are more likely to locate their offices near other companies due to the perceived stability and better image of the neighborhood, Godchaux agreed.
However, vacancy is low and is likely to remain that way, Florova cautioned.
"This area hypothetically has a lot of potential, but at the moment I don't see a lot of future supply in this area," she explained.
The consultants also gave mixed results to a potential business district in the southeast of Moscow between metro stations Avtozavodskaya and Kolomenskaya, where a number of office complexes are renting space, including Danilovskaya Manufactory and the Danilovsky Fort business center. But the critical juncture of the area is the Nagatino i-land technopark project, the first stage of which includes six B+ office buildings with an area of 169,000 square meters. Eventually, around one million meters of office space will come online here, according to NAI Becar, which working with the technopark to find it tenants.
Nagatino i-land will get a much-needed boost in accessibility with the construction of metro station Technopark, which will begin in 2012, according to the Moscow transport development plan.
"It's key for this neighborhood, for the success of this business district, that the subway station will reall be built, and quickly," Godchaux said. "If this doesn't happen it's going to be difficult."
Even if not in this area, Moscow office development will likely continue to decentralize on the whole.
"In the long run ... Moscow is going to look more and more like any other major capital," Godchaux said.